How To Choose Good Quality Mutual Funds

Did you know there are different types of equity mutual funds and each offers a different type of benefit? When mutual funds invest maximum part of their corpus in the stock market, they are broadly called an equity mutual fund schemes. Remember, the structure of the fund may vary for different schemes and also on fund manager’s view on different stocks. The structure depends on the objective of the scheme. Depending on their investment objectives, you can classify equity mutual funds into a number of types.

Equity mutual funds are also classified according to their market capitalization. Market capitalization simply means the company’s stake in the market. It is the value of the company on the stock market. Market capitalization can be divided into three categories i.e. Large cap, Mid cap and Small cap equity funds.
Now you know, Equity Mutual funds are also of many types and investor can use them as per his investment objectives, risk bearing capacity and the horizon.

Types or Classifications of Mutual Funds

Miscellaneous Classification
Open and Close Ended Mutual Funds: A mutual fund can be either Open ended or Close ended. Open ended funds can buy and sell its units at any time – so an an investor, you can purchase and sell your holdings in such funds at any time.

Given this, its corpus keeps changing. On the contrary, close ended funds can only be bought by investors buying the period they are up for sale – called the New Fund Offer (NFO) period. Investors can sell them either on the stock exchanges where it is listed or during special buy back periods which the AMC (Asset Management Company) schedules.

Growth and Dividend Mutual Funds : Funds that make your capital grow over a period of time without giving out profits/dividends to you are called growth funds.

In case you received dividends from them, its called a dividend fund. Obviously, in the latter case, since the profits are paid out from the fund corpus, the NAV of the fund will be less while that of the growth option will be more.

Equity Mutual Funds

These invest primarily in stocks of companies – in a sense, you own up ending a part of the company when you buy into these. These are meant for long term investments and carry a great deal of risk. Their purpose is capital appreciation over a long period of time.

Diversified Equity funds invest in a wide selection of stocks across different companies and market capitalizations so as to reduce the risk for the investor.

Index funds invest in companies that comprise the benchmark index (say NSE or BSE) and in the same proportion as the index itself. So the returns of these are in line with the index.

ELSS (equity linked savings schemes) or tax saving mutual funds provide tax benefit to investors under section 80(C) and also have a lock-in period of 3 years – this means that as an investor, you cannot redeem(sell) your holdings before three years of buying the mutual fund.

Sector or Thematic funds invest in a particular sector eg, there could be a fund investing in only the banking sector. Similarly, there could be thematic funds investing in a particular theme, example, infrastructure.

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