Mutual funds are new age investment offering flexibility and more options to the investor. Mutual funds help to diversify the investment horizon by offering different mutual fund types based on financial goals, be it long term or short term. Various types of Mutual Funds exist to cater to different needs of the people.
Types of Mutual Funds for Investing-
Based On Asset Class
- Equity Fund- In the Equity Mutual Fund, the money is invested in primarily in the stock market. Equity Funds are risky and should be considered when the investment horizon is more than 5 Years to beat the market fluctuations and to get good returns. As risk and reward go hand and hand Equity Mutual Funds have given good returns in the past. Equity Funds can be further classified as-
A)Large Cap Funds- Theses Funds invests the money primarily in well-established companies who have the market capitalization of more than Rs 10,000 Cr. They are capable of withstanding bear market as they are financially strong, though there are fewer growth possibilities in these companies these mutual funds are safer and have less risk compared to Mid Cap & Small Cap.
B)Mid Cap Funds – Theses Funds invests the money primarily in companies who have the market capitalization between 2-10 Cr. They are well established but have the potential to grow as they are yet in the growth stage in the business cycle. They are more volatile as they show fluctuation in profit and at sometimes even struggle to sustain in the market. These Funds have higher risk and reward when compared to Large Cap Funds.
C)Small Cap Funds –These Funds invests the money primarily in companies who have market capitalization less than 2 Cr. These companies have high growth potential and have aggressive expansion plans. These Funds have the highest risk and returns among the large & mid cap
D)Sector Funds-These funds invest solely in a particular or industry in an economy. Eg Like SBI Pharma Fund(A Pharma Fund) invests money only in pharmaceutical companies.
E)Diversified Equity- A well-diversified equity fund, commonly referred to simply as a diversified equity fund, invests in companies regardless of whether they are large caps or mid caps or small caps. A diversified equity fund invests in companies regardless of size and sector. It diversifies investments across the stock market in a bid to maximize gains for investors.
F)Dividend Yield Schemes-Dividend Mutual Funds are funds where dividends are given to investors at intervals by the Mutual Fund Company. These funds are just like growth funds, except for one difference. In the case of growth funds, the earned amount gets reinvested by the mutual fund company whereas in case of dividend funds the amount is paid back to the investors at intervals.
G)ELSS Funds-Investing in ELSS of Tax Saving Funds gets you a tax deduction under Section 80 C of the Income Tax Act, 1961 for investment up to Rs 1.5 lakh per annum.EPF has a lock-in for 3 years. Thereafter you can either withdraw your money or leave it in the ELSS fund where it will continue to earn returns.
H)Thematic Funds- Thematic Funds are growth-oriented equity schemes which aim to achieve capital appreciation by investing in a set of stocks that are closely related to a particular theme. For example, an automobile thematic fund will invest in companies which may work in different industries but are part of common theme like automobiles companies, auto ancillaries, and petrochemicals, all related to the automobile sector.
2. Debt Funds- In Debt Mutual Funds money is primarily invested in fixed income securities such as bonds, treasury bills, money market instruments etc. Less volatile hence less risky than equity funds.Ideal for investors who don’t want the risk. Debt Funds can be further classified as:-
A)Gilt Funds-These funds invest money only in government securities with different maturity period these are ideally good for an investment horizon of 3-5 years. These are less riskier and mostly give stable returns to the investors.
B)Junk Bond Schemes- These are those funds which are issued by a company whose financial strength is questionable or without proven track records.,these funds are volatile and are higher yielding than bonds with superior quality ratings, but they also have a higher default risk than the investment grade bonds.
C)Fixed Maturity Plans- These are close ended funds i.e investment can be made in them only during a new fund offer, they have a fixed maturity horizon. Most Of FMP’s are not liquid, few of them are liquid(are listed on the stock exchange) but then also very difficult to find a buyer. The period of maturity varies from 1 month to 5 years. These returns on these funds are indicative.
D)Liquid Schemes- These funds invest money in very short-term money market instruments(which have maturity upto 91 days) invests in securities like T-bills, Term Deposits, Commercial Paper etc. They do not have any exit load and they can be easily converted into cash.
3. Hybrid Funds-It is a type of mutual fund that invests in both equity and fixed income asset so as to minimize the risk and increase the returns. Hybrid Funds combines the benefits of both equity and debt funds and relieves the investors from the worry of asset allocation.
A)Monthly Income Plan-These are hybrid funds which invest 75%-85% of the money in debt securities and the remaining in equities, this helps it to generate more returns than funds which invest money only in debt securities. These are safer than equity oriented funds.MIPs are generally of 2 types, In the first, the investor has the option to take dividends monthly, quarterly, half-yearly or annually. In the second option the dividends of the investor is not withdrawn by him and are added to the corpus.
B)Balanced Funds- These funds invest 65%-85% of the money in equities and the remaining in debt securities, they provide good returns to the investors. The exposure of debts helps to reduce the equity related risks.
C)Arbitrage Funds-These are equity-oriented mutual funds that try to take advantage of the mispricing in the price of stock between the derivatives market and futures market. The fund manager looks for such opportunities to maximize returns by buying the stock at a lower price in one market and selling it at a higher price in another market.