Chapter 3 – Types of Mutual funds
Mutual funds are designed in a way that they suit every investor’s need, it is like a melting pot of what every investor would desire. Here is a list of the different types of Mutual funds.
Types of Mutual funds can be broadly classified into Debt Funds, Equity Funds and Balanced Funds
Debt Mutual funds
Debt mutual funds mainly invest in fixed income securities like Treasury Bills, Government securities, corporate bonds, and other debt securities with different maturities. Generally, the Debt mutual funds pay a fixed rate of return.
The returns of debt funds are mainly decided on the interest income and capital appreciation or depreciation depending on the market dynamics.
Things to watch when you buy: Debt securities are generally assigned credit ratings by independent credit rating agencies like CRISIL, CARE, FITCH, ICRA etc. that do their research on the credit worthiness of the issuer of the debt securities. Checking out the ratings of the securities a mutual fund invests in can give a good indication of how safe the fund is.
There are a lot of debt funds available in the market, and investors can pick anyone which suits their need based on their investment horizon and risk bearing ability.
Further, Debt funds can be classified into the following:
- Ultra Short
- Short term bond
Gilt Funds: Gilt Funds are mutual Funds that invest only in government securities. These funds are generally preferred by investors who have a very low risk appetite and want their investments to be protected. These funds invest in securities having sovereign guarantee hence the default risk is very low. These funds have both short term as well as long term maturity with ingrained interest rates.
Bond Funds: A Bond fund is a combination of various bonds with different maturities. This way, if one bond does not perform others neutralize it. These bonds are diversified in multiple fixed return avenues.
Liquid Funds: Liquid funds are simple debt mutual funds that invest your money in short-term money market instruments. These instruments have maturity up to 91 days. These securities are less risky and have low volatility. They are not generally traded in the market, but held till they reach maturity.
Ultra Short Term funds: These funds are also suited for short term investment. These are a little high on risk when compared to liquid fund because they invest in securities that have maturity over three months. This increases the tradability and hence the volatility of the funds, with the change in market dynamics.
Short Term bond: Investors having a horizon of more than a year generally prefer these funds since they have better returns than Liquid and ultra-short term funds. These funds generally have a maturity of 3 years. These funds perform the best when short term interest rates are high. These funds are best suited for investors with minimum to high risk taking ability.
Equity Mutual Funds
Equity funds are a type of mutual funds that mandate the wealth managers to buy ownership in businesses. (Thus, the term ‘equity’). These investments are mostly made in publicly traded stocks. The major advantage with this fund is that the investors get to enjoy the benefit of divided as well.
Things to watch out when you buy: The fund must have a steady history and a well-informed fund manager.
There is a plethora of investment options in Equity based Mutual funds. Equity mutual funds are best suited for investors who have a risk taking nature and look for better returns. Following are the different types of Equity Mutual funds.
- Large Cap Mutual Fund
- Mid Cap Mutual Funds
- Small cap Mutual Funds
- Sector funds
- Flexi cap Mutual funds
Large Cap Mutual Fund: Funds that invest a large portion of their corpus in companies with large market capitalization or ‘the Big Fish’ are called Large Cap Mutual Fund. These funds generally offer a stable and sustainable return and they have a moderate risk attached to them. These funds can prove to be of a great value to the investor who have a long term investment horizon- ‘Buy and Hold.’
Mid Cap Mutual Fund: Funds, which invests in companies with mid-sized corpus, having the focus on growth story are called Mid Cap Mutual Fund. These funds are risky in nature and they have a high volatility. It is not necessary that the mid-caps would move with the market. But it is often seen that when the market performs well, the midcaps tend to outperform the market and they fall more than large cap funds when the market is under the bear grip. These funds are placed on a high risk-return trade-off and are best suited for investors with risky appetite who are looking to invest for long term.
Small Cap Mutual Fund: Small cap funds typically invest in companies that are in their early stages of business. Small cap companies have low revenue and client base. These include the start-ups or companies that are in the early stage of development. Small cap stocks are potentially big gainers as they are yet to be discovered within the sector and can show growth potential in large numbers once expand in the market. Since small companies do not have financial strength to survive bad times, it is essential that one does a thorough research regarding the fundamentals of the company and track record of its management before investing. Small cap funds are best investment avenue for investors who can tolerate high risk and have an aggressive approach to the market.
Sector Funds: These funds invest solely in the business of a particular industry of the economy. They are non-diversified and hence their performance is aligned to the performance of that sector. The inherent nature of non-diversification makes it risky. These funds are normally suited for investors with high risk taking capabilities.
Flexi cap Mutual Funds: These funds do not have a restricted mandate when it comes to choose for a particular type of stock to invest. The fund invests in companies of all sizes and offer immense diversification. They are suited to investors who have a medium risk appetite.
Balanced or Hybrid funds are a mix of both equities and bonds. The proportion of equity and debt can either be defined or may vary from time to time. These funds are good choice for first-time investors. The objective of these funds is to provide capital growth via a mix of equity and debt: blend of growth and safety. These Funds may be further classified into:
- Equity Oriented
- Debt Oriented
Equity Oriented Balanced Fund: Balanced Equity Funds make at least 65% of the investment in the equity market. These funds generally have an average return but when the market under performs these funds to better than a plain equity small cap or mid cap.
Debt Oriented Balanced Fund: Balanced Debt fund invest at least 65% of their portfolio in debt and/or cash and the remaining in the domestic stock market. They have better returns of interest than the short term bonds.
An investor must understand and analyse his risk appetite and profile before making any investments. Taking reviews and doing research on funds as well as the fund managers can also prove to be very beneficial to the investor while picking the Mutual Funds. ‘Informed investments are the best investments.’
यह ब्लॉग हिंदी में पढ़े- Types of Mutual Funds in Hindi
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