Today we are going to discuss various types of mutual funds in India. Mutual funds are one of the most popular investment options these days. It is an investment formed when an Asset Management Company (AMC) or fund house collects investments from individuals or investors with common investment objectives.
The finance professionals manage the accumulated investment and purchases securities such as stocks, bonds with keeping the main intention to provide maximum returns to investors. Investors can diversify their portfolios by investing in mutual funds. As the funding would cover several instruments and get returns with fund units based on the amount they spend. Profits or losses can be experienced proportionally to their investment.
How Mutual Funds work
Unlike stocks, mutual funds don’t invest in a particular share, instead, mutual funds invest in several investments to balance any possible loss and provide the best returns. Investors don’t need to worry about the market, timing, or any specific share. The professional financial personnel do this, they do research and analysis to invest all the investors’ accumulated funds. Then after getting the profit, each investor will get the returns based on the units of share they have invested on. The price of the fund unit of a mutual fund is referred to as the Net Asset Value (NAV). It is the price at which one can buy or sell their fund units of a mutual fund plan. The NAV is calculated by dividing the total worth of assets in the portfolio minus liabilities.
1. It begins when a fund house identifies potential and profitable opportunities in the market subject to key risks.
2. The fund house then calculates the newly identified opportunity against existing investment opportunities and analyses it to add more value for current investors.
3. The fund manager or specialist creates a portfolio of different asset classes like equities, debt, and securities. The asset allocation of the scheme decides the mutual fund category like Equity Fund, Debt Fund, or Hybrid Fund.
4. The fund manager or fund house specialist creates all the details and documents for market regulator SEBI approval.
5. After getting approved, the fund house makes the scheme available to the public for subscriptions through a New Fund Offer (NFO).
Types of Mutual Funds In India
In India, mutual funds are classified as Equity Funds, Debt Funds, and Hybrid Funds. Each of these has its characteristics of risk and return.
As the name suggests, the funds are invested mostly in equity shares. Mutual funds are considered Equity Funds if the investments are at least 65% of its portfolio in equity. This category has the highest returns offering among all other types of mutual funds. Have to mention, these returns depend on market situations and other economic factors.
Types Of Equity Mutual Funds In India
Small Cap Funds
Funds that invest in shares of companies have small market capitalization. As per SEBI Small Cap companies are ranked after 251 in market capitalization.
Mid Cap Funds
Like Small Cap funds, Mid Cap funds invest in equity or equity-related instruments of companies having medium market capitalization. As per SEBI, mid-cap companies are ranked between 101-250 in market capitalization.
Large Cap Funds
Large Cap Funds invest in equity of companies having large market capitalization. In market capitalization, these companies are ranked between 1-100 by SEBI.
Multi Cap Funds
Multi-Cap Funds invest in equity or equity-linked instruments of companies from all kinds of market capitalization. The fund manager analyses and researches market conditions to maximize the return and minimize the risk factor.
These funds invest in equity also, but primarily for companies of specific sectors like It and FMCG.
These are types of equity funds having the sole purpose of tracking and evaluating the performance of stock market indexes like BSE, SENSEX, NIFTY, etc. So, the Index Mutual Fund returns would be similar to its based Index.
ELSS (Equity Linked Saving Scheme)
It is the only mutual fund that is covered under section80c of IncomeTaxAct, 1961. Investors can claim a Tax deduction by investing in ELSS.
Debt Mutual Funds
These types of funds mostly invest in debt and other fixed-income instruments like government bonds, certificates of deposit, etc. Mutual Funds are considered as Debt Mutual Funds only if the funds do invest a minimum of 65% of its portfolio in debts. These funds don’t suffer major effects due to market fluctuations hence, reducing the risk factor. But, the returns are not so high and predictable.
Types Of Debt Mutual Funds In India
Dynamic Bond Funds
These debt funds have portfolios modified depending on the fluctuations in the interest rates.
Income Funds invest in securities with a long maturity period. So, these funds provide stable returns over time. On average, these funds take five years to get mature.
Short and Ultra Short term Debt Funds
These debt funds invest in securities that get mature in 1-3 years and are perfect for investors not willing to take many risks.
Liquid Funds are also debt funds that invest in assets and securities that in just 91 days. It offers much higher returns than savings accounts.
These types of debt funds invest in high-rated government securities. The returns are not much high but also carry very minimum risk.
Credit Opportunity Funds
It is the riskiest class of debt funds. Credit Opportunities Funds invest in low-rated securities having higher return potential hence, carry much more risk.
Fixed Maturity Plans
These debt funds invest in fixed income securities like government bonds. One can invest in FMPs during the offer period and the investment will be locked for a specific period.
Hybrid Mutual Funds
As the name suggests hybrid, these type of funds invests in both equity and debts. Due to the diverse portfolio, these funds offer a balance between risk and returns. The fund expert will invest the fund in different aspects depending on the market research to provide the maximum returns. These funds are great for large exposure and diversify your area of investment in both equity and debts.
Types Of Hybrid Mutual Funds In India
Equity oriented Hybrid Funds
These funds invest 65% or more of their portfolio in equity and the rest in debt instruments.
Debt oriented Hybrid Funds
Opposite, these funds invest at least 65% or more in debts like government securities and the rest in equity.
Monthly Income Plans
The primary motive of these funds is to provide a steady return over time by investing in debt instruments. Equity investments are restricted at 20% and investors can decide to receive dividends on a monthly, quarterly, or annual basis.
To maximize returns, these funds invest in securities by purchasing at lower prices from one market and selling them to another market at a higher price.
Benefits of investing in Mutual Funds
Investment is worry-free
The financial expert personnel of the funds takes care of the investments. They are good at managing investment portfolios and are also supported by analysts and researchers to work efficiently, hence judging and picking up the best performing stock or stocks that might perform well doesn’t get difficult. So, the investors don’t need to worry about their investments because it is taken care of by the experts.
No fixed time
The Lock-in period is a predetermined time before which investors couldn’t withdraw the investments. Some investments allow premature withdrawals before maturity, but after serving a penalty. Most mutual funds do not come with any lock-in period except ELSS. So, Investments can be withdrawn at any given moment without any penalty.
Mutual funds come at much lower costs and are suitable for any beginner or small investor. Asset Management Companies (AMC) levy expense ratios between 0.5%-1.5% of the total amount invested by the investors. SEBI mandated the expense ratio to be under 2.5% maximum, which makes mutual fund investments very economic.
Systematic Investment Plan (SIP)
It is one of the biggest benefits of mutual fund investments. Investors can invest small amounts according to their financial limits with the availability of monthly, quarterly, bi-annual frequency as per preference. Mostly there is no limitation of investment and withdrawal time. It is advised to start SIP investments as early as possible and continue as long as possible to get the most returns. We have discussed SIP in a separate post, please visit to know everything about the Systematic Investment Plan (SIP).
Investors can switch their investments to any other fund in the same fund house. Experienced investors know when to enter and exit specific funds. So, if one realizes that some other fund may perform better than the current fund invested, he/she can switch.
Diverse in nature
Mutual funds invest in various assets or shares of several companies. This diversification allows stability in the return margin. If one class fails to perform as expected then another class may do perform well and stops from bearing the high loss.
As most mutual funds don’t have any time foundation for withdrawal, investors can access high liquidity. The investments can be withdrawn at any emergency and the process takes only 4-7 days.
All the mutual fund houses and plans are under strict norms of SEBI and RBI. Also, all fund houses in India created a self-regulatory body known as the Association of Mutual Funds in India (AMFI), which controls all fund plans. So, investors don’t need to worry much about their investments.
Who should invest in Mutual Funds
It is an ideal investment way for all types of investors. The wide array of mutual funds has something to offer each type of investor according to their risk management capability or investment goals. So, mutual fund investments can be made by individual investors as well as institutional investors also.
When to invest in Mutual Funds
Although, investing in Mutual Funds doesn’t require any specific or perfect market timing but experience investors consider some factors like Stock market condition and national economic condition. In case one wants to invest in SIP, it can be done at any moment.
India has one of the highest savings rates globally. This wealth creation makes it necessary for Indian investors to look beyond the traditionally favored bank savings account, Fixed Deposits, and gold towards mutual funds. However, the lack of awareness has made mutual funds a less preferred investment way. While investors of all categories can invest in the securities market on their own, a mutual fund is a better choice for the only reason that all benefits come in a package.