Mutual funds are investment vehicles that help you reach your financial goals. Mutual funds have different categories of funds in them and you can choose to invest in different funds based on your goals and risk profile and gain from diversification. Mutual funds can be open-ended or closed ended. You can invest in an open-ended mutual fund anytime, however in case of closed-ended mutual funds you can only at the time of the launch of the fund. Broadly, there are five types of open-ended mutual funds.
Let’s have a look at them:
Equity funds
Equity mutual funds invest in the shares or equities of different companies. This means you get to invest in the stock market but through a mutual fund. With such funds, you can buy and hold securities of various companies across sectors and market capitalizations. The mutual fund performance largely depends on the stock market performance. Thus, equity funds investment are said to be highly risky. Nevertheless, they have the potential to deliver significant returns in the long run and are ideal for long-term financial goals. These funds are ideal for investor with a high-risk appetite.Types of equity mutual funds:
- Large Cap Fund
- Mid Cap Fund
- Large & Mid Cap Fund
- Small Cap Fund
- Multi Cap Fund
- Dividend Yield Fund
- Value Fund, Contra Fund
- Focused Fund
- Sectoral/Thematic
- ELSS
Debt funds
Debt mutual funds invest in fixed income securities such as bonds, government securities, money market instruments, etc. These funds are comparatively low cost, generate relatively stable returns and are less risky than equity mutual funds as their main aim is generating regular income by way of interest. . Debt mutual funds are usually a good alternative to traditional banking products such as bank fixed deposits, term deposits, savings bank accounts, etc. These funds are suited for short-term financial goals when the investor’s risk appetite is relatively low and the need for capital protection is higher.Types of debt mutual funds
- Overnight Fund
- Liquid Fund
- Ultra-Short Duration Fund
- Low Duration Fund
- Money Market Fund
- Short Duration Fund
- Medium Duration Fund
- Medium to Long Duration Fund
- Long Duration Fund
- Dynamic Bond
- Corporate Bond Fund
- Credit Risk Fund
- Banking and PSU Fund
- Gilt Fund
- Gilt Fund with 10-year constant duration
- Floater Fund
Hybrid funds
Hybrid mutual funds invest in a mix of equity and debt. The equity component of the fund helps you earn returns, whereas, the debt component helps you maintains stability. These funds are able to cater to investors across the risk spectrum as the portion devoted to equity and debt varies across various sub-categories. Some funds have higher equity exposure while others have higher debt exposure. Investing in Hybrid Mutual funds are ideally suited for medium-term financial goals where an investor is looking for equal parts risk and equal parts capital protection.Types of hybrid mutual funds:
- Conservative Hybrid Fund
- Balance Hybrid Fund, Aggressive Hybrid Fund
- Dynamic Asset Allocation or Balanced Advantage
- Multi Asset Allocation
- Arbitrage Fund
- Equity Savings
Solution-oriented funds
These funds are designed for helping you meet certain long-term financial goals common to most people. The mutual fund industry currently has on offer funds to suit two of the most popular goals people have – retirement and children’s benefit. Since the aim of these funds is to meet the specified goal, these funds can be equity-oriented, debt-oriented or hybrid. Mutual funds offer various plans with different asset allocation and investors can choose the any one plan based on their risk appetite and investment horizon.Other funds
Another category is the index funds, exchange traded funds (ETFs) and fund of funds (FoFs). Index funds and ETFs both are passive mutual funds. They track and imitate the performance of a particular index. However, there are certain differences too. Index funds are mutual funds that seek to imitate the constituents of an index but ETFs are funds that are listed and traded on exchanges like the stock of a company. The NAV of an index fund is calculated like that of an equity mutual funds; whereas the NAV of an ETF is calculated on a real-time basis like the stock price of a company.Therefore, index funds have a higher expense ratio as compared to ETFs. Moreover, , the taxation of Index and ETFs depends on their type. For example, sectoral ETFs have the same tax treatment as equity funds, but gold ETFs are taxed like debt funds.
FoFs, as the name suggests, are mutual funds that invest in other mutual funds. At present in the industry we have equity FoFs and gold FoFs which are simply called gold funds. Equity FoFs invest in other equity mutual funds while gold funds invest in gold ETFs. The advantages of FoFs are that they help get exposure to various mutual funds with one investment. For instance, international FoFs help us gain exposure to international equity markets through mutual funds. Therefore, an investor, sitting in India can gain exposure to international stock such as Google, Apple, Deutsche Bank, Microsoft or even international themes such as healthcare, technology, etc by investing in an international FoF.
Similarly, in case of a gold fund, mutual fund investors can gain access to a gold ETF without having to open a demat account, which is a must for ETF investments. Thus, investors could end up getting the benefits of an ETF without going through the hassle of opening a demat account.
Each category of mutual fund has its own benefits and risks. As explained earlier, each category can be used to fulfil a specific financial goal based on investor risk appetite and investment horizon. An ideal investor portfolio should aim to have exposure to different fund categories. By diversifying investments you can spread the risk across in such a way that the underperformance of a few schemes can be off-set by the outperformance of others.
So consult a financial advisor or expert and choose your investments carefully.
