Mutual fund in India offer various category and types of mutual fund schemes which are mostly categorized into two types – Actively managed mutual funds and passively managed mutual funds in which we find ETF and index funds. One should invest in mutual funds after fully understanding the difference between actively and passively managed mutual fund investment.
In actively managed mutual funds, they are classified into the following broad category of funds –
Equity funds, Debt funds, Hybrid funds and solution oriented funds. Again in these mutual fund broad category of funds, there are numerous categories in which investors can invest based on their risk profile, investment tenure and financial goals.
For example, equity mutual fund can be very good for long term wealth creation provided the investor can take high to very high risk, whereas the debt funds can be for investors who do not want to take much risk and happy with moderate returns. Hybrid mutual funds are categories of mutual fund schemes where the portfolios are a mix of equity and debt investments. Investors can select a hybrid fund based on their investment objective and investment time horizon.
In actively managed mutual fund investments, investors can invest by way of lumpsum investment as well as through systematic investment plans (SIPs)
What are ETF or exchange traded funds?
ETF or exchange traded funds are passively managed mutual fund schemes. Due to the marketing maturity, ETF funds are gaining popularity in our country as they are low cost funds, simple to understand and offer wide range of investments. Investors can not only invest in broad market indices like Nifty or Sensex, they can also invest in Gold ETFs or market cap based ETFs like mid cap, large cap, small cap and sector ETF.
To invest in ETF funds, investors should have a demat and trading account as these funds can be bought or sold only on stock exchange platforms only. One important point that investors should note is that you cannot invest in ETF through SIPs.
Predominantly, the institutional investors hold the largest share of ETF investments in India, the retail segment is also growing fast in terms of interest and AUM. We feel that, with times and growing investment awareness, the retail participation will grow manifold.
How you can invest in ETF – One can invest in ETF schemes during the market hours like any other equity shares on the price prevailing at the time of the trade. Contrary to this, investment in active mutual fund schemes can be done during the cut off time prescribed by AMFI during the day, but the unit price of an active mutual fund, known as NAV is declared at the end of the day. Basis this mutual fund NAV, units are allotted to the investors at the end of the day.
What about the NAV of ETF funds – Though the NAV of actively managed mutual fund schemes and ETF funds are declared after the market closure, in case of exchange traded fund, the NAV applied is the rate at which the investors buy the units during the market hours.
In this article we discussed what different types of mutual fund schemes in India are and what are exchange traded funds and how they work.