Today we will learn different types of Mutual Funds and its detailed description.
Mutual funds can be categorised based on different attributes (like Equity Mutual Fund
, asset class, time frame, goal based, age factor etc.)
Mutual Fund types Based on Structure :
Structure Classification : open-ended Funds, close-ended funds and interval funds are broad in nature and the difference depends on how flexible is the purchase and sales of individual mutual fund units.
- Open-Ended Funds : These are the funds which are always open for the investors to invest or withdraw the money on all working days they do not have any fixed maturity period. Liquidity is the key feature of open ended schemes. This is why its unit capital changes constantly with new entries and exits. An open-ended fund may also decide to stop taking in new investors if they do not want to (or cannot manage large funds).
- Close-Ended Funds : These are the funds which have a fixed maturity period like: 3 Years, 6 Years. These funds are opened at a particular launch date for investors to buy or sell their funds or at the completion of their maturity. SEBI mandates investors to be given either repurchase option or listing on stock exchanges to exit the scheme.
- Interval Funds : This has traits of both open-ended and closed-ended funds. Interval funds can be purchased or exited only at specific intervals (decided by the fund house) and are closed the rest of the time. No transactions will be permitted for at least 2 years.
Mutual Fund types Based on Investment Objective :
Mutual Funds can be classified according to the investment objective –
- Equity Mutual Fund : Equity funds are mutual funds which invest majorly in equity stocks of the company. Equity funds are considered to be risky but they tend to give higher returns in the long term.
There are also different types of Equity Funds :
- Large Cap Fund
- Mid Cap Fund
- Small Cap Fund
- Sector Fund
- Multi Cap Fund
- Dividend Yield Schemes
- Thematic Fund
Before knowing the details of equity funds lets first understand what Market Capitalisation is.
We get to understand the size of a company through Market Capitalisation means the company is small or large.
Large Cap Fund :
- In large cap fund, a large portion of investment is done in companies with large market capitalisation. Large cap are big, well established companies of the equity market. These companies are strong, reputable and trustworthy. Large cap companies generally are top 100 companies in a market..
- Investment in large cap fund is best suited for investors with low risk appetite and for investment of lump sum amount.
- Large cap funds have lower growth potential and give investors lower returns on investment as compared to mid and small cap funds. But provide good stability in returns on investment, if invested for longer duration.
- Liquidity of shares of large cap fund is very high because they are reputed, mature and firmly established players in the market.
- They are highly followed in stock market and usually tapped by institutional investors
Mid Cap Fund :
- In mid cap funds, a large portion of investment is done in companies with medium market capitalisation i.e. a bunch of 100-250 companies in a market after large cap companies
- Stocks of mid cap companies are riskier then large cap but not as risky investment instrument as small cap
- Mid cap funds have better growth potential and give investors higher returns on investment as compared to large cap funds
- Investment in mid cap companies are best suited for investors with moderate risk appetite and are most popular among investors.
- Liquidity of shares of mid cap companies is more as compared to small cap funds.
- They are highly followed in stock market and usually tapped by institutional investors
Small Cap Fund :
- In small cap funds, a large portion of investment is done in companies with small market capitalisation i.e. having a market cap of less than INR 500 crore.
- Stocks of small cap companies are highly risky and volatile investment instrument.
- Small cap funds have exponential growth potential and give investors high returns on investment
- Investment in small cap is best suited for investors with high risk appetite and has good knowledge of stock market.
- Liquidity of shares of small cap companies is least.
- They are under followed in stock market and usually untapped by institutional investors, giving a huge opportunity to wise investors to grow their investment quickly.
Sector Cap Fund :
- Sector funds invest in stocks of companies that operate in a particular industry or sector of the economy like banking, PSU, infra, rural, pharma etc.
- These funds are riskier than the well diversified ones and are more volatile due to holdings in one particular sector.
- Sector funds are best when there are high chances that a particular area is going to get great gains in the coming year. For instance, the banking sector is performing well on the market these days and hence providing good returns to the investors of banking sector funds.
Multi Cap Fund :
- An open-ended equity scheme which invests at least 65% of its assets across large cap, mid cap, and small cap stocks and equity related instruments.
- Stocks of multi cap funds are riskier then large cap
- Multi cap funds can provide relatively higher returns than other funds like large cap, mid cap, and small cap as they have the advantage of investing across the market.
- In a multi cap fund, the fund manager re-balances between large, mid and small stocks and this is a lower-cost option than if you had to switch between large, mid and small cap mutual funds yourself.
Dividend Yield Schemes :
- An open-ended equity scheme which invests at least 65% of its total assets in equities, predominantly in dividend-yielding stocks
- It is important to note that this fund invests in stocks which are capable of providing good dividends but the fund is not under any obligation to declare dividends.
- ELSS is a dedicated mutual fund scheme that allows investors to save tax. It also provides an opportunity for long term capital appreciation.
- An ELSS fund manager invests in a diversified portfolio, predominantly consisting of equity and equity related instruments that carry high-risk and have the potential to deliver high-returns.
- In this fund investors cannot invest for less than 3 years
- In ELSS schemes under section 80 C you get tax rebate of up to 1.5 Lakhs
Thematic Fund :
- An open-ended scheme which invests at least 80% of its total assets in a particular sector or theme such as Banking, IT or Pharma
- These funds are a risky investment option as their returns are dependent on a performance of single sector/theme but if timed correctly, can also give extremely high returns
2. Debt Funds : Debt funds are mutual funds which usually invest in the government securities, corporate bonds etc. Debt funds are more stable and less volatile to the market conditions. Debt funds are less risky then equity funds and the returns are also less.
There are also different types of Debt 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 Fund
- Corporate Bond Fund
- Credit Risk Fund
- Banking and PSU Fund
- Gilt Fund
- Gilt Fund with 10 years constant duration
- Floater Fund
|S.No.||Category of Scheme||Broader Scheme Classification||Schemes Characteristics||Type of Scheme (Uniform Description of Schemes)||Returns Details|
|1||Overnight Fund||Maturity Type Debt Fund||Investment in overnight securities having maturity of 1 day||An open ended debt scheme investing in overnight securities||It possesses very little interest rate fluctuation risk and credit default risk.|
|2||Liquid Fund||Maturity Type Debt Fund||Investment in Debt and money market securities with maturity of upto 91 days only||An open ended Liquid Scheme||Liquid funds generally give returns higher than savings accounts but similar to fixed deposits.|
|3||Ultra Short Duration Fund||Duration Based Debt Funds||Investment in Debt and Money Market instruments such that the Macaulay duration of the portfolio is between 3 months and 6 months||An open ended ultra-short term debt scheme investing in instruments with Macaulay duration between 3 months and 6 months||These funds generally offer returns higher than bank fixed deposits and involve a relatively low amount of interest rate risk.|
|4||Low Duration Fund||Duration Based Debt Funds||Investment in Debt and Money Market instruments such that the Macaulay duration of the portfolio is between 6 months and 12 months||An open ended low duration debt scheme investing in instruments with Macaulay duration between 6 months and 12 months||These funds generally offer returns higher than bank fixed deposits and involve a relatively low amount of interest rate risk.|
|5||Money Market Fund||Scheme holding Type Debt Funds||Investment in Money Market instruments having maturity upto 1 year||An open ended debt scheme investing in money market instruments||This fund provides investors with liquidity and relatively low risk of principal by investing in relatively low-risk short-term securities.|
|6||Short Duration Fund||Duration Base Debt Funds||Investment in Debt & Money Market instruments such that the Macaulay duration of the portfolio is between 1 Year-3 Years||An Open ended short term debt scheme investing in instruments with Macaulay duration between 1 Year and 3 Years||Considering the maturity period, these funds provide relatively low returns but also carry low amount of risk.|
|7||Medium Duration Fund||Duration Base Debt Funds||Investment in Debt & Money Market instruments such that the Macaulay duration of the portfolio is between 3 Years-4 Years||An Open ended medium term debt scheme investing in instruments with Macaulay duration between 3 Years and 4 Years||To provide investors an opportunity to generate attractive returns with moderate degree of liquidity.|
|8||Medium to Long Duration Fund||Duration Base Debt Funds||Investment in Debt & Money Market instruments such that the Macaulay duration of the portfolio is between 4 Years-7 Years||An Open ended medium to long term debt scheme investing in instruments with Macaulay duration between 4 Years and 7 Years||Longer duration funds may provide higher returns but are more sensitive to interest rate changes.|
|9||Long Duration Fund||Duration Base Debt Funds||Investment in Debt & Money Market instruments such that the Macaulay duration of the portfolio is greater than 7 Years||An Open ended debt scheme investing in instruments with Macaulay duration greater than 7 Years||Longer duration funds may provide higher returns but are more sensitive to interest rate changes.|
|10||Dynamic Bond||Duration Base Debt Funds||Investment across duration||An open ended debt scheme investing across duration||These funds are ideal for investors with 3-5 years time horizon and moderate risk appetite.|
|11||Corporate Bond Fund||Issuer Based Debt Funds||Minimum investment in corporate bonds 80% of total assets (only in highest rated instruments)||An open ended debt scheme mostly investing in highest rated corporate bonds||These funds are capable of providing high returns and also carry a low amount of risk by investing in high-rated instruments.|
|12||Credit Risk Fund||Issuer Based Debt Funds||Minimum investment in corporate bonds 65% of total assets (only in below highest rated instruments)||An open ended debt scheme investing in below highest rated corporate bonds||These funds are typically capable of generating 2-3% higher returns compared to risk-free instruments. They also carry a higher level of risk.|
|13||Banking and PSU Fund||Issuer Based Debt Funds||Minimum investment in debt instruments of banks, public sector undertakings, public financial institutions 80% of total assets||An open ended debt scheme mostly investing in debt instruments of banks, public sector undertakings, public financial institutions||It is an emerging class of debt funds that provides liquidity, carries low risk and volatility, and can generate reasonably stable returns.|
|14||Gilt Fund||Issuer Based Debt Funds||Minimum investment in Gsecs- 80% of total assets (across maturity)||An open ended debt scheme investing in government securities across maturity||Since, this fund mostly invests in government securities, it carries no credit risk. However this type of a fund carries a high level of interest rate risk.|
|15||Gilt Fund with 10 year constant duration||Issuer Based Debt Funds||Minimum investment in Gsecs- 80% of total assets such that the Macaulay duration of the portfolio is equal to 10 years||An open ended debt scheme investing in government securities having a constant maturity of 10 years||They will invest a minimum 80 per cent in government securities.|
|16||Floater Fund||Scheme holding Type Debt Funds||Minimum investment in floating rate instruments- 65% of total assets||An open ended debt scheme mostly investing in floating rate instruments||This type of fund has a low level of interest rate risk because the instruments it holds have their rates periodically reset to prevailing interest rates.|
There are also different types of Hybrid Funds
- Conservative Hybrid Fund
- Balanced Hybrid Fund
- Aggressive Hybrid Fund
- Dynamic Asset Allocation/ Balanced Advantage Fund
- Multi-Asset Allocation Fund
- Arbitrage Fund
- Equity Savings Fund
Conservative Hybrid Fund :
Conservative fund as the name indicates it is made for conservative investors with low-risk appetite. These funds invest mostly in debt instruments. Fund objective is to invest around 70-90% money in debt and remaining in equity. These funds were earlier known as MIP (Monthly Income Plan). It can invest the remaining 25%-10% of its assets in equity and equity-related instruments. Since this fund, invests a majority of its assets in debt instruments, it has a relatively low risk among hybrid funds. The ideal investment horizon for Regular Savings Funds is 3 or more years. These funds are taxed like debt funds.
Balanced Hybrid Fund :
This fund invests in both equity and debt in nearly equal (balanced) proportion. Fund objective is to invest 40-60% in equity-related instruments and remaining in debt. These funds are suitable for investors with a moderate risk profile. No arbitrage is permitted in this fund.
Aggressive Hybrid Fund :
Aggressive Hybrid Fund has aggressive investment strategy and higher exposure to equity and equity related instrument. The objective of this fund is to invest 65-80% in equity related instrument and remaining in debt instruments. These funds are suitable for aggressive investors. It invests the remaining 20%-35% of its assets in debt instruments. This fund has the flexibility to include an arbitrage exposure. The volatility of these funds is higher than other hybrid funds but lower than pure equity funds.
Dynamic Asset Allocation/Balanced Advantage Fund :
Dynamic Asset Allocation fund as name indicates asset allocation in this fund is dynamic. It can take extreme exposure to either equity or debt based on market condition. Asset allocation ratio in this fund is decided by formula. These funds are suitable for the investor who prefers less volatility in returns. An open-ended scheme which has the flexibility to invest between 0%-100% in either equity or debt. It will correspondingly increase its equity exposure in undervalued markets and reduce debt exposure.
Multi-Asset Allocation Fund :
Multi-Asset Allocation fund invests in multiple asset class or at least 3 asset class with 10% exposure to each. The asset types include equity, debt, commodity, real estate etc. These types of fund reduce the risk as portfolio is diversified.
Arbitrage Fund :
Arbitrage fund is a type of mutual fund that takes advantage of the differences in the price of securities in the cash and derivatives market to generate a return. The arbitrage fund makes money from low risk buy and sell opportunities available in cash and future market. This fund is suitable for low-risk investors. An open-ended scheme which invests in arbitrage opportunities with at least 65% of its total assets invested in equity and equity-related instruments. This type of fund gives a return similar to liquid funds. These funds make money by buying and selling securities on different exchanges.
Equity Savings Fund :
An open-ended hybrid scheme which invests in equity, arbitrage and debt. This type of fund uses derivatives to reduce risk while maintaining a minimum of 65% of its assets in equity (to be classed as equity for tax purposes). It also invests a minimum of 10% in debt instruments. This fund comes with moderate amount of risk due to moderate exposure to equity.