Mutual funds have emerged as one of the most popular investment avenues for both beginners and seasoned investors. With professional fund managers, diversified portfolios, and relatively lower entry barriers, mutual funds offer a convenient route to participate in the financial markets. Whether your goal is wealth creation, income generation, or capital preservation, there’s likely a mutual fund that fits your objective. However, the sheer variety of mutual funds can be overwhelming. From equity and debt to hybrid and solution-oriented schemes, the categorization of mutual funds is extensive, and each category comes with its risk-return profile, time horizon, and investment philosophy.
Understanding the types of investment funds, along with their subcategories, is critical for making informed investment decisions. Each fund is structured to meet a specific investment goal, and choosing the wrong type could result in misaligned expectations and suboptimal returns. Knowing how these funds work, their risk levels, and their ideal investors can help you build a portfolio that aligns with your financial objectives.
Equity Mutual Funds
Equity mutual funds focus their investments in the stocks or shares of companies. They work well for investors who are seeking long-term capital gains, while at the same time being able to take on a more considerable risk.
Different Types of Equity Mutual Funds:
Large Cap Funds
These mutual funds invest in a company’s stocks listed as some of the top 100 companies by market capitalization. Such funds are usually considered more stable and less volatile than other equity mutual funds.
Mid Cap Funds
These mutual funds will invest in companies that are ranked 101-250. While these companies provide a higher potential growth than large cap companies, there is also a higher level of risk associated with them.
Small Cap Funds
Small-cap mutual funds invest in stocks of companies ranked 251 or below. While there is a high level of risk that goes with investing in small-cap mutual funds, there is the potential for substantial returns for those seeking longer-term returns.
Multi Cap Funds
Multi-cap mutual funds invest in more than one type of company; for instance, large, mid, and small cap companies. This type of fund, when considering investment options, may be more appealing to an investor who prefers the option of exposure to all market caps.
ELSS (Equity Linked Saving Scheme)
This equity mutual fund type comes with a lock-in of three years while also providing tax benefits under Section 80C a.e.; the amount contributed to the fund helps the investor claim tax deductions.
Sectoral/Thematic Funds
These types of investment funds invest in one specific sector, for example, IT/Technology, Pharma, or Banking. These types of funds are more uncertain as they invest heavily in one industry.
Value Funds & Contra Funds
These mutual funds invest in undervalued stocks or follow contrarian-attitude investment styles. Any investment strategies of this type, take time and require the investor to understand how to read the market.
Debt Mutual Funds
Debt mutual funds focus on fixed-income securities. These include government security, corporate bonds, treasury bills, and money market instruments. They are the best MF to invest for long term for conservative investors wanting security and consistent cash flows.
Sub-Categories of Debt Mutual Funds
Liquid Funds
Invest in securities that mature in 91 days or less. Low risk and ideal for short-term investments.
Ultra Short Duration Funds
Invest in securities that mature in three to six months. This will earn slightly more than a liquid fund.
Short Duration Funds
Duration up to one to three years. More appropriate to a medium-term horizon.
Corporate Bond Funds
Invest in high-rated corporate bonds. They generally have more return than government bonds but with moderate credit risk.
Credit Risk Funds
Invest in lower rated bonds for higher potential return, with a higher degree of credit risk.
Gilt Funds
Invest in government securities. There is no credit risk, but there is higher interest rate sensitivity.
Dynamic Bond Funds
Invest across the various durations with the potential for one-month returns managed based on views of interest rates.
Hybrid Mutual Funds
A hybrid fund is an investment fund comprised of both equity and debt instruments for investors looking to obtain a reasonable risk-return ratio.
Types of Hybrid Funds
Aggressive Hybrid Fund
Maintain a portfolio of 65 – 80 percent in equity and the balance in debt. This best investment fund for investors seeking capital appreciation with some stability.
Conservative Hybrid Fund
Invest most of the portfolio in debt while investing a small percentage in equity. Lower risk with moderate returns.
Balanced Advantage Fund
Invest dynamically in equity and debt allocation or to suit market conditions. The flexibility of Balanced Advantage funds is a great source of interest for risk-averse investors.
Arbitrage Fund
Invest in price differences between cash and derivatives market. Taxed like equity, and are low-risk with some return.
Solution-Oriented Mutual Funds
Sub-Categories
Retirement Fund
Has a lock-in period of 5 years or until retirement. It is invested in equity and debt for wealth creation.
Children’s Fund
Also has a lock-in period of 5 years. It seeks to prepare for the future of your child through long-term capital growth.
Other Categories
Index Funds
Mimic a market index like Nifty 50 or Sensex. Passively managed and cheaper. Useful for investors who believe the market is efficient.
Fund of Funds (FoFs)
Invest either in mutual funds and not directly in stocks or bonds. Good for the diversification approach, but it might have a higher expense ratio than typical mutual funds.
Exchange-Traded Funds (ETFs)
It can be traded like stocks on an exchange. Generally replicate an index and provide liquidity at lower fees.
Final Notes
Mutual funds offer a diverse range of investment options tailored to different financial goals, time horizons, and risk appetites. Whether you are a first-time investor or a market veteran, understanding the various categories and sub-categories of mutual funds helps you make better investment decisions. The key lies in aligning your financial objectives with the right type of mutual fund and staying consistent with your investment strategy.
If you’re looking for expert guidance for types of investment funds or to optimize your mutual fund investment journey, look no further than Gravitas Investments. Our team of experienced financial advisors can help you navigate the mutual fund landscape with ease and build a portfolio that aligns perfectly with your long-term goals.
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