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How to Select the Best Mutual Funds to Invest?


You may have an idea about what is mutual fund. But, do you know there are various types of mutual funds available in the market?

Mutual funds can be categorised into various types based on their structure, management and asset class. While the best mutual funds to buy or the best mutual funds to invest in a 'myth', each mutual fund type has its own set of characteristics and advantages for different kinds of goals.

Let's look at each of the types of mutual funds in detail:

1. Based on Fund Structure

Mutual funds can be divided into open-ended, closed-ended and interval funds, based on their fund structure.

  • In open-ended mutual funds, investors can enter and exit at any point of time after the New Fund Offering (NFO).
  • In contrast, closed-ended mutual funds are characterised by a fixed maturity period as investors can buy units only during the NFO. The scheme is wound up at the end of the scheme maturity period.
  • Interval funds combine the features of both open-ended and closed-ended mutual funds. These funds become open-ended during the "transaction period".

2. Based on Management Style

Mutual funds investment can be actively managed or passive funds.

  • Actively managed mutual funds try to beat their benchmark indices. Here, the fund manager has the flexibility to choose and rebalance the portfolio for investing. This makes the fund manager's role meticulous and important in managing the fund, thus increasing the TER (Total Expense Ratio) of the fund.
  • On the other hand, passively managed funds simply mirror their benchmark indices. The fund manager has no control over the choice of the portfolio for the fund. Therefore, there can be no impact of the fund manager's strategy on portfolio performance. Thus, the TER of these funds is lower as compared with actively managed funds. Index funds and Exchange Traded Funds (ETFs) are examples of passive funds.

3. Based on Investment Universe

Mutual funds can be categorised into equity funds, debt funds, gold funds, fixed income and more depending on their underlying asset class.

You can also invest in two asset classes together with hybrid or balanced mutual funds. In hybrid funds, you can get the stability associated with debt-based securities along with equity returns that can beat inflation.

Dividing mutual funds based on their underlying asset can be made even more specific in terms of small-cap, mid-cap and large-cap funds, sectoral and thematic, dividend yield and value, and more. Similarly, debt funds can also be further divided into government and corporate, ultra-short and liquid, gilt and floater funds, among others.

While there is no single way of categorising various types of mutual funds schemes, you can choose mutual funds based on their suitability with your goals and risk appetite. Using a mutual fund calculator can come in handy to chart your mutual fund investment journey.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully

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