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Mutual Funds are financial instruments made up of a pool of money collected from investors to invest in professionally managed portfolio of stocks, bonds, Money market instruments and other assets.
Mutual Funds are categorized into different kinds based on securities they invest in, Mutual funds investment objectives and type of return they seek.
An SIP or Systematic Investment Plan allows an investor to invest a fixed amount of money regularly in various mutual fund scheme.
Open ended fund: An open ended mutual fund is one where investor can invest and redeem at any point of time. These type of mutual funds generally don’t have fixed assets under management or a tenure.
Closed ended fund: A closed ended fund has a fixed tenure. These mutual fund scheme is listed on the stock exchange and can be traded like shares.
Equity fund: Equity mutual funds are those that invest money primarily in Equity shares along with other investment products. An equity fund allows investors to reap the benefits of investing in stocks which may cater to higher risk and higher return.
Debt fund: A debt fund invests in various fixed income instruments like government securities, bonds, debentures and commercial paper. These mutual funds are not volatile like equity funds and enable investors to earn steady but low returns. It is worth remembering that debt funds too involve some interest rate risk.
Index fund: This kind of mutual fund replicates Index which they represent. If they invest in Nifty Index, returns are very similar to that toh Nifty’s return. These are passive mutual fund schemes and are not actively managed. They typically have very less expense ratio.
Sectoral fund: A sectoral fund invests in the stocks of specific sectors, like pharmaceuticals, energy, infrastructure, information technology and fast moving consumer goods (FMCG). This is ideal for investors who wants to invest in particular sector to earn higher returns. They are little risky as returns purely depends on performance of particular sector.
Equity-linked saving scheme (ELSS): These mutual funds offer considerable tax benefits under Section 80C upto Rs. 1.5 Lakh, especially to those in the higher tax bracket. So your taxable income will be reduced to that extent. ELSS have Shortest Lock-in period of 3 years among various financial products available under Section 80C.
Hybrid fund: A hybrid fund is type of mutual fund that invests in two or more financial instruments. Most of these mutual funds invest in mix of debt and equity and are also known as balanced funds. In India, any fund that invests 60 per cent of its funds in equity and the rest in debt is called a balanced fund.