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As a productive investing channel, mutual funds have recently gained a lot of appeal. They have emerged as a preferred investment option amongst retail investors because of the convenience of investing and professional fund management. One may choose from different types of mutual funds in India that are broadly classified into five major categories. The investment goal will determine the best type of mutual fund to pick for your needs.
Continue reading below to learn more about various Mutual Fund types and their examples.
Here are the various types of mutual funds one may invest in and more:
1. Equity Schemes
Equity mutual funds invest predominantly in equities and equity-related securities. These funds provide an excellent alternative to investing in stocks directly and have the benefit of professional fund management. Considering the broad investment objectives of different categories of equity funds, the classification of mutual funds is as follows:
Based on Market Capitalisation
Mutual funds focus on investing in companies in a specific market capitalisation segment. Examples of such funds are multi-cap fund, large-cap fund, mid-cap fund, small-cap fund, etc. SEBI defines market capitalisation segments based on the ranking of companies as per the full market capitalisation on a half-yearly basis.
The top 100 companies in such a list are categorised as large-cap companies; the companies featured between rank 101 and 250 are categorised as mid-cap companies. The companies ranked beyond 250th rank are classified as small-cap companies. In their respective market capitalisation segments, different companies generally reflect varying fundamental strength and growth potential. Different equity funds based on such classification tend to reflect a similar risk profile.
Based on Investing Strategy
Equity funds may also be categorised based on the investing strategies adopted by such funds. Examples of such funds are contra fund, value fund, focused fund, dividend yield fund, sectoral/ thematic fund, etc. Investors may invest in such mutual fund types to balance the portfolio’s risk.
Tax-Saving Funds
Equity Linked Savings Schemes (ELSS) are a specified category of mutual fund schemes that are eligible for a tax deduction of up to ₹1.50 lakh under Section 80C of the Income Tax Act 1961 and carry a lock-in period of 3 years from the allotment date.
2. Debt Funds
Debt funds invest predominantly in debt securities. Such funds tend to generate returns for investors primarily through the accrual of interest income. Some of the funds may also generate better returns through appreciation in portfolio valuation due to favourable changes in interest rates and improvements in credit quality. Here are the different types of debt funds available to investors:
Overnight and Liquid Funds
Overnight & Liquid funds invest in short-term securities with a one-day maturity and up to 91-days maturity, respectively. With a lower maturity period, such funds carry insignificant interest rate risk and credit risk. These funds are suited to investing in short-term surplus funds and emergency fund corpus.
Duration Funds
Duration funds aim to invest in debt securities with different durations. The examples of duration funds are ultra-short duration fund, short duration fund, medium duration fund, etc. The interest rate risk is directly proportional to the fund duration; thus, investors may choose a specific duration fund based on their risk appetite.
Gilt Funds
As the name suggests, Gilt funds predominantly invest in Government Securities (G-Secs) across different maturities. As the portfolio comprises mainly sovereign securities, such funds carry insignificant credit risk but may be subject to interest rate risk based on the portfolio duration.
Credit Opportunities Funds
Credit Opportunities funds aim to capitalise on the opportunities available across the credit spectrum. The difference in the yields of a risk-free Government Security and a debt security with a specific credit rating is referred to as the credit spread.
As such, the lower the credit rating, the higher the credit spread and yield. Credit Opportunities funds, therefore, aim to generate better returns by creating an investment portfolio of debt instruments with varied credit ratings. Examples of such funds are banking & PSU funds, corporate bond funds, etc.
3. Hybrid Funds
Hybrid funds create a combination of equity and debt investments within their investment portfolio. As such, hybrid funds allow investors to invest in different asset classes with a single investment product. Such funds may vary from conservative hybrid funds to aggressive hybrid funds or may be dynamic asset allocation funds. Further, SEBI allows mutual funds to offer multi-asset funds, enabling investment exposure to three or more asset classes.
4.Solution-Oriented Schemes
Mutual funds may also allow solution-oriented schemes catering to specific financial goals, such as children education, retirement planning, etc. Such schemes have a lock-in period of 5 years or the child’s age or retirement age, whichever is earlier. As such, the investors benefit from implied resistance to liquidating their investments sooner.
5. Other Schemes
This is the residual category for the mutual funds, comprising index funds/ ETFs (Exchange Traded Funds), Fund of Funds (domestic/ overseas). While index funds/ ETFs mirror an underlying index, and are passive investment products, Fund of Funds (FoFs) create an investment portfolio comprising of other mutual fund schemes, instead of directly investing in securities. Therefore, investors may benefit from the investment experience of the fund manager managing the FoF and the fund manager managing the schemes in which such an FoF has invested.
With different types of mutual funds in India offering various benefits and carrying different investment risks, investors may evaluate and make informed investment decisions.
