Mutual funds offer a wide range of investment options, catering to various goals and timeframes. Before we get started, let’s look at the different categories depending on maturity duration, investment objectives, and asset classes to help you make informed investing decisions.
In short
Different types of mutual fund schemes
Mutual fund types based on investment objectives
Mutual funds offer various investment options, like growth/equity, income/debt, hybrid, index, or liquid funds, depending on their investment objectives. Growth/equity funds focus on capital appreciation through stocks, while income/debt funds generate regular income through fixed-income securities. Hybrid funds are financial instruments that combine both equity and debt, providing a balanced approach. Index funds provide broad market exposure by tracking a specific market index, while liquid funds offer high liquidity by investing in short-term debt securities.
Equity fund
Equity funds invest directly in stocks, offering potential higher returns but increased volatility. They offer various strategies for achieving goals like capital appreciation, regular income, or tax savings, including dividend, growth, or dividend reinvestment options. Investors can select the option that aligns best with their preferences and financial objectives.
Debt fund
Debt funds provide investors with a steady income by investing in fixed-income securities like corporate and government bonds. These schemes, deemed safer than equity funds, provide modest returns, making them suitable for investors seeking stability and income generation.
Hybrid fund
Hybrid funds balance investments in equities and fixed-income instruments, providing stable returns and moderate growth. Equity funds typically allocate 60–70% in equities and 30–40% in debt schemes, offering a blend of growth and stability, making them attractive to investors.
Index funds
Index funds purchase stocks in equal proportions to track a benchmark index, ensuring a performance correlation with the index. Passively managed investments offer low-cost investment options with minimal turnover, as they typically don’t outperform or underperform their benchmark. Diversification is a significant advantage as it encompasses all sectors in the benchmark index, making it increasingly popular among investors.
Liquid fund
Liquid funds, also known as income schemes, are financial instruments that prioritize liquidity, capital preservation, and moderate income. Investing in short-term instruments typically results in lower returns compared to other funds. Liquid funds are commonly used for short-term surplus fund parking or systematic transfer plans into equity funds, as they do not impose an exit load.
Funds Based on Asset Class
Large-cap
Large-cap funds primarily invest in established, high-capitalized companies, typically within the top 100, to manage their assets. The strategic focus on established firms provides investors with stability, consistent returns, and lower volatility compared to mid-cap and small-cap funds. Large-cap funds offer investors the potential to benefit from the resilience and growth potential of top-market companies.
Mid-cap
Mid-cap funds significantly invest in mid-sized companies. Mid-cap stocks are companies that have the potential to transition into large-cap status, offering investors promising growth prospects. Mid-cap funds offer higher returns than large-cap funds but often have higher volatility due to the nature of the companies they invest in.
Small-cap
Small-cap funds invest in younger, high-growth companies with a higher risk of failure compared to larger companies. Small-cap stocks, despite their volatility and potential underperformance during recessions, often demonstrate strong outperformance as the economy recovers. Small-cap funds are preferred by investors seeking long-term returns, particularly those who are comfortable with higher risk.
Multi-cap
Multi-capital funds offer flexibility in equity funds, allowing investors to invest in large, mid, or small-cap stocks. Fund managers can adjust allocations based on market conditions, ensuring stable performance in various market environments.
Different types of schemes according to time period
Mutual fund schemes are divided into two groups based on their maturity period: open-ended and closed-ended schemes.
Open-ended fund
An open-ended fund allows investors to buy or sell units at any time because there is no fixed maturity period. This type of scheme provides increased liquidity, making it easier for investors to manage their money.
Close-ended fund
A closed-ended fund has a set maturity period. Investors can only invest in the fund for a limited time following its introduction. Once subscribed, investors can trade the fund units on publicly traded stock markets.
Mutual fund types based on income schemes
Long-term wealth creation of regular income
Investors can choose between growth and dividend options, which serve as sub-categories within each fund type. The growth option focuses on long-term wealth accumulation through compounding and reinvesting profits to increase the mutual fund’s NAV over time. This option is suitable for those seeking consistent growth without regular dividend payouts.
Dividend
The dividend option is a suitable option for investors seeking regular passive income. The AMC distributes dividends on a periodic basis from its accumulated profits. The NAV of this option, despite being preferred by some investors for extra income, is lower due to dividends.
Other types
Sectoral funds
Sector-specific funds, also known as sectoral funds, are investment strategies that concentrate on businesses within a specific industry or sector. Multi-cap funds are investment strategies that invest in stocks from large, mid-, and small-cap companies in specific sectors like pharmaceuticals, banking, energy, or technology. Sectoral funds, despite their potential for higher returns, are often viewed as high-risk investments due to their increased volatility. Investors in sectoral funds should understand relevant sectors and their performance trends to make timely exits due to the cyclical nature of returns.
Equity Linked Saving Schemes (ELSS)
ELSS funds, primarily investing in equities, provide diversification and tax benefits. ELSS redemption profits are considered long-term capital gains, subject to tax rates and a mandatory three-year lock-in period. Investors can choose to continue with the fund if it aligns with their financial goals, unlike auto redemption.
Global fund
Global funds are investment vehicles that invest capital in global companies’ stocks, providing investors with exposure to diverse global markets. These funds capitalize on opportunities in rapidly growing economies, offering investors access to the most dynamic and promising sectors worldwide. Global funds provide diversification benefits and long-term potential for robust returns by investing in diverse geographical regions and industries.
Exchange Traded Fund (ETF)
ETFs, or exchange-traded funds, allow investors to trade index funds directly from their accounts. ETFs, with holdings structured to match the relevant index, offer returns that are consistent with the index’s performance, making them excellent for individuals looking for index-matched returns. Furthermore, their passive management and reduced expense ratios when compared to active funds add to their rising popularity as a rapidly growing financial product.
Final thoughts
Mutual funds provide a diverse array of investment options that cater to different investor preferences and expertise levels. Direct funds, purchased without intermediary advisors, offer lower expense ratios and are primarily suitable for experienced investors. Regular funds purchased through advisors are a preferred choice for newcomers seeking guidance. Active funds aim to outperform benchmark indices, while passive funds mirror benchmark returns, each with its own associated expense ratio. Choose wisely based on your investment goals and market comfort level.
FAQs
Which type of MF gives highest return?
Equity mutual funds have the potential to provide the highest long-term returns among various mutual fund types. These funds primarily invest in stocks, which have historically yielded higher returns compared to other asset classes like bonds or money market instruments. However, equity mutual funds involve a higher level of volatility and risk.
Which type of mutual fund is safe?
Debt mutual funds are often seen as safer than equity funds. Debt funds generally invest in fixed-income assets, including government bonds, corporate bonds, and other debt instruments. Compared to equities, these instruments provide relatively consistent returns with less volatility. Debt funds are ideal for investors seeking capital preservation and consistent income generation while minimizing risk exposure. However, it's essential to note that while debt funds are generally less volatile than equity funds, they still carry some level of risk, including interest rate risk, credit risk, and liquidity risk. Therefore, investors should assess their risk tolerance and investment objectives before choosing a mutual fund category.
