Types of Mutual Funds — Equity, Debt, Hybrid, and Others

Mutual funds have emerged as a popular investment avenue in India, offering a range of products that cater to different investment needs, risk appetites, and time horizons. Understanding the various types of mutual funds can help investors make informed decisions to meet their financial goals.

Here’s an overview of the key types of mutual funds available in India.

1. Equity mutual funds.

Equity mutual funds primarily invest in stocks and aim for capital appreciation over the long term. They are suitable for investors with a higher risk tolerance. These funds can be further classified into several categories:

• Large-cap funds: Invest in large, well-established companies with a strong market presence. Large-caps are considered safe investments in equity.
• Mid-cap funds: Focus on medium-sized companies that have the potential for higher growth. Compared to large-caps, mid-caps are way riskier.
• Small-cap funds: Target small-sized companies, offering high growth potential but with even more increased risk compared to other caps.
• Multi-cap funds: Invest across companies of various market capitalizations. It is a combination of large, mid, and small caps.
• Sectoral or thematic funds: Concentrate on specific sectors (like technology or healthcare) or themes (like infrastructure or consumption).
• ELSS (Equity Linked Savings Scheme): Offer tax benefits under Section 80C of the Income Tax Act, with a lock-in period of three years.

2. Debt mutual funds.

Debt mutual funds invest in fixed-income securities like government bonds, corporate bonds, and money market instruments. They are suitable for investors seeking stable returns with lower risk compared to equity funds.

Types of debt funds include:

• Liquid funds: Invest in short-term money market instruments with maturities up to 91 days, offering high liquidity. Consider this like an FD’s alternative.
• Ultra-short duration funds: Invest in instruments with a duration between three and six months. It is also considered safe investment instrument.
• Short duration funds: Invest in securities with a duration of one to three years.
• Medium duration funds: Invest in instruments with a duration of three to four years. Midterm to semi long term investors can invest in such schemes.
• Long duration funds: Invest in securities with a duration of more than seven years. Recommended for long term investors.
• Corporate bond funds: Focus on high-quality corporate bonds.
• Gilt funds: Invest in government securities with varying maturities.
• Fixed Maturity Plans (FMPs): Closed-ended funds with a fixed tenure, investing in debt instruments that mature in line with the fund’s tenure.

3. Hybrid mutual funds.

Hybrid funds, also known as balanced funds, invest in a mix of equities and debt instruments to balance risk and return. Types of hybrid funds include:

• Aggressive hybrid funds: Invest predominantly in equities (65-80%) and the rest in debt securities. If there is any reserve option, then 2-3% in cash.
• Conservative hybrid funds: Allocate a higher portion to debt (75-90%) and the remainder to equities, which is opposite of the above hybrid scheme.
• Balanced hybrid funds: Maintain a balanced allocation between equities and debt. If the fund manager is accurate, the fund beats the index, all time.
• Dynamic asset allocation or balanced advantage funds: Adjust the allocation between equities and debt based on market conditions.
• Multi-asset allocation funds: Invest in at least three asset classes, with a minimum allocation of 10% to each, including gold and alternate assets.

4. Solution-oriented mutual funds.

These funds are designed to meet specific financial goals, such as retirement or children’s education. They typically have a lock-in period of five years.

Examples include:

• Retirement funds: Aim to provide financial security post-retirement.
• Children’s funds: Focus on generating wealth for children’s future needs like education and higher-education fees, and marriage expenses.

5. Index funds and ETFs.

• Index Funds: These funds replicate the performance of a specific index, such as the Nifty 50 or Sensex. They offer broad market exposure with low management fees. It is because the fund manager has to just replicate the index.
• Exchange-Traded Funds (ETFs): Similar to index funds, but traded on stock exchanges. They offer flexibility and liquidity.

6. Fund of Funds (FoFs).

FoFs in brief, Funds of Funds, invest in other mutual funds, providing diversification across different fund categories and asset classes. They can be equity-oriented, debt-oriented, or a mix of both, and foreign securities.

Conclusion.

Mutual funds in India offer a variety of investment options to suit different financial goals and risk appetites. From high-growth equity funds to stable debt funds, balanced hybrid funds to goal-oriented solutions, investors can choose funds that align with their investment objectives.

It’s crucial to assess one’s risk tolerance, investment horizon, and financial goals before selecting a mutual fund. Consulting with a financial advisor can also provide valuable insights and help in making informed investment decisions.