Mutual funds are one of the most attractive and affordable ways to create a diversified portfolio of investments. They are comprehensive, easy, and flexible and allow investors with several options to match their diverse risk appetites. As per SEBI, mutual funds can be divided into 3 major categories – Equity Funds, Debt Funds, and Hybrid Funds.
Equity Funds
Equity or growth funds are one of the most popular mutual fund schemes. They allow you to invest largely in stock markets (at least 65% of their corpus in equity and equity-related securities) and thus categorized as high risk. However, they are favourites among investors in the prime earning stage because of their potential to achieve long-term capital growth. They are also referred to as diversified equity funds since they invest over a range of sectors to distribute the risk.
These funds can be further classified into three broad categories:
Sector-Specific Funds
These mutual fund schemes allow you to invest in a specific sector such as infrastructure, banking, etc. or specific segments such as mid-cap, small-cap, or large-cap segments. They are ideal for investors with a high-risk appetite aiming for higher returns.
Index Funds
These funds are ideal for investors with a medium risk appetite since they promise returns in line with the index they mirror and limit the loss to the proportional loss of that index.
Tax Saving Funds
These funds are tax-saving investments and usually have a3 year lock-in period. They are also referred to as ELSS (Equity Linked Savings Scheme) that invests over 80% of its total assets in equities.
Debt Funds
These mutual fund schemes are comparatively less volatile than equity funds. They usually invest 65% of the amount in fixed income securities like bonds, government securities (gilts), corporate debentures, and money market instruments. They are ideal for investors with a low-risk appetite aiming for a steady income. A common type of debt fund in terms of AUM (Assets Under Management) is a liquid fund that allows investors to park their excess cash for short periods (instead of putting it in a savings account).
Hybrid Funds
As the name suggests, these mutual fund schemes allow you to invest in two or more asset classes including equities, debt, gold, overseas securities money market instruments, etc. They are ideal for investors looking for moderate returns with comparatively low risk. They are more commonly invested in only two asset classes namely equity and debt.
Besides the above-mentioned classification, mutual fund schemes can also be divided into open-ended or close-ended schemes.
Open-Ended Funds
They allow you to invest/enter and redeem/exit at any point in time and do not have a fixed maturity period.
Closed-Ended Funds
They allow you to invest/enter in schemes during the initial period or NFO period. They are listed on the stock exchange(s) and have a fixed maturity date.
A variety of mutual fund schemes on offer allows investors to choose one that suits their risk appetite or investment objective. That is why they are preferred by both individual retail investors and institutional investors.
