What are the Types of Mutual Funds

Types of Mutual Funds based on structure/ Maturity Period

1. Open-Ended Funds

Open-ended mutual funds are the most flexible type of mutual fund in the market. Investors can purchase units of these funds at any time and redeem them directly with the fund whenever they wish, without a fixed maturity date. The price for buying or selling units is determined by the fund’s Net Asset Value (NAV), which is calculated daily.

Open-ended funds are highly preferred due to their liquidity and ease of access. Their flexibility makes them an excellent option for long-term investment, especially for those who value the ability to enter or exit the fund at their convenience.

2. Close-Ended Funds

Close-ended mutual funds have a fixed maturity period. These funds are open for subscription only during their initial launch period, after which the units are listed on the stock exchange. While investors cannot redeem their units directly with the fund until the maturity date, they can trade the units on the exchange before the fund’s maturity.

Close-ended funds are well-suited for investors who can commit to a fixed investment period and are looking for potentially higher returns within the specified timeframe. Although they lack the liquidity of open-ended funds, they often provide more distinct growth opportunities over the investment period.

Types of Mutual Funds based on asset class

1. Equity Funds: 

Equity funds primarily invest in stocks of companies. The primary goal of these funds is to achieve long-term capital growth. While equity funds can be volatile due to fluctuations in the stock market, they have the potential to generate higher returns over time compared to other fund types. These funds are best suited for investors with a higher risk tolerance and a longer investment horizon, who are comfortable with market ups and downs in pursuit of significant growth.

2. Debt Funds: 

Debt mutual funds invest in fixed-income instruments such as government securities, corporate bonds, and money market instruments. These funds are considered safer than equity funds and provide more consistent returns. They are ideal for risk-averse investors seeking steady income with minimal exposure to market volatility. If you prioritize low-risk investments, debt funds are a reliable option for achieving stable returns.

3. Hybrid Funds

Hybrid funds invest in a combination of equities (stocks) and debt instruments (bonds), offering a balanced approach to risk and return. These funds are well-suited for investors seeking moderate risk, as they combine the growth potential of equity with the stability of debt. By diversifying investments within a single product, hybrid funds cater to those looking for both capital appreciation and income generation, making them an attractive option for balanced portfolios.

Types of Mutual Funds based on Investment goals

1. Growth Funds

Growth funds focus on achieving high capital appreciation by primarily investing in equities. These funds are designed for long-term investment horizons and are ideal for investors with a reasonable risk tolerance who seek superior returns over time. Growth funds require patience, as the value of the investment typically takes time to increase significantly. They are well-suited for investors willing to endure market fluctuations in pursuit of substantial growth.

2. Income Funds

Income funds aim to provide regular dividend income by investing in bonds and other income-generating securities. These funds prioritize stability over high growth and are considered one of the safest mutual fund options due to their lower risk compared to equity funds. Income funds are particularly appealing to conservative investors who value consistent returns and minimal market volatility, making them a reliable choice for generating steady income.

Types of Mutual Funds based on risk

1. High-Risk Mutual Funds

High-risk mutual funds primarily invest in equities and are designed for long-term capital appreciation. While these funds have the potential for high returns, they also carry significant risks, with their value prone to short-term fluctuations. These funds are ideal for investors with a high risk tolerance who are willing to accept short-term volatility in pursuit of strong long-term growth. If you prioritize potential gains over stability, high-risk mutual funds can be an excellent option for long-term investments.

2. Medium-Risk Mutual Funds

Medium-risk mutual funds, often referred to as balanced or hybrid funds, invest in a combination of equities and debt instruments. These funds aim to achieve a balance between growth and stability, offering higher returns than purely debt-based funds while maintaining lower risk compared to equity-only funds. They are suitable for investors seeking moderate risk and a mix of steady income and capital appreciation. These funds are a good choice for those who prefer a balanced approach to risk and return.

3. Low-Risk Mutual Funds

Low-risk mutual funds prioritize capital preservation and stability over growth. Examples include debt funds and money market funds, which invest in fixed-income securities such as government bonds, corporate bonds, and short-term obligations. These funds are considered among the safest mutual fund options, providing steady, low-risk income. They are best suited for conservative investors who value stability and are less focused on high returns, making them ideal for those looking to protect their investments while earning consistent income.

FAQs

1. Is an index fund a type of mutual fund?

Yes, an index fund is a type of mutual fund that aims to replicate the performance of a specific market index, such as the NEPSE Index or Nifty 50. These funds passively track the index by investing in the same securities, offering investors a low-cost, diversified option

2. What are the most common types of mutual fund?

The most common types of mutual funds are equity funds, debt funds, and balanced (hybrid) funds.

3. Is it better to invest in shares or in mutual funds?
The choice between shares and mutual funds depends on your investment goals and risk tolerance:

• Mutual Funds: Offer diversification, professional management, and are suitable for investors who prefer a hands-off approach with moderate risk.
• Shares: Involve direct stock market investment, requiring active management and a higher tolerance for risk due to potential market volatility.