Mutual Funds1210 views
So finally, you have mentally prepared yourself to invest in mutual funds, right? Just to give you a sneak peak, a mutual fund is an investment that collects a pool of money from several investors having a common goal. A highly experienced team of financial experts would constantly supervise your investment and diversify it across numerous financial assets such as stocks, bonds, equities and much more.
Now coming back to the topic, if we talk about what are the types of mutual fund, they are broadly classified into Equity Funds, Debt Funds and Balanced(Hybrid) Funds. You can select the fund you want to invest in after considering your risk appetite, financial goals and investment horizons.
So, without wasting any time further, let’s just start from the beginning and enlighten you about the topic in the post below.
Table of Contents
- 1 Equity Funds
- 2 Debt Funds
- 3 Balanced Funds (Hybrid Funds)
- 4 Exchange Traded Funds (ETFs)
An equity fund also known as stock fund is a type of investment tool that offers capital appreciation and growth. These funds invest principally in stock market and are categorized according to company size , investment style of holdings in the portfolio and geography. Ideally suited to the investors looking for higher returns for a longer period of time with having medium to high risk taking appetite.
- Those who have long-term financial goals like child education or marriage to fulfill, equity funds are ideal for them as it gives a lot of years to build on the corpus.
- These funds invest mainly in equity and equity related instruments.
- Returns are higher and so are the risks involved due to the massive volatility of the stock prices.
- These can be rewarding because the long-term capital gains are exempted from tax.
- A marginal allocation in debt instruments also gives a regular flow of income.
Now the equity funds are further classified into following types:
A type of equity fund that offers twin benefits of capital appreciation and tax exemption to the investors. These tax-saving funds invest a majority of their portfolio in the stock market. It is a disciplinary Systematic Investment Plan (SIP) starts from as low as ₹500, best known for giving long-term capital gains along with the tax benefits.
- Want to reap the tax benefits under mutual funds? If yes, you should know about Equity Linked Savings Scheme (ELSS).
- A type of equity linked investment that offers tax deductions from the annual gross income for upto ₹ 1.5 Lakh in a financial year.
- An investor can enjoy the tax benefits under Section 80C of the Income Tax Act.
- The investments made in ELSS have a lock-in period of 3 years.
Large Cap Funds
These types of equity funds invest a larger proportion of their corpus in companies having large market capitalization. Though the criteria for large cap companies may vary as per their assets. These funds are best known to offer stable and sustainable returns to the investors over a period of time.
Mid Cap Funds
The mid cap funds are a type of stock funds that invest in mid-sized companies. Talking about a company’s size, it is determined by its market capitalization. Recommended for those who are willing to take the risk.
Small Cap Funds
Funds which diversify their investments in small cap companies are termed as small cap funds. These funds because of their exposure in high beta stocks are positioned on a high risk return trade-off plane compared to large cap funds.
These funds invest in companies across the market capitalization. The scope for diversification here is massive as money is invested across stocks of different capitalization. These funds are less risky due to the diversification of money.
Funds which invest in a particular sector or industry are known as sector funds. These types of funds offer less diversification and are considered to be risky as they invest in one particular type of sector.
- Sector funds are a part of equity and basically invest in various sectors of the economy like infrastructure, IT, pharmaceuticals, etc.
- Since the portfolio of these funds focuses investment in one particular type of sector, so the scope for diversification here is limited.
- They are considered to be risky as they are exposed to a single sector. And, if the sector witnesses a negative sentiment it will adversely impact your MF investment.
- Normally suitable for an investor with a high- risk appetite.
It is a type of closed-end fund or you can say exchange traded fund, which invests in companies located anywhere in the world. These funds offer more global opportunities for the diversification and act as a hedge against currency risks and inflation.
- In global funds, the funds are invested in the assets outside of India.
- It adds an additional layer in the domestic diversification.
- It is for those investors, who know the international market as well as the risks involved.
It is an investment tool which offers fixed income solutions while preserving your original investment. These types of funds are designed to invest in a mix of debt and fixed income securities by taking into account low-risk return investment avenue.
- People with a lower risk appetite should go for debt funds. These funds are ideally suited for retirees seeking a regular flow of income.
- The funds invest predominantly in government or corporate securities, bonds and other debt instruments.
- Here investments can be short- term or long term, and the investors get the fixed returns at a lower risk to manage their daily expenses.
- You can also avail the indexation benefits while selling your fund units after 3 years.
Debt Funds are further classified into:
Ultra Short-Term Debt Funds
These are the funds which invest in fixed-income instruments and are mostly liquid having short-term maturities. If you wish to park your cash for a shorter tenure, these funds are for you.
- Another category of debt funds, ultra short-term debt funds (also called liquid-plus funds) are a perfect tool for the investors to put their money in fixed income schemes.
- These funds mainly invest in highly liquid, fixed income securities with short-term maturities ranging from 6 Months to 1 Year.
- These funds help investors avoid interest rate risks. Despite this, they are riskier and can fall prey to market fluctuations.
These are the funds which invest only in government securities and are preferred by conservative investors. Since these funds invest in secure government bonds, hence investors are protected from credit risk.
- Investment is completely in government securities
- The value of gilt funds units is dictated by the market volatility.
It is a type of debt fund that invests in bonds or other debt securities. These types of funds pay periodic dividends that include interest payments on the fund’s underlying securities along with periodic realized capital appreciation.
- Created to manage an investment portfolio of individual bonds.
- Investors purchase shares in the fund.
- Each share represents the proportional ownership interest in the pool of bonds comprising the fund’s portfolio.
These are the types of debt funds that invest in securities with a residual maturity of upto 91 days. The assets invested in these funds are not tied-up for a long time, thus it further helps the fund manager in meeting the redemption demands of investors.
- Want to invest in a fund offering high liquidity? If yes, look no further than investing in liquid funds.
- These funds offer liquidity to the investor/s by investing in liquid instruments such as treasury bills, certificates of deposits, commercial papers, etc.
- Liquid funds invest in securities having a residual maturity of upto 91 days.
Balanced Funds (Hybrid Funds)
A type of fund that offers a mixture of safety, income and modest capital appreciation. This investment option owns both stocks and bonds and is an option for intermediate-term investors to invest. The asset allocation may vary as per market conditions.
- Want to enjoy the benefits of both the worlds, i.e. equity and debt? If yes, say hello to balanced funds, giving you both capital appreciation and income generation.
- These types of funds invest in a mix of both equity and debt instruments in the proportion decided by the fund managers after studying the market conditions.
- Balanced funds generate high income from equity while the regular flow of money is ensured via investments made in debt instruments.
Balanced Funds(Hybrid Funds) have further classification:
Income funds are long-term debt schemes that mainly invest in government bonds, corporate bonds and money market instruments. These funds are highly vulnerable to interest rate changes and are apt for those having long-term investment horizon and higher-risk appetite.
- If you fall under 10% or 20%tax slab, try to invest in these funds.
- The long-term capital gains on investments held over 3 years are taxed at 20% with indexation benefit.
- In case you fall under 30% tax slab, these funds can offer better post- tax returns.
Capital Protection Fund
It is a closed-ended scheme where no redemption is allowed before the maturity. The main objective of this fund is capital protection by investing in fixed income securities in line with the tenure seeking capital appreciation by investing in equity and equity-related instruments.
- The portfolio comprises heavenly oriented towards debt and only a small portion is invested in equity.
- These funds mainly invest in bonds, T-bills, Certificates of Deposits(CDs).
- Since it is a closed-ended scheme, the fresh units can be availed during the new fund offer period (NFO).
- The maturity of the debt portfolio is aligned with the lock-in period of the fund, thereby insulating it from the gyrations of interest rate movements.
Fund of Funds
A Fund of Funds (FOF) also known as a Multi-Manager Investment, is a type of investment strategy in which a fund is invested in other types of funds. The portfolio of this investment contains different underlying assets instead allowing you to invest directly in stocks, bonds and other types of securities.
- Here the funds are invested in mutual funds directly, instead of assets.
- Your investment is diversified in the mutual funds instead of market instruments.
- The returns will be an average of all the funds.
Exchange Traded Funds (ETFs)
An ETF is a bouquet of stocks, an investment fund traded on stock exchange. They are essentially index funds reflecting the composition of an Index like S&P CNX Nifty or BSE Sensex.
- ETFs enable investors to get the broader exposure of the stock market in different countries and specific sectors.
- The trading value is based on the net asset value of the underlying stocks that it represents.
- You can buy and sell it in a real-time at a price that changes throughout the day.
Also known as index tracker, these funds have the portfolio constructed to match or track the components of a market index. These types of funds provide broader market exposure and low operating expenses.
- Index funds are designed to replicate the portfolio of the market index such as BSE SENSEX, NSE Nifty.
- The risk involved is proportionate to the index fluctuations.
- No fund manager is there for help and support.
These ETFs aim to track the domestic physical gold price, trades like a common stock on a stock exchange. Gold ETFs(units) experience price changes throughout the day as they are bought and sold.
Disclaimer- Mutual Funds are subject to market risks. Please read the scheme related documents carefully before investing.