What are the different types of Mutual Funds?
Here are the different types of equity and debt schemes.
Liquid Funds invest in highly liquid money market instruments. They invest in securities with a residual maturity of not more than 91 days. Investors can park money in them for a few days to few months.
Ultra Short-Term Funds invest mostly in very short-term debt securities and a small portion in longer-term debt securities. Investors can park their short-term surplus for a few months to a year in these funds.
Fixed Maturity Plans are closed-ended debt mutual funds that work almost like fixed deposits. They invest in debt instruments with less than or equal to the maturity date of the scheme. Securities are redeemed on or before maturity and proceeds are paid to the investors. FMPs are a good alternative to fixed deposits for investors in the higher tax bracket.
Short-Term Funds invest mostly in debt securities with an average maturity of one to three years. They perform well when short term interest rates are high. They are suitable to invest with a horizon of a few years.
Dynamic Bond Funds invest across all classes of debt and money market instruments with varying maturities. These funds have an actively-managed portfolio that varies dynamically with the interest rate view of the fund manager. They are ideal for investors who want to leave the job of taking call on interest rates to the fund manager.
Income Funds invest in corporate bonds, government bonds and money market instruments with long maturities. They are highly vulnerable to the changes in interest rates. They are suitable for investors who are ready to take high risk and have a long term investment horizon. The right time to invest in these funds is when the interest rates are likely to fall.
Gilt Funds invest in government securities. They do not have the default risk because the bonds are issued by the government. However, they are highly vulnerable to the changes in interest rates and other economic factors. These funds have high interest rate risk. Invest with a long-term horizon.
Debt-oriented hybrid funds, as the name suggests, invest mostly in debt and a small part of the corpus in equity. The equity part of the portfolio would provide extra returns, but the exposure also makes them a little risky. Invest with a horizon of three years or more.
Equity-oriented hybrid funds invest a mix of equity (at least 65 per cent of the corpus) and debt. These schemes are less volatile than pure equity funds because of the mixed portfolio. The debt investments provide stability in times of volatility. These funds are suitable for new stock investors and very conservative equity investors.
Largecap funds invest mostly in big companies. Funds identify these companies by their market capitalisation. These companies are considered safe to invest because they are likely to be well-established players and leaders in their respective filed. This is the reason why largecap funds are considered suitable for conservative equity investors. These funds are likely to offer modest returns as they carry relatively less risk.
Diversified funds invest across market capitalisations, depending on the market view of the fund manager. Since the portfolio is spread across different market capitalisations, they are less risky than mid- and small-cap funds, but a little riskier than large cap funds. They are suitable for investors with modest risk appetite.
Equity Linked Savings Schemes or tax planning mutual funds are suitable for investors looking to save taxes under Section 80 C of the Income Tax Act. Investments in these funds qualify for a tax deduction of up to Rs 1.5 lakh. They come with a mandatory lock-in period of three years.
Midcap funds invest mostly in medium-sized companies. These companies can be risky as they may or may not realise their full potential. However, if they succeed, they will become large companies and investors will be rewarded handsomely. Investors with high risk appetite should bet on these funds.
Smallcap funds invest in small companies. These companies can be extremely risky, as there will be very little information about them available in the public domain. However, they can also offer phenomenal return. They are suitable only for investors with a very high risk appetite.
Sector funds invest mostly in a particular sector or along the lines of a defined theme. Since the investments are concentrated on a single sector or theme, sector funds are considered extremely risky. It is very important to time the entry into and exit from them as the fortunes of sectors changing in different cycles in the economy. They are meant for investors with an intimate knowledge about a particular sector. Investors should take only a small exposure in them.