Mutual funds are an investment class that allows you to invest your money in various securities, including stocks and bonds. Each mutual fund’s specific investment purpose determines the underlying investment instrument. A professional fund manager manages the money.
There are different types of mutual funds. The market regulator, SEBI, has categorized mutual funds into multiple categories. However, this article will only look at the important types of mutual funds.
We have broadly segregated mutual funds as per their asset allocation:
- Equity Funds
- Debt Funds
- Hybrid Funds
What are Equity Funds?
Equity funds are mutual funds that invest in stocks or company shares, also known as equity securities. Equity funds are typically more aggressive and volatile than other mutual funds, such as debt funds. But at the same time, equity funds have the potential to provide high returns. For this reason, equity mutual funds are often best suited for those investors with a long-term investment horizon who can stomach the ups and downs of the stock market.
Equity funds are also primarily classified into the following different types:
Large Cap Funds: These funds have to invest at least 80% of their corpus in the top 100 companies as per market capitalization.
Mid Cap Funds: These are equity mutual fund that predominantly invests in mid cap stocks, i.e. 101st – 250th company. The minimum investment in these stocks should be 65%.
Small Cap Funds: A small cap fund is an open-ended equity scheme that predominantly invests in small-cap stocks. The fund manager has to invest at least 65% of total assets in small-cap stocks. Small cap stocks are 251st and beyond in terms of full market capitalization.
Multi Cap Fund: A multi cap fund is an equity mutual fund that invests in a mix of large, mid and small-sized companies across sectors. These funds must invest at least 25% of their corpus in large, mid and small-cap stocks.
Flexi Cap Equity Fund: A flexi-cap equity fund is an open-ended equity scheme that invests in a mix of large, small, and mid-sized companies. The fund’s manager can adjust the fund’s asset allocation based on market conditions. As per SEBI, the minimum investment in equity and equity-related instruments of a particular theme shall be 65% of total assets.
What are Debt Funds?
Debt mutual funds are a type of investment fund that primarily invests in fixed-income securities, such as bonds and Treasury Bills. These funds seek to provide investors with regular income through interest payments and capital appreciation through the growth in the value of the underlying securities.
Types of Debt Funds
Liquid Funds: It invests in short-term debt and money market instruments with maturities of a maximum of 91 days. The aim is to provide investors with liquidity and stability of returns.
Ultra-Short Duration Fund: As per SEBI regulations, ultra-short duration debt funds are debt mutual fund schemes with a Macaulay duration of three months to six months.
Low Duration Fund: As per SEBI regulations, low-duration debt funds are debt mutual fund schemes with a Macaulay duration of between six months to twelve months.
Short Duration Fund: As per SEBI regulations, short-duration debt funds are debt mutual fund schemes with a Macaulay duration of one year to three years.
Corporate Bond Fund: SEBI guidelines state that corporate bond debt funds must invest at least 80% of their assets in corporate bonds with a AAA or above credit rating. These bonds can be considered ideal for investors who seek to invest in high-quality corporate bonds with lower risk tolerance.
What are Hybrid Funds?
A hybrid mutual fund is a type of investment that invests in equity and debt investments. These funds can invest in commodities such as gold as well. The goal of a hybrid mutual fund is to provide investors with exposure to both types of assets while also managing risk through diversification.
Types of Hybrid Mutual Funds
Aggressive Hybrid Fund: These funds mainly invest in equity and equity-related instruments and invest a minimum of 65% and a maximum of 80% of total assets and 20% -35% of total assets in debt instruments.
Conservative Hybrid Fund: A minimum of 10%-25% of total assets is to be invested in equity and equity-related instruments. 70%-90% is invested in debt instruments.
Dynamic Asset Allocation Fund: This dynamic scheme can shift from 100% debt to 100% equity asset class, which is perfectly suitable for investors who wish to automate their asset allocation.
Multi-Asset Allocation: In this scheme, there should be a minimum investment of at least three asset classes with a minimum of 10% for each asset class. The scheme gives investors exposure to investing in multiple asset classes.
Arbitrage Fund: The arbitrage strategy is taking advantage of the price differences in the cash and futures markets. There is no directional call on the stock as there is simultaneous buying and selling in the market. The scheme invests 65% – 100% equity assets and 0 – 35% debt instruments.
Conclusion
Mutual funds are an excellent tool for anyone looking to invest their money. That said, not all mutual funds are created equal, so it is important to know what you’re getting into before jumping into mutual funds. We have outlined some popular types of mutual funds in this blog.
