There are several categories of mutual funds. These categories represent the kinds of securities that the mutual fund investor decides to invest in. So, depending on the risk-taking ability, there is a mutual fund for every type of investor. Each mutual fund has its own risk and reward. The higher the risk, higher is the returns. The three types of significant mutual funds are debt, equity and balanced. Let's see what each one means in brief.
Funds that invest primarily in bonds or fixed income securities such as corporate bonds, government securities and other debt securities of different time horizons are debt funds.
.A debt fund has relatively lower risks compared to other forms of mutual funds. So, based on the investment horizon and risk-taking ability, there are various types of debt mutual funds. The returns remain fixed here. Thus, an investor with a lower risk appetite may decide to invest in a debt fund.
Equity funds are the ones who invest primarily in stocks. An investor with an objective of a long-term capital growth can decide to invest in equity funds. These funds have relatively higher risks compared to other forms of mutual funds. But the returns are also higher than other mutual funds. Also known as hybrid funds, a balanced fund is the one which allocates funds to diversified channels of investments. These funds invest in both equity funds and debt funds.
A hybrid fund provides a balanced mixture of safety, income, and capital appreciation. If an investor wants to diversify his risks, a balanced fund is a good option to invest. Thus, one who is willing to take moderate risks can invest in a balanced fund.