Types Of Mutual Funds: Part-1

Navigating the world of mutual funds can feel complex, but understanding the different types of Mutual Funds is the key to making informed investment decisions that align with your comfort level of investment. This guide will help you grasp the basic descriptions of various funds, making your investment journey simpler and more sustainable.

Mutual funds are generally categorized in various ways, often with overlapping characteristics. Let’s dive into the Part 1 of our exploration!

Part 1: Based on Asset Class

Equity Funds
Debt Funds
Hybrid Funds

Equity Funds

These funds primarily invest in stocks or equity-related instruments. They aim for capital appreciation and are generally considered higher risk with the potential for higher returns over the long term.

Further shared are the different types of Equity Funds –

  • Large-Cap Funds
    Invest in well-established, large companies with high market capitalization. They are generally considered less volatile, offering a degree of stability.

  • Mid-Cap Funds
    Focus investments on mid-sized companies that often have significant growth potential. They carry more risk than large-cap funds but are typically less volatile than small-cap funds.

  • Small-Cap Funds
    Invest in smaller companies, which can offer very high growth potential. However, they also come with higher risk due to their greater sensitivity to market swings.

  • Multi-Cap Funds/Flexi-Cap Funds
    These funds invest across all market capitalizations – large, mid, and small-cap companies – thereby offering broad diversification. Flexi-cap funds provide with even greater flexibility to shift allocations dynamically based on market opportunities.

  • Sectoral/Thematic Funds
    These invest in a specific industry (e.g., Technology, Banking, Pharma) or a broader theme (e.g., ESG, Infrastructure). They are considered high-risk as their performance is heavily dependent on the outlook and growth of that particular sector or theme.

  • Dividend Yield Funds
    The strategy here is to focus on companies that consistently pay high dividends, providing a potential source of regular income.

  • Contra Funds
    These funds follow a ‘contrarian’ investment strategy, seeking opportunities by investing in stocks or sectors that are currently out of favor but are believed to have strong long-term potential.

  • Focused Funds
    As the name suggests, these funds invest in a concentrated portfolio of a limited number of stocks (e.g., a maximum of 30).

  • Equity-Linked Savings Schemes (ELSS)
    Highly popular in India, ELSS funds offer significant tax benefits under Section 80C of the Income Tax Act. They come with a mandatory 3-year lock-in period.

Debt Funds

These funds primarily invest in fixed-income securities such as government bonds, corporate bonds, treasury bills, and other money market instruments. They are generally considered less risky than equity funds, aiming to provide more stable returns and regular income.

Below mentioned are the different types of Debt Funds –

  • Liquid Funds
    Invest in very short-term debt instruments (with a maturity of up to 91 days). They offer very high liquidity and minimal risk, making them an excellent choice for parking surplus funds for a short duration.

  • Ultra-Short Duration Funds
    Invest in debt instruments with a Macaulay duration between 3-6 months.

  • Low Duration Funds
    Invest in debt instruments with a Macaulay duration between 6-12 months.

  • Short Duration Funds
    Invest in debt instruments with a Macaulay duration between 1-3 years.

  • Medium Duration Funds
    Invest in debt instruments with a Macaulay duration between 3-4 years.

  • Long Duration Funds
    Invest in debt instruments with a Macaulay duration greater than 7 years.

  • Dynamic Bond Funds
    These funds dynamically adjust their portfolio’s duration based on prevailing interest rate trends, aiming to benefit from interest rate movements.

  • Corporate Bond Funds
    Primarily invest in bonds, typically focusing on those with high credit ratings to minimize risk.

  • Gift Funds
    Invest exclusively in government securities (G-secs). While they carry virtually no credit risk, they are still subject to interest rate risk.

  • Banking and PSU Funds
    By mandate, these funds invest a minimum of 80% of their assets in debt instruments issued by banks, Public Sector Undertakings (PSUs), Public Financial Institutions, and Municipal Bonds.

  • Overnight Funds
    Invest in overnight securities with a maturity of just 1 day. They offer extremely low risk and very high liquidity.

Hybrid Funds (Balanced Funds)

These funds strategically invest in a mix of both equity and debt instruments to strike a balance between risk and potential returns. The allocation ratio in this asset can be fixed or dynamically adjusted.

Types of Hybrid Funds –

  • Aggressive Hybrid Funds
    As the name suggests, they predominantly invest in equity (typically 65-80%) with a smaller allocation to debt, aiming for higher growth.

  • Conservative Hybrid Funds
    These funds primarily focus on debt instruments (typically 60-80%) with a smaller portion in equity, making them suitable for investors seeking lower risk.

  • Balanced Hybrid Funds
    These funds aim to maintain a relatively balanced allocation between equity and debt (e.g., around 40-60% each), offering a moderate risk-return profile.

  • Dynamic Asset Allocation/Balanced Advantage Funds
    These funds truly live up to their name by dynamically adjusting their allocation between equity and debt based on prevailing market conditions, aiming to optimize returns in varying market cycles.

  • Multi-Asset Allocation Funds
    These funds diversify across three or more distinct asset classes (e.g., equity, debt, gold, real estate), providing broader diversification.

  • Arbitrage Funds
    They aim to exploit temporary price differentials of an asset in different markets (e.g., between the cash and futures markets), offering attractive equity-like taxation benefits with relatively lower risk.

  • Equity Savings Funds
    These funds utilize a strategic mix of equity, debt, and arbitrage strategies, offering a balanced approach to risk and return.

This concludes Part 1 of our guide to types of mutual funds based on asset class. Stay tuned for more insights to help you make informed investment decisions!

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