What are different types of mutual funds?

Mutual funds provide a wide range of investment options to investors. You can choose the right type of mutual fund scheme depending on your risk appetite, financial goals and investment horizon. Mutual funds can be broadly classified into five categories, viz. equity funds, debt funds, hybrid funds, solution-oriented schemes and other schemes. There are further sub-categories of mutual fund schemes under these five broad categories, which are differentiated based on the specific investment objectives of these schemes. With different types of mutual fund schemes available for investors with diverse investment objectives, it becomes easier for them to choose the best suited financial plans.

What are long-term mutual funds?

While there is no specific category of long-term mutual fund schemes under the SEBI (Securities & Exchange Board of India) guidelines, mutual fund schemes suited for long- term investment horizons can be classified as long-term mutual funds. Investors generally have several long-term financial goals, like retirement planning, buying a house, child’s education, etc., for which the investors must choose like-minded mutual fund schemes. Different asset classes tend to be suited for different goals. For example, equities are suited for long-term investment horizons carrying the potential of wealth creation over the long term but volatile over the short term. Debt may render relative stability to the investment portfolio over the short term with a predominantly fixed income portfolio. Investors can choose the mutual fund scheme that suits their financial goals and investment horizon.

What is the difference between long-term and short-term investment?

No specific long-term and short-term mutual fund schemes are defined under the SEBI (Securities & Exchange Board of India) guidelines. However, mutual fund schemes that suit long-term and short-term financial goals may be considered for long-term and short- term investments. The broader difference between long-term and short-term investments is the proportion of asset classes, viz., equity and debt, within them. This is because equities carry the potential of wealth creation over the long term but are volatile over the short term. Similarly, debt tends to render relative stability over the short term, albeit with reasonable returns. Thus, the risk-reward trade-offs for investing in the short- term and long-term are strikingly different. The lower the risk undertaken, the lower may be the expected returns for investors.

How do I choose the right mutual fund investment plans for me?

There is no certain right or wrong mutual fund investment plan for investors. One must choose to invest in mutual fund schemes depending upon the investment objective and asset allocation pattern. An investment approach contrary to the objective can be harmful to financial planning. While equities may be suitable for long-term goals with their potential for wealth creation over the long term, choosing such schemes for short- term goals may expose the investors to short-term volatility. Similarly, debt may be suitable for short-term stability in the investment portfolio, but choosing such schemes for long-term goals may hamper the long-term financial goals with relatively lower returns and correspondingly higher investment requirements. Since one may have different short-term and long-term goals simultaneously, the investment portfolio should ideally include an optimal balance between different mutual fund schemes, which are further chosen based on investors’ financial goals, risk profile and investment horizon.