Mutual funds are financial products that pool money from multiple investors to invest in a diversified portfolio of stocks, bonds, or other securities.
Mutual funds are managed by professional portfolio managers who allocate the fund's assets in an attempt to achieve specific financial objectives, such as growth and income.
When you invest in mutual funds you get units /shares of a fund. Each share represents an investor’s part ownership in the fund and the income it generates.
Why Mutual Funds are Papuler?
Mutual Funds are Professionally Managed:
Diversified:
Affordable:
Liquidity:
What types of mutual funds are there?
1. Equity Mutual Funds
- Primarily invest in stocks of companies.
- Invest in equities and equity related instruments of companies
- Seek growth in the long term, can be volatile in the short term
- Suitable for investors with higher risk appetite and longer investment horizon
Subcategories
Large Cap Fund
Focus on well-established companies. At least 80% investment in equity & equity related instruments
Large and Mid Cap Fund
At least 35% investment in large cap stocks and 35% in mid cap stocks
Mid Cap Fund
At least 65% investment in mid cap stocks
Multi Cap Fund
At least 65% investment in equity & equity related instruments
Flexi Cap Fund
An open ended dynamic equity scheme investing across large cap, mid cap, small cap stocks
Small Cap Fund
At least 65% investment in small cap stocks
Contra Fund
Scheme follows contrarian investment strategy with at least 65% in stocks
Focused Fund
Focused on the number of stocks (maximum 30) with at least 65% in equity & equity related instruments
Value Fund
Value investment strategy, with at least 65% in stocks
Dividend Yield Fund
Predominantly invest in dividend yielding stocks, with at least 65% in stocks
Sectoral/ Thematic Fund
At least 80% investment in stocks of a particular sector/ theme
ELSS
At least 80% in stocks in accordance with Equity Linked Saving Scheme, 2005, notified by Ministry of Finance.
Deduction from taxable income of up to Rs.1,50,000 under Sec 80C
Invests predominantly in equity and helps generate market-linked returns
Shortest lock-in period of 3 years, as compared to other tax-saving options
2. Debt Mutual Funds
- Invest in fixed-income instruments like government and corporate bonds.
- Invest in different types of fixed income securities
- Aim to earn interest income and capital appreciation
- Suitable for investors seeking returns with low or moderate risk
Subcategories
Overnight Fund
Overnight securities/ Securities having maturity of 1 day
Liquid Fund
Debt and money market securities with maturity of upto 91 days only
Ultra Short Duration Fund
Securities with Macaulay duration of the portfolio between 3 months - 6 months
Low Duration Fund
Securities with Macaulay duration of the portfolio between 6 months - 12 months
Short Duration Fund
Securities with Macaulay duration of the portfolio between 1 year- 3 years
Medium duration fund
Securities with Macaulay duration of the portfolio between 3 year- 4 years
Medium to long duration fund
Securities with Macaulay duration of the portfolio between 4 year- 7 years
Long Duration Fund
Securities with Macaulay duration of the portfolio greater than 7 years
Dynamic Bond
Securities across duration
Corporate Bond Fund
Minimum 80% investment in corporate bonds only in AA+ and above rated corporate bonds
Credit Risk Fund
Minimum 65% investment in corporate bonds, only in AA and below rated corporate bonds
Banking and PSU Fund
Minimum 80% in Debt instruments of banks, Public Sector Undertakings, Public Financial Institutions and Municipal Bonds
Gilt Fund
Minimum 80% in G-secs, across maturity
Gilt Fund with 10 year constant Duration
Minimum 80% in G-secs, such that the Macaulay duration of the portfolio is equal to 10 years
Floater fund
Minimum 65% in floating rate instruments (including fixed rate instruments converted to floating rate exposures using swaps/ derivatives)
3. Hybrid Mutual Funds
- Invest in a mix of equities and debt
- Aim to generate wealth from equity exposure while the debt portion fortifies them against any downturn
- Suitable for investors looking for a mix of safety, income and modest capital appreciation
Subcategories
Conservative Hybrid Fund
10% to 25% investment in equity & equity related instruments; and 75% to 90% in Debt instruments
Balanced Hybrid Fund
40% to 60% investment in equity & equity related instruments; and 40% to 60% in Debt instruments
Aggressive Hybrid Fund
65% to 80% investment in equity & equity related instruments; and 20% to 35% in Debt instruments
Dynamic Asset Allocation or Balanced Advantage
Investment in equity/ debt that is managed dynamically (0% to 100% in equity & equity related instruments; and 0% to 100% in Debt instruments)
Multi Asset Allocation
Investment in at least 3 asset classes with a minimum allocation of at least 10% in each asset class
Arbitrage Fund
Arbitrage funds are hybrid mutual funds that generate returns by using the strategy of simultaneously buying and selling of securities in different markets to take advantage of different prices.
Equity Savings
Equity and equity related instruments (min.65%); Debt instruments (min.10%) and Derivatives (min. for hedging to be specified in the SID)
4. Solution-Oriented and other Schemes
Subcategories
Retirement Funds
Lock-in for at least 5 years or till retirement age whichever is earlier
Children’s Funds
Lock-in for at least 5 years or till the child attains age of majority whichever is earlier
Index Funds/ ETFs
Minimum 95% investment in securities of a particular index
Fund of Funds (Overseas/ Domestic)
Minimum 95% investment in securities of a particular index
5. Index Funds
- Portfolio replicates the index
- Aims to provide returns in line with index
- Suitable for investors seeking returns similar to index
Benefits
- Mirrors a market index.
- Includes securities as per index and in the same proportion/weightage
- Passive fund management
- Aims to offer returns and undertake risks similar to the of the index it tracks
- Fees capped at: 1.5% (of the amount one invests annually)
- Complete transparency in knowing the stocks in the portfolio
6. Exchange Traded Funds (ETFs)
- Tracks an index, a commodity, bonds, or a basket of assets
- Trades like a common stock on the stock exchange
- Passive fund management
- Lower cost of fund management than active funds
7. Gold Exchange Traded Funds
- Invests in pure physical gold bullion of 99.5% purity. May also invest in gold related instruments approved by SEBI and Gold Deposit Scheme of banks upto 20% of net assets
- Each unit of Gold ETFs represents a defined weight in gold, typically one gram.
- The price of Gold ETF unit moves in line with the domestic price of gold.
- Gold ETF are benchmarked against the price of gold.
- Considered as non-equity mutual funds for the purpose of taxation Eligible for long-term capital gains benefits if held for 3 years No wealth tax is applicable on Units of Gold ETFs
8. Fund of Funds (FoF)
- Fund of funds invest in the units of another mutual fund. Hence, FoFs are also known as multi-manager funds
- The portfolio of a FoF scheme includes the units of different mutual fund schemes the FOF invests in
- The fund management cost includes expenses of FoF along with underlying schemes.
- Investing in an FoF helps diversify the portfolio and benefit from risk diversification
9. Arbitrage Funds
- The word 'Arbitrage' refers to the practice of buying a security in one market, and then selling it at a higher price in another market.
- An Arbitrage fund buys a security in the cash market and simultaneously sells it in the Futures market, at a higher price. The price difference in these two markets helps generate returns.
- The positions have to be held until expiry of the derivative cycle and both positions need to be closed at the same price to realize the difference.
- The cash market price converges with the futures market price at the end of the contract period. Thus it delivers risk-free profit for the investor/trader.
- Price movements do not affect initial price differential because the profit in one market is set-off by the loss in the other market.
- Suitable for cautious investors who want to benefit from a volatile market without taking on too much risk
10. International Funds
- International funds expose your portfolio to international markets, by holding Equity/ Debt of companies listed abroad
- An international equity fund may also hold some Indian equity or debt and invest in money market instruments to manage liquidity.