Types of Mutual Funds
Mutual fund investment is a popular investment option nowadays. Mutual fund investment involves risk and past performance is not indicative of the future results so it is essential to read carefully all the fund documents and consult with a qualified financial advisor. Mutual funds are categorized into various types based on the underlying assets and objective of investment. Some types of mutual funds are discussed below,
Equity funds
The funds are invested mainly in equities known as Equity Funds. The aim of these funds is long-term capital appreciation. These funds invest in a diversified portfolio of stocks of various sectors, which helps to spread the risk. Equity funds are further subdivided into large cap, mid cap & small cap. The market capitalization of companies is the basis for the investment of these funds. Equity mutual funds are most popular due to their high return potential. Professional fund managers make decisions about buying and selling based on thorough research and market analysis. Before investing in any equity mutual fund it is advisable to carefully read the fund’s prospectus, understand the investment objectives, and consult with the financial advisor. Examples of Equity Funds- ICICI Prudential Focused Equity Fund, HFDC Large and Mid-cap Fund, Nippon India Large Cap Fund, etc.
Debt Funds
These funds invest in fixed-income securities like Government securities, corporate bonds, and debentures. It is considered a safer investment than equity funds. And it provides regular income to investors. It is also known as fixed-income funds. The average fee ratio of Debt funds is lower than equity funds. Examples- Bank of India Short Term Income Fund, SBI Magnum Medium Duration Fund, HDFC Low Duration Fund, etc.
Hybrid Funds
It is also known as balanced funds because it a mix of equity and debt investment. It serves both the objectives of capital appreciation as well as income generation. Due to the mix of asset classes, it offers diversified investment options to investors. Examples- ICICI Prudential Equity & Debt Fund, JM Equity Hybrid Fund, ICICI Prudential Multi-Asset Fund, etc.
Index Funds
These funds objective to reflect the performance of a specific stock market index, like Nifty 50, S&P 500, etc. These funds offer broad market exposures. The Investment of these funds is in stocks that are part of the index. I.e. Nifty 50 index fund invests in stocks that are part of the Nifty 50 index with the same weightage. It is a passively managed fund so the management fees are low compared to equity funds. Examples- HDFC Index Fund Nifty 50 Plan, Nippon India Index Nifty 50, SBI Nifty Index Fund etc.
Sector Funds
Funds that focus on specific sectors known as Sector funds, for example- the Pharma sector, technology sector, finance, banking, petrochemical etc. Due to investment in a particular sector, these funds can give a high return but risk also high. Examples- ICICI Prudential Manufacturing Fund, HDFC Housing Opportunities Fund, ICICI Prudential FMCG Fund, etc.
Gilt Funds
The funds that are investing in fixed interest-bearing securities issued by the Government. It is a debt fund with the safest returns on investment. The risk factor is minimal as it is investing in government-guaranteed instruments. It is suitable for investors who are looking for stable returns over the long term and may not be suitable for investors looking for capital appreciation. These funds are influenced by changes in interest rates. Examples- ICICI Prudential Gilt Fund, SBI Magnum Gilt Fund, Kotak Gilt Investment Fund etc.
Tax Saving Funds (ELSS)
The name itself suggests that it is offering Tax Benefits to investors under section 80C of the Income Tax Act in India. ELSS means Equity Linked Saving Schemes. These funds have a lock-in period and provide the benefit of tax savings as well as wealth creation. Examples- Bandhan Tax Advantage (ELSS) Fund, HDFC Tax Saver Fund, DSP Tax Saver Fund, etc.
