Mutual funds come in all shapes and sizes and there is one for everyone. Right from options to help you save on taxes, to options that give you regular income, to even one that lets you invest in the stock markets, mutual funds have it all.
But because there are just so many options to spoil you, you wouldn’t know where to start. To make this easier for you, we’ve listed out the different types of mutual fund schemes and what goal they serve.
A. Types based on your investment objectives:
#1. Growth Funds: If you want higher returns, can take the risk and can stay invested for a long time:
Growth funds invest mostly in equity (or stocks), and their returns depend on the performance of the markets. That’s why these are risky, mostly in the short term. But if you wait and stay invested in them for a long time let’s say 5-7 years then you’re likely to get good returns. The returns from few of the best growth funds over 3 years range from 9% to 20%. While the returns over 6 months are negative!
These funds don’t give regular income like fixed income funds, but their returns come from capital appreciation, which are gains made on selling an asset at a price higher than its purchase price:
For example, You bought Tata Steel shares at Rs. 100 and today the market value is Rs 750. The capital appreciation will be Rs. 650 [750-100].
#2. Income Funds (also called as long-term debt funds): If you want a steady flow of income with some amount of risk and can stay invested for a long time
These funds invest in fixed income bearing debt instruments like corporate bonds, government bonds and money market instruments having long maturities usually 5-8 years. Few income funds also invest in stocks that pay out high dividends.
The performance of these funds is subject to interest rates because when interest rates rise bond prices fall and vice-versa. Since these funds invest mostly in bonds, interest rates play a big role.
Over a year the range of returns from these funds is between 6% to 7.5% but the returns could be higher if you invest for a longer time. An ideal time to invest in them is when you anticipate interest rates to fall.
Another aspect to consider for these funds is the tax at 20% applicable on long-term gains (after 3 years). So it only makes sense to invest in these for people in the 30% tax slab.
#3. Liquid Funds (short-term debt funds): If you’re looking for quick, short-term safe returns:
These funds invest in money market instruments that mature in less than a year. They are good investments if you have spare cash and want it back within a short time. The range of returns from these funds is between 6% to 7% over a year.
#4. Balanced Funds: If you want higher returns than debt funds but are afraid to invest it all in equity then balance funds are great
These invest both in debt and equity and the proportion varies from fund to fund. One might invest 80% in equity and 20% in debt while one might invest 65% in equity and 35% in debt. The investment in equity is always higher than debt because equity gives better returns. The returns on these funds range from 10% to 18% depending on how long you stay invested.
Tax saving funds: If you’re looking for saving taxes and want higher returns (at a risk):
These are also called as ELSS (Equity linked savings scheme). Mostly these invest in equity shares and investments made in these tax deductible. Although they have a high risk the
Apart from these popular funds, there are a few other objective based funds like capital protection fund, retirement fund, and pension funds.
B. Funds based on speciality:
#1. Sector funds: These funds invest in a particular sector like banking, infrastructure, pharma etc. Their performance is based on the performance of the sector. These are risky because you’re restricted to only one sector and there isn’t any diversification. Example: You invested in banking sector funds and a banking scam like the Nirav Modi scam happens. Then your entire investment would be at stake. But if you invest in great sectors that are booming then you can get returns in the range of 18%-27%!
#2. Index funds: The stock markets have many different companies which makes it difficult to judge the general market condition. That’s why there are stock market indices (singular index) that act as indicators of the stock markets. There are benchmark indices like Sensex and Nifty made up of the best stocks from different sectors giving a general idea of how Indian markets are performing, and there are sectoral indices like Nifty Pharma made up of few pharma stocks only, indicating how the pharma sector is performing. If you independently want to create a portfolio of stocks by replicating these indices it might be tough, that’s why index funds make this concept easier. You can simply invest in them and get exposure to all the stocks in the index. And if something in the index changes then the index fund will also change accordingly. So if Nifty up then your Nifty Index fund will also be up.
#3. Fund of funds: These funds invest in other mutual funds and their performance depends on the performance of these funds. They are also called as multi manager funds and are safe because risks are adjusted between different mutual funds that the fund invests in.
C. Fund based on asset classes:
#1. Equity Funds:
Buying ownership in a company means investing in equity. Mutual Funds that invest in equity are called as equity funds. These funds give really good returns sometimes even up 30% but they are risky. Depending on the types of companies that the fund invests in there are:
1. Large Cap Equity Funds: These funds invest in the top 30 companies of India which have a high market capitalization (i.e high market value at least worth Rs 10,000 crore) They are also called as Blue Chip companies. Example: Tata, Reliance etc.
2. Mid Cap Equity Funds: These funds invest in medium scale companies who’s market capitalization is between Rs 10 crore and Rs 2 crore. Examples: Bajaj, Bata, Essar Steel etc.
3. Small Cap Equity Funds- These funds invest in small, growing companies having a market capitalization below Rs. 2 crores. Example: Videocon Industries, Vardhaman industries, AGI Infra etc.
#2. Debt Funds: Investing in debt means loaning money to someone in return of, periodic interests. Bonds are financial instruments and are just like loans. They are issued by governments (government bonds) and companies (corporate bonds) to borrow money from others and in return, they give interest/coupon to the investor. Bonds could be short term or long term depending on the maturity of the loans. Funds that invest in such debt instruments (like bonds) are called as debt funds.Fixed income funds, liquid funds, gilt funds (funds that invest only in government securities like government bonds) are few types of debt funds. Although debt funds don’t give returns as high as equity they are safer than equity. The returns range from 7%- 18% depending on the time you remain invested.
With so many options you can see how tough it would be to pick one that suits you best. That’s why first understand your need, and fix upon a goal. Then figure how much risk you can take and how much returns you expect. Once you’ve got this outlined pick a scheme that meets all these criteria’s.