Most people think that mutual fund is a platform of investment without any category or sub-category under it. However, that is a misconception.
You can think of the mutual industry as a big shopping mall, with various stores, catering to every type of investor, depending on the investor’s risk appetite and ideal investment duration.
Due to the lack of knowledge regarding mutual funds, many investors choose the wrong fund or do not invest in the industry at all.
In this article, I will talk about the various mutual categories and the respective sub-categories under it.
So, there are three broad categories of mutual funds, which are:
- Equity Funds
- Debt Funds
- Hybrid Funds
We will now talk about each category and the respective sub-categories under each of these.
Categories of Mutual Funds
1. Equity Fund
An equity mutual fund is the type of fund that invests in the stocks, shares and equity related securities of various companies. These funds are more volatile in nature because of their exposure to equity and they are also riskier.
However these funds also give higher returns. An equity fund is more suitable for long-term investment, rather than short-term.
Let’s look at the various types of equity funds:
A. Large-Cap Funds – These funds invest in companies that have a market capitalization of 1-100. They are the least risky equity fund and are not very volatile. The returns provided by them are decent, but not as high as mid, or small cap funds
B. Mid-Cap Funds – These funds invest in companies with a market capitalization of 101-250. They are relatively risky and are considered volatile. They provide more returns than large-cap funds and comparatively less returns than small caps.
C. Small-Cap Funds – They invest in companies that have a market capitalization of 251-500. These funds are highly risky and are quite volatile in nature. When the market is on its upward trend, funds like SBI Small Cap fund have even provided 50% (approximately) returns in 5 years. Click here to get more detailed information on SBI Small Cap fund.
D. Multi-Cap Funds – They invest in small, mid and large cap companies and therefore moderate the risk. These funds are moderately volatile and provide decent returns to investors.
E. ELSS – ELSS or equity linked savings schemes are popular among investors because they are tax saving funds. According to the Income Tax Act of 1961, these funds provide an exemption of upto 1,50,000 to its investors in a year.
However, they act as any other equity fund and have a lock-in period.
F. Sector Funds – These funds invest in a particular sector and are also known as thematic funds. They are highly volatile in nature and harbour a considerable amount of risk. The returns will obviously vary from one sector to another.
G. Contra Funds – These funds pick stocks and shares that are presently not performing well, but have immense potential. Basically, the stocks they pick are estimated to perform well in the future.
H. Value – They basically invest in stocks that are presently undervalued. It is often compared to growth investing, because they invest in stocks of companies which have a high growth prospect.
2. Debt Funds
These funds invest in government securities, bonds and other money market securities. They are relatively stable in nature because they are not exposed to the equity market. These funds obviously provide lower returns than the equity category.
They are suitable for investors who want to invest for a short duration and provide higher returns than fixed deposits and savings account.
Let’s look at the various sub-categories:
A. Low Duration Debt Funds – These funds invest in one-year bonds and are perfect to achieve short-term goals like buying a mobile phone or a short vacation.
B. Medium Duration Debt Funds – They invest in bonds and debt funds which have a maturity period of not more than 3-4 years
C. Dynamic Bond Funds – They basically invest in long-term bonds and their major objective is to gain stable income by switching their investment pattern between short term and long term debt fund.
D. Gilt Funds– They only invest in various government securities, including central government, state government and treasury bills.
E. Liquid Funds – They are one of the safest options and invest in 90 days bonds and other similar instruments. They are mostly used as an emergency fund.
3. Hybrid Funds
These funds invest in equity as well as debt and therefore moderate the returns. These funds carry moderate risk and relatively volatile.
There are three types of hybrid funds.
A. Conservative Funds – These funds invest in 40% in equity and the remaining in debt. They lean more towards the debt category.
B. Aggressive Funds – These funds invest 40% in debt and the remaining 60% in equity. They lean more towards the equity category.
C. Arbitrage Funds – They invest only in debt and cash securities and therefore harbour very little risk.
I think, now you have a clear idea about different types of mutual funds available in the market. Study each and every investment option carefully before investing your hard earned savings into market.