A mutual fund is a pool of money collected from many small and large investors for the purpose of investing in securities such as stocks, bonds, money market papers and similar assets. Mutual funds are operated by fund managers, who invest the fund’s capital and aim to generate capital gains and income for their investors.
Mutual Funds
Types of Mutual Funds
1. Equity: A fund that mainly invest in stocks .
Equity funds are further classified as :
Multi-cap fund:- An open-ended equity fund with a minimum of 65% of assets across large-cap, mid-cap, small-cap stocks.
Large Cap Fund:- An open-ended equity fund with a minimum of 80% of assets in large-cap stocks.
Large & mid-cap fund:- An open-ended equity fund with 35% of its assets each in both large-cap and mid-cap stocks.
Mid-cap fund:- An open-ended equity fund with a minimum of 65% of its assets in mid-cap stocks.
Small-cap fund:- An open-ended equity fund with a minimum of 65% of its assets in small-cap stocks.
Dividend yield fund: – An open-ended equity fund with a minimum of 65% of its assets in dividend yielding stocks.
Value fund:- An open ended equity fund that follows a value investment strategy.A minimum of 65% of total assets are invested in equity.
Contra fund:- An open ended equity fund that follows contrarian investment strategy. A minimum of 65% of total assets are invested in equity.
Focused fund:- An open ended equity fund with maximum 30 stocks in portfolio (where ever the fund intends to focus like small cap, mid cap, multi cap and large cap). A minimum of 65% of total assets are invested in equity.
Sectoral/ Thematic:- An open-ended equity fund that invests in a particular sector is called a sectoral fund. These funds invests in a particular theme. Minimum investment in equity of a particular sector or theme is 80% of total assets.
ELSS:- Equity-linked saving schemes come with a lock-in period of three years that offers tax benefits. The minimum investment in equity is 80% of total assets.
2. Hybrid: A fund that basically diversify the investment among two or more asset classes.
Hybrid funds are further classified as
Conservative hybrid fund:- An open-ended hybrid fund investing 75-90% of its assets in debt instruments and remaining 10-25% of its assets in equity .
Balanced hybrid fund:- An open-ended hybrid fund investing in equity and debt instruments at a ratio of 40-60%. Arbitrage is not permitted in these schemes.
Aggressive Hybrid Fund:- An open ended hybrid fund investing mainly 65-80% of its assets in equity & remaining 20-35% is invested in debt instruments.
Dynamic asset allocation or balanced advantage funds:- An open-ended dynamic asset allocation fund that invests in a mix of equity and debt instruments .
Multi-asset allocation:- An open-ended fund that invests in at least three asset classes with a minimum of at least 10% in each of the three asset classes.
Arbitrage fund:- An open-ended fund that generate returns from arbitrage opportunities with 65% of its total assets in equity.
Equity savings:- An open-ended fund that invests in equity, arbitrage and debt instruments with a minimum of 65% of its total assets in equity and 10% in debt . The Scheme Information Document must state the minimum hedged & unhedged proportion.
3.Debt: A fund that invest in interest oriented instruments like Government securities, Bonds, Debentures etc. They have a fixed maturity date & fixed interest payout.
Debt funds are further classified as
Overnight fund:- An open-ended debt fund that invests in overnight maturity securities.
Liquid Fund:- A open-ended fund that park money in money-market instruments such as commercial papers, certificates of deposit, treasury bills, with tenures of up to 91 days.
Ultra short duration fund:- An open-ended debt fund that invest in debt & money market instruments with weighted average tenure of 3-6 months.
Low duration fund:- An open-ended debt fund that invest in Debt & Money Market instruments with weighted average tenure of 6-12 months.
Money-market fund:- An open-ended debt fund that invests in money-market instruments with a maturity of up to one year.
Short duration fund:- An open-ended debt fund that invests in debt & money market instruments with a weighted average tenure of 1-3 years.
Medium duration fund:- An open-ended debt fund that invests in debt & money market instruments with a weighted average tenure of 3-4 years.
Medium to long-duration fund:- An open-ended debt fund that invests in Debt & Money Market instruments with a weighted average tenure of 4-7 years.
Long duration fund:- An open-ended debt fund that invests in Debt & Money Market instruments with a weighted average tenure of more than seven years.
Dynamic Bond:- An open-ended debt fund that invests across duration.
Corporate bond fund:- An open-ended debt fund that invests 80% of its total assets in the highest-rated corporate bonds.
Credit Risk Fund:- An open-ended debt fund that invests 65% of its total assets in Low rated corporate bonds.
Banking and PSU Fund:- An open-ended debt fund that invests a minimum of 80% of its total assets in debt instruments of banks, PSUs, public financial institutions.
Gilt Fund:- An open-ended debt fund that invests a minimum of 80% of its total assets in government securities across maturities.
Gilt fund with 10-year constant duration:- An open-ended debt that invests a minimum of 80% of its total assets in government securities that has a constant maturity of 10 years.
Floater Fund:- An open-ended debt fund that invests a minimum of 65% of its total assets in floating rate instruments.
4. Solution-Oriented Fund:-These funds mainly invest with an objective of certain goals like child education and retirement. Investment is done in equity stocks and Bonds.
Sub-Categories under these funds are
Children’s fund:- An open-ended fund that invests the majority of its total assets in equity & balance in debt. This fund comes with a lock-in period of at least 5 years or till the child attains the age of majority, whichever is earlier.
Retirement fund:- An open-ended fund having a lock-in period of five years or up to the age of retirement, whichever is earlier. Invests majority of its total assets in equity and remaining in debt
5. Others:- These funds includes Exchange traded funds(ETFs), Index funds, Fund of Funds(FOFs).
Index Funds/ ETFs:- An open-ended fund that tracks a particular index and invests a minimum of 95% of its total assets in securities of that particular index (which is being tracked).
FoFs (overseas/ domestic):- An open-ended fund of fund scheme that invest in an underlying fund. These funds invest a minimum of 95% of its total assets in the underlying funds.
Benefits of investing through Mutual funds
There are multiple benefits of investing through mutual funds:
- They are Professionally Managed by qualified fund managers.
- ELSS (Equity Linked Saving Schemes) funds offer a tax benefit under sec 80 C of Income tax Act,1961.
- They are affordable even for very small investors as they can start SIP in mutual funds with a very small amount i.e. Rs. 500 per month.
- They offers a much needed diversification to the portfolio by investing in a basket of equity and debt instruments.
- They are very easy to liquidate.
- They offer lot of convenience as transactions are completely online and transparent.