If you are looking to invest in mutual funds, you must know how they are classified. Mutual funds are classified into numerous types based on a variety of criteria. Read about the various types and choose the best one for you.
Based on the Lock-in Requirements:
- Open-ended: Open-ended schemes are the ones where the mutual fund house accepts investments all the time. This allows investors to buy and sell fund units anytime, as they are more liquid. Most of the mutual funds in India are open-ended.
- Close-ended: Close-ended funds, on the other hand, can only be bought during the time of their launch and can be sold after the maturity period. The buying period has a specific window, after that, you won’t be able to buy these funds.
- Interval funds: Interval funds are a mix of both open-ended and close-ended funds. Trading in interval funds is open for a while when you can buy and sell units of those mutual funds.
Note: There are two exceptions regarding fund categorization based on the lock-in period.
- ELSS funds have a lock-in period of 3 years but they are open-ended funds as one can buy them anytime.
- Solution-oriented funds have a lock-in period of 5 years (some conditions depending on the fund like children's funds have a lock-in period of 5 years or till the child attends the age of 18 whichever is earlier) but they are also open-ended funds.
Based on the Subscription Type:
- Regular plan: Regular mutual funds are the ones that we buy from an agent. We may use this option if we need the financial expertise of the agent. But in this case, the person selling you mutual funds (agent) will receive a commission on your investments. The problem with regular funds is that they have a high expense ratio, which reduces your returns over time.
- Direct plan: Direct plans are the ones where we buy mutual funds directly from AMC and there is no intermediary in between. This helps us save on the commission. This will increase our returns which can make a massive impact in the long run.
Based on the Income Distribution:
- Growth plan: Most of the mutual funds have "growth" written behind the name, which means that when the underlying securities in the mutual funds receive dividends/interest, those are then invested back into the fund. These plans do not pay out any distribution to the investors and all the gains come from an increase in the NAV of the scheme. This is ideal for investors looking for long-term compounding as the reinvested amount also gets added to the investment corpus.
- IDCW: Also known as dividend payout, IDCW stands for income distribution cum withdrawal plan. If you opt for the IDCW plan, you get a certain amount periodically, as and when the mutual fund scheme declares it.
Based on the Asset Class
Now that you know the types of mutual funds based on various parameters let us briefly introduce mutual funds categorization. Mutual funds are further classified based on the assets they invest in. For example equity mutual funds invest in stocks and equity instruments.
As per the Securities and Exchange Board of India (SEBI) guidelines, mutual funds are broadly categorized according to the assets they invest in. The different types of mutual funds are:
- Equity schemes
- Debt schemes
- Hybrid schemes
- Solution-oriented schemes
- Other schemes
You can learn about each subcategory in detail here.
FAQs
Shall I invest in a direct plan over a regular plan in mutual funds?
Yes, it is always better to invest in a direct plan over a regular plan as it will help you save on the expense ratio.
Which is a better option - a growth plan or IDCW?
It is better to invest in a growth plan as the invested amount gets compounded over time. But if you are looking for regular income from your investments you can choose for IDCW plan.
