Mutual Funds are the funds that have the pool of Assets (Stocks or Fixed Income or otherwise, as the case may be) for the common investment objective as specific to that fund. This provides and investor a less risky asset class as compared to direct investing in stocks or secondary bonds; also, saves him from the hassle of active management.
Not only this, an investor can invest through SIP (Systematic Investment Plan) mode so that a disciplined monthly saving be made. There are various types of funds, and below mentioned will give a peek into the same.
Equity Mutual Funds
Equity Mutual Funds enable an investor to take positions in a basket of stocks through the pooled fund route. There are further various options or alternatives as available to the investor.
• Blue-chip: This is one type of mutual fund wherein diversified equity funds have major exposure in the large-cap domain. Further, this product is also suitable for any long-term wealth creation.
• Core Diversified: These have higher exposure to large-cap stocks, and they take little exposure in mid-cap stocks for generating more returns.
• Mid and Small Cap: Mid and Small-cap funds usually add a lot of diversity to the portfolio. Further, they are capable of providing above-average returns while the markets are rising. However, these types of mutual funds are more prone to volatility when markets go down.
• Balanced: These are equity-oriented and hybrid and have around 60%-65% of the equity portfolio and the rest in debt. These provide capital growth and are considered as a medium to long-term investment option.
• Sector or Thematic Funds: When you invest only in the stocks of selected sectors or industries, such funds are known as Sector or Thematic Funds. The returns in these funds are very dependent on the performance of the respective sectors or industries.
• Arbitrage: This type of mutual fund leverages the price differential in the cash and derivatives market for generating returns. This fund is suitable for investors looking to generate low volatility returns over the short to medium term.
• ELSS: Equity Linked Savings Schemes (ELSS) is an open-ended Equity Mutual Fund that doesn’t just help you save tax but also allows you to grow your money. It qualifies for tax exemptions under section (u/s) 80C of the Indian Income Tax Act,1961.
• ETF: These are traded on stock exchanges just like stocks. These funds hold assets like stocks, bonds, and commodities. The return and risk on these funds are directly related to the underlying asset or index.
Debt Mutual Funds
Debt Mutual Funds enable an investor to take positions in a basket of fixed income investment through the pooled fund route. There are further various options or alternatives as available to the investor.
• Gilt Funds: These funds invest in government securities having medium to long-term maturities. Further, there is no risk of default and liquidity in the case of government securities.
• Income Funds: These funds are made from the return from both interest income and capital appreciation or depreciation.
• Monthly Income Plans: These are debt-oriented hybrid funds having 70%-85% of the portfolio in debt.
• Liquid Funds: These invest in safer short-term instruments like Certificates of Deposit, Treasury Bills, and Commercial Papers for a period of fewer than 91 days.
• Fixed Maturity Plans: These are closed-end funds that invest in debt securities with maturities that match the scheme’s term. These are issued for various maturity periods ranging from 3 months to 5 years.