Are you thinking about investing in mutual funds? If so, it is critical to understand their different categories. Mutual funds are the most comprehensive, simple, and adaptable way to build a diversified investing portfolio. Securities and Exchange Board of India (or SEBI, in short) is Mutual Fund regulatory authority which provides guideline regarding classification of the mutual fund based on its objective, underlying assets, investment strategy etc.
We broadly classify mutual fund schemes in to 5 categories. Let us now take a look at them.
NO. 1: EQUITY SCHEMES – Equity or stock based Mutual funds are the most common type. This type of fund invests mostly in equities and equity related instruments. There are a number of subcategories within this area. Some equity funds are categorised based on the market cap of the companies in which they invest: example: Large Cap, Mid Cap or Small-cap, Large and Mid Cap and Multi Cap. Multi Cap funds invest across small, mid and large cap stocks but with an equal measure of 25%. Flexi-cap funds on the other hand, can invest in any stock irrespective of the company’s market cap without being constrained by a given proportion.
Others are classified according to their investment strategy: aggressive growth, income-oriented, value, and so on. Equity Linked Saving Scheme (ELSS) invests in the Equity with a 3 year lock-in, and providing tax benefits under Sec 80C.
The objective of an equity fund is generally to seek long-term capital appreciation
NO. 2: DEBT SCHEMES – A debt fund (also known as income fund) is a fund that invests primarily in bonds or other debt securities. Debt funds invest in short and long-term securities issued by government, public financial institutions, companies
– Treasury bills, Government Securities, Debentures, Commercial paper, Certificates of Deposit and others. Debt funds have potential for income generation and capital preservation. Debt funds can be categorized based on the tenor of the securities held in the portfolio and/or on the basis of the issuers of the securities or their fund management strategies
NO. 3: HYBRID SCHEMES – These are the funds which invest in multiple schemes under different asset categories in a specific proportion. Let us look at the table below.
• Conservative Hybrid Fund – Investment in equity & equity related instruments between 10% to 25% and in debt instruments between 75% to 90% of the total assets.
• Balanced Hybrid Fund – Investment in equity & equity related instruments between 40% to 60% and rest of the assets in debt instruments.
• Aggressive Hybrid Fund – Investment in equity & equity related instruments between 65% to 80% and in debt instruments between 20% to 35% of the total assets.
• Dynamic Asset Allocation or Balanced Advantage Fund – Investment in equity and debt is managed dynamically.
Other examples of Hybrid Fund are Multi Asset Allocation Fund, Arbitrage Fund, Equity Savings Fund.
NO. 4: SOLUTION ORIENTED SCHEMES – Solution-oriented mutual funds promote investing for corpus preservation or capital appreciation to cover future expenses such as retirement, marriage, or kid’s education among others. These type of schemes have a lock-in period of 5 years or till objective of the fund is reached i.e. till retirement age is attained or till the child becomes a major etc.
NO. 5: OTHERS SCHEMES – Index Funds, Exchange Traded Fund Scheme (i.e. ETFs) and Fund of Fund scheme (i.e. FOFs) are additional types of funds categorised under other schemes. An Index fund or an exchange traded fund are open ended schemes replicating or tracking a particular index. Here the minimum investment in securities of a particular index is 95% of the total assets.
FOFs also follow similar guidelines but they operate in domestic and international markets as well. These schemes gives the investment a broader spectrum ultimately increasing diversification.
Well, now you know the mutual fund categories. Please also know that the benchmark, returns, risk profile, tax treatment etc. change based on the category of the fund. Start investing in mutual funds and earn profits with the help of this guide. We hope you have learnt something new today, as it is our constant endeavour to educate and make an ‘investor’ a ‘sound investor’! Happy Investing!