Types of Mutual Funds

There are over 1,400 Mutual Fund schemes in India across 40 Mutual Funds. The total number of options under all the schemes is over 5,000! Given such a large number of options, the investor is spoilt for choices.

An understanding of the classifications of the various categories of schemes will help sort clear the confusion to a certain extent.

EQUITY FUNDS

Any fund which invests not less than 65% of its corpus in equities is known as an equity fund.

 Large Cap Funds: Large cap funds are those funds which invest primarily in stocks of large blue chip companies. Different mutual funds have different criteria for classifying a company as a large cap company. Generally, companies with a market capitalisation greater than Rs. Rs 1,000 crores are considered as large cap companies.

Small and Mid Cap Funds: Small and mid cap funds are mutual funds which invest in small/medium sized companies. Again each mutual fund has its own criteria for classifying a company as a small cap or a mid cap company. Generally, companies with a market-cap between Rs. 500 and Rs. 1,000 crores are classified as mid cap companies and those with a market cap of lesser than Rs. 500 crores are classified as small cap companies. 

Multi Cap Funds: These are funds which are flexible with respect to their investments and invest across large cap, mid cap and small cap funds. Based on the market conditions they keep changing the proportion of the fund  invested in the different market cap companies. They are generally biased towards large cap companies with a major portion of the fund size invested such companies. 

 

PICK YOUR FUND…

Thematic Funds: These funds are also known as Sectoral Funds. They invest in companies of a particular sector or sectors based on the scheme mandate. Such funds can be focused on Infrastructure, Power, Banking sector, Pharma companies, only Public Sector Undertakings(PSUs) etc. 

Index Funds: An index fund is a mutual fund or exchange-traded fund(ETF) that aims to replicate the returns of a specific index. The fund manager does not have a major role as he has to only replicate the composition of the index.

DEBT FUNDS

Debt Funds are funds that invest in debt securities like debentures, commercial paper(CP), certificate of deposit(CD), government securities, etc.

Long Term Funds: Though there is no concrete definition, debt funds which invest in securities with a horizon of greater than four years are classified as long term debt fund.

Short Term Funds: Debt funds with a tenure greater than one year and less than four year fall under this category.

Gilt Funds: These are debt funds which invest only in Government Securities with maturities ranging from 91 days to ten years. Government securities are considered to be risk free.

Liquid Funds: Liquid funds invest in ultra short-term debt instruments with maturities of upto 91 days like money market instruments, short-term corporate deposits, commercial paper and treasury bills. They act as a good substitute to keeping money in a savings bank account as they offer a higher return and are liquid as well. 

Fixed Matutiy Plans(FMPs): As the name suggests, these are funds which have a fixed tenure like a fixed deposit. FMPs typically invest in debt securities and have maturities ranging from 3 months to 36 months. 367 days FMPs are extremly popular because of the double indexation tax benefit associated with them.

 

HYBRID FUNDS 

Hybrid funds are funds that invest in a mix of debt and equity based on their investment mandate.

Balanced Funds: are funds that invest about 65% of their corpus in equities and balance in debt securities. They are classified as Equity funds for tax purposes.

Monthly Income Plans(MIPs): These are predominantly debt funds and invest upto 25% of the corpus in equities. Though not guaranteed, MIPs are an avenue for individuals to park their retirement funds and earn regular income. The equity portion helps the fund deliver returns higher than traditional fixed deposits.

Debt Oriented Funds: These funds invest a very small portion of the corpus in equities(upto 10%). The equity portion helps adds a sweetener to the debt returns and delivers higher returns. 

Equity+Debt+Gold Funds: Innovation has led to launch of funds which invest their corpus in a mix of debt, equity and gold to try and capture the varying returns of the three investment categories in different market conditions.

So before making an investment, make sure you understand what the fund is and it fits into your portfolio.

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