Investments idea In India

Subtitle

What are the different types of mutual funds in India?

Switch on any business news channel or speak to anyone who is knowledgeable in finance will ask you to invest in a mutual fund. While you may be sold on the idea, you still need to know if it’s right for you basis your goals or objectives. After all, they say investments do not work on a one-size-fits-all approach. Before you decide to go for a mutual fund, you also need to know the kinds of mutual funds that exist - it’s always better to make an educated decision rather than a hasty one! 


But first let’s talk about what mutual funds are - as the name suggests, these funds are formed when capital that is collected by several investors is invested in a company’s shares, stocks or bonds. These collective investments are managed by a professional called the fund manager who ensures you get the highest possible returns. 


If you want to grow your wealth in the long run, there is no better and hassle-free way than a mutual fund. But remember you need to go for a credible fund house that has a fund manager who is experienced. 


What are the different types of mutual funds?


Now that we know what mutual funds are, let’s deep dive into the types of mutual funds that exist: 


Equity funds: As the name suggests, these funds invest in shares of companies having different market capitalisations and deliver potentially higher returns. An equity fund invests at least 60% of its assets in equity shares - it could be large-cap, mid-cap, small-cap or a mix of different market capitalisations. The remaining amount goes into debt and money-market instruments. It is the fund manager who decides if it’s the right time to buy or sell, based on the performance of the market. 


Under equity funds, there are other sub-categories: 


Sector-specific funds: These funds invest in a specific sector, be it infrastructure, banking or mining, or even segments like mid-cap, small-cap or large-cap segments. These funds works well for only those investors who have a high risk appetite  - this means they are willing to take risks in the hope of high returns. 

Index funds: This fund is a part of the mutual fund family, and invest in a broader market index, like the Sensex and Nifty. They are passively managed, which means the fund manager’s intervention is not allowed. There are two popular indices in India - BSE Sensex and NSE Nifty. In a nutshell, index funds track these funds. In addition, a low expense ratio is the highlight of these index funds. The total expense ratio for index funds is 1%, according to SEBI. 

Tax-saving funds: As the name suggests, tax-saving mutual funds offer the benefit of tax saving to the investor. Also known as Equity-Linked Savings Scheme (ELSS), this mutual fund scheme primarily puts in money in the stock market. One reason why several investors prefer this financial instrument is because it has the shortest lock-in period, i.e; three years. In simple terms, this also means that even if you would like to, you can’t sell your investment until its maturity date. 

Debt funds: A debt fund invests money in fixed-income securities such as corporate bonds, government securities, treasury bills and other money market instruments. The primary objective to invest in such funds is to earn interest and capital appreciation. The issuer decides the interest rate before hand as well as the maturity period, which is why it is called fixed-income securities. 


Here’s a list of debt funds: 

Dynamic bond funds: These bonds, as the name suggests, are dynamic in nature - this means the fund manager keeps changing the composition of the portfolio basis the fluctuating interest rates in the market. These funds take interest rates call and invest in instruments of different maturity periods. 

Income funds: These funds decide the interest rates and invest in debt securities with extended maturities. This also makes them more stable than dynamic bond funds. 

Short-term and Ultra Short-term Debt funds: Again, these are debt funds that invest in shorter maturities that range anywhere between a year to three years. These work well for risk-averse investors, since they are not impacted by interest rate fluctuations. 

Liquid funds: These funds invest in debt instruments that have a maturity of about 9- days - this makes them risk-averse. What’s more, they are better than savings bank accounts that offer great liquidity and higher returns. 

Gilt funds: These funds invest in government securities - these are highly-rated and you do not have to suffer from credit risk. This makes it ideal for risk-averse fixed-income investors. 

 

Balanced or hybrid funds : If you are a dilemma and do not know if equity or debt is better for you - then it is best to invest in a hybrid or balanced mutual fund. Of course, your age, risk appetite and the current market conditions play an important role. As an investor, if you are looking for diversification of your portfolio, then balanced mutual funds are your best bet. You can also re balance your portfolio on a regular basis. 


When you decide to go for these funds, remember you can enjoy the benefits of both worlds, and at the same time, have a low-risk profile.


The bottom line


All in all, the idea is to not follow the herd and go for a mutual fund that is in sync with your goals and objectives. After all, it is your hard-earned money and you should take your time to decide where you must invest!