Types of Mutual Funds: Equity, Debt, ETF, Index and more

First salary in hand, settled all responsibilities, and some money saved. Now comes the question: should I keep it in the bank or invest in different types of Mutual Funds? This is a common question among all newcomers. We find ourselves on search engines, looking for information on what Mutual Funds are, the types of Mutual Funds, rate of return, AUM, NAV, and often end up feeling confused and lost.

First and foremost, take a moment to relax and congratulate yourself for considering ways to grow your money, which would otherwise be sitting idle. The next step is to learn how to choose a Mutual Fund that aligns with your dedicated goal and long-term vision. You are young and willing to learn and grow, starting early is the mantra and having a lot of patience and a little bit risk taking ability is the requirement. You are all set to find yourself a great way to make efficient use of your money.

What is a Mutual Fund?

Mutual Funds are like a team of people who join their money together to invest in different things like stocks and bonds managed by seasoned professionals. Picture it as an investment team led by an expert coach.

What makes Mutual Funds attractive, especially for beginners, is the expert oversight. Fund managers adeptly navigate the markets, sparing investors the intricacies of stock selection.

There are different types of Mutual Funds. Some aim for long-term capital growth, much like a strategy plan, while others focus on creating periodic income, providing a steady source of income.

Selecting the right Mutual Fund hinges on aligning your investment goals with the fund’s strategy. Seek advice from a financial advisor if uncertainty persists.

So, if you want to start growing your money, Mutual Funds can be a good first step. It’s like being on a winning team without the stress!

Also read: Tourism Stocks In India: Emerging Trends From Taj Mahal To BSE

Types of Mutual Funds in India

Mutual funds come in various types, each designed to cater to different investment goals, risk tolerances, and time horizons. Here are the main types of mutual funds:

1. Equity Funds: These funds primarily invest in stocks or equities. They aim for capital appreciation over the long term. Types of equity funds include:

-Large Cap Funds: Invest in large, well-established companies.
-Mid Cap Funds: Focus on medium-sized companies with growth potential.
-Small Cap Funds: Target smaller companies with high growth potential.

2. Debt Funds: These funds invest in fixed-income securities like bonds, government securities, and money market instruments. They aim for regular income and capital preservation. Types of debt funds include:

-Liquid Funds: Invest in very short-term securities and are highly liquid.
-Income Funds: Focus on a mix of government and corporate bonds.
-Gilt Funds: Invest primarily in government securities.

3. Hybrid Funds: These funds combine both equity and debt components. They aim to balance risk and return. Types of hybrid funds include:

-Balanced Funds: Maintain a fixed allocation of equity and debt.
-Dynamic Asset Allocation Funds: Adjust their equity-debt allocation based on market conditions.

4. Index Funds: These funds aim to replicate the performance of a specific market index (e.g., Nifty 50, S&P 500). They are passively managed and typically have lower expense ratios.

5. Tax-saving (ELSS) Funds: These equity-linked saving schemes help investors save on taxes under Section 80C of the Income Tax Act. They have a lock-in period of three years.

The suitability of a particular type of mutual funds depends on individual’s own financial goals, risk tolerance, and investment horizon.

Also read: Best PSU Stocks In India In 2023: Bulls In Public Sector

Let’s explore the different types of mutual funds in India

Equity funds

Equity funds function as a kind of ticket to holding a stake in several businesses. They are run by specialists who research the stock market and make choices that will grow your wealth. It’s like you have a staff of financial geniuses on your side! The interesting thing is that equity funds concentrate on stock investments. These are modest stakes in large corporations. Imagine owning a slice of your favorite pizza, but in companies!

Let’s now explore several fundamental equity fund categories that newcomers frequently find fascinating:

1. Large Cap Funds

2. Large & Mid Cap Funds

3. Multicap (Diversified) Funds

4. Mid Cap Funds

5. Small Cap Funds

6. Flexi Cap Funds:

–Investment Focus: Flexi Cap funds have the flexibility to invest across market capitalizations (large-cap, mid-cap, and small-cap) based on the fund manager’s assessment of market conditions.
–Objective: The primary goal is to provide the fund manager with the freedom to adjust the portfolio composition based on their outlook on different market segments.
–Risk Level: The risk level of a Flexi Cap fund can vary based on the allocation. When heavily invested in small-caps, it may carry higher risk compared to a predominantly large-cap portfolio.
–Suitable Goals: Suited for investors seeking a flexible investment strategy that can adapt to changing market conditions.
–Expected Rate of Return: Returns can vary widely depending on the allocation between different market segments.
–Time Frame: A time horizon of at least 5-7 years is recommended for equity investments.
–Top Examples :

a) Kotak Flexicap Fund
b) HDFC Flexi Cap Fund
c) Aditya Birla Sun Life Flexi Cap Fund

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Debt Funds

Bonds, government securities, and corporate debentures are the main fixed-income assets that debt funds, a subcategory of mutual funds, invest in. Unlike equity funds that focus on stocks, debt funds aim to offer investors a steady and reliable income stream. These funds center their strategy on investments that provide regular returns, distinguishing them from equity funds.

–Investment Focus: Debt funds primarily invest in fixed-income securities like bonds, government securities, and money market instruments. They are designed to provide regular income.

–Objective: Ideal for investors seeking a stable income stream and capital preservation. These funds aim to minimize risk by investing in relatively safer debt instruments.

–Suitable Goals: Short-term goals like saving for a vacation, creating an emergency fund, or managing cash reserves. Also, useful for risk-averse investors looking for an alternative to traditional savings accounts.

-Expected Rate of Return: Debt funds have historically produced annual returns between 6 and 9%. It’s crucial to remember that returns might change depending on the state of the market.

-Risk Level: Debt funds are generally considered to have lower risk compared to equity funds. However, they are not entirely risk-free, as they can be affected by interest rate changes and credit risk.

-Time Frame: Debt funds are suitable for both short-term and medium-term investment horizons. They can be a good option for investors with a time horizon of 1-3 years.

Top Examples:

a) HDFC Corporate Bond Fund

b) ICICI Prudential Banking and PSU Debt Fund

c) SBI Short Term Debt Fund

Hybrid Funds

Hybrid Funds are a mix of stocks and bonds. They’re like having a balanced meal with both main course and dessert. They aim for a blend of growth and stability.

–Investment Focus: These funds put money in both large and mid-sized companies. It’s like having a team with experienced players (large-caps) and promising rookies (mid-caps).

–Objective: Great for folks who want the best of both worlds – safety from big companies and growth potential from the up-and-comers.

–Suitable Goals: Hybrid funds are like a Swiss army knife for your money. They work well for building wealth over the long run or meeting medium-term financial goals.

–Expected Rate of Return: Historically, hybrid funds have delivered yearly returns between 12-15%. But remember, actual results can vary.

–Time Frame: Think of this as a marathon, not a sprint. It’s best to keep your money here for at least 5-7 years. That’s when you’ll see the best results.

Balanced Funds: Examples:

-HDFC Balanced Advantage Fund

-ICICI Prudential Equity & Debt Fund

Aggressive Hybrid Funds: Examples:

-Mirae Asset Hybrid Equity Fund

-SBI Equity Hybrid Fund

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Index Fund

These funds aim to replicate the performance of a specific market index (like the Nifty 50 or S&P 500). They do so by investing in the same securities in the same proportion as the chosen index. Index funds are passively managed.

–Investment Focus: These funds seek to match the performance of an index of the market, such as the Sensex or Nifty 50.

Objective: To deliver passive returns that track the selected index.

Suitable Goals: Long-term wealth accumulation, financial goals with a lower cost approach.

Expected Rate of Return: The returns closely mirror the performance of the chosen index, minus a small tracking error.

Risk Level: Lower risk compared to actively managed funds, as they aim to match the performance of the index they track.

Time Frame: A time horizon of at least 5-7 years is recommended.

Top Examples:

a) ICICI Prudential Nifty Index Fund
b) UTI Nifty Index Fund

Tax-saving (ELSS) Funds

Tax-saving (ELSS) Funds are a unique category of mutual funds designed to help individuals save on taxes while also offering the potential for long-term capital appreciation. Here are some key features and details about ELSS Funds:

–Objective: The primary objective of ELSS Funds is to provide tax benefits under Section 80C of the Income Tax Act in India. Investors may deduct the amount they invested from their taxable income up to a certain cap.

–Lock-in Period: ELSS Funds come with a mandatory lock-in period of three years from the date of investment. This means that investors cannot redeem or withdraw their investment before the completion of this period.

–Investment Focus: ELSS Funds predominantly invest in equities or equity-related instruments. This sets them apart from other tax-saving alternatives like Public Provident Fund (PPF) and National Savings Certificate (NSC), which invest mostly in fixed-income securities.

–Diversification: ELSS Funds typically maintain a diversified portfolio, which means they spread investments across a range of stocks or sectors. This diversification helps manage risk.

–Potential for Capital Appreciation: While the primary goal is tax-saving, ELSS Funds also offer the potential for capital appreciation. They may yield larger returns than traditional tax-saving strategies since they invest in shares.

–Taxation on Returns: Gains from ELSS Funds are considered long-term capital gains if held for more than one year. They are subject to a 10% tax on gains above Rs. 1 lakh.

–Flexibility: ELSS Funds offer flexibility in terms of investment amount and frequency. Investors can choose to invest either through lump sum investments or through Systematic Investment Plans (SIPs).

–Suitable Goals: ELSS Funds are well-suited for investors looking to save on taxes while also aiming for long-term wealth creation. They can be a part of a diversified investment portfolio.

Top Examples

a) Axis Long Term Equity Fund

b) Aditya Birla Sun Life Tax Relief 96

c) HDFC Tax Saver

Also read: Best Green Hydrogen Stocks In India: Profit With Purpose

Advantages & Disadvantages- types of mutual funds

Advantages

1. Diversification: MFs pool money from various investors to invest in a diversified portfolio of stocks, bonds, or other securities. This spreads risk compared to investing in individual stocks.

2. Professional Management: Fund managers handle the day-to-day decisions, market research, and security selection. This can be beneficial, especially if you’re not experienced in managing a stock portfolio.

3. Accessibility: Mutual funds are easily accessible, and you can start with a relatively small amount of money.

4. Lower Entry Barrier: You can invest in a variety of assets even with a limited budget. This makes it suitable for beginners or those with smaller sums to invest.

5. SIPs for Discipline: Systematic Investment Plans (SIPs) help in disciplined investing. You can invest a fixed amount regularly, which helps in rupee cost averaging.

Disadvantages

1. Fees and Expenses: Mutual funds charge fees, including expense ratios and sometimes entry/exit loads. This can impact your overall returns.

2. Limited Control: You’re relying on a fund manager’s decisions, and you have no control over individual stock selections.

3. Market Dependency: Your returns are dependent on the overall market performance.

Also read: Fundamentally Strong Midcap Stocks: Untapped Opportunities

BOTTOM LINE

Summing up types of mutual funds, the crux of today’s column is to make young people informed about the various options available to help grow our money and the economy as well. We all have some dreams and desires that we want to fulfill in the coming years. Instead of saving a large amount of money in traditional saving sources we can educate ourselves about these kind of resources available where we can start small and then grow gradually.

That’s all for today’s post. Hope you get some valuable insights from here.

Happy reading!

Disclaimer

The blog is meant for informational purposes and serves the general analysis of the stocks. Contents provided here are based on careful research and analysis utilizing the fundamental and technical indicators over a period of time. The post does not consist any direct recommendation about Investing or trading in the securities market. Thorough research and careful consideration are necessary for individuals to fulfill their personal responsibility in making financial decisions. Seeking professional advice before making any financial decisions is always advisable.