Mutual funds are gaining widespread popularity in India, thanks to the growing awareness around investing and creating a diversified portfolio. Moreover, fund houses now offer different types of mutual funds to suit the investors' diverse investment objectives and risk appetite.
But which mutual fund is right for you? Here are the types of mutual fund categories with tips on how to choose mutual funds in India-
Types of Mutual Funds
As per SEBI (Securities Exchange Board of India), mutual funds can be divided into 5 categories. Let's look at these categories and some of the popular mutual funds under each.
1. Equity Funds
Equity funds are open-ended schemes that invest at least 65% of their portfolio into equities and equity-related instruments per the fund's stated objective. While equity schemes carry high-risk funds, they also come with the highest returns potential. Some of the popular equity funds are;
Large-cap Funds
These are open-ended funds that invest at least 80% of their portfolio into equity and equity-related instruments of large-cap companies.
Mid-cap Funds:
These funds invest at least 65% of their portfolio into equities and related instruments of mid-cap companies.
Small-cap Funds
These funds invest at least 65% of their portfolio into equities and equity-related instruments of small-cap companies.
Flexi-cap Funds
These funds maintain at least 65% exposure to equities and equity-related instruments but can invest across large-cap, mid-cap, and small-cap companies.
Also Read - What are Flexi Cap Funds?
Multi-cap Funds
Similar to Flexi-cap funds, these funds have to invest at least 75% of their portfolio into equities and equity-related instruments while ensuring that at least 25% is invested into small-cap, mid-cap, and large-cap companies at any given time.
Focused Funds
These funds must invest at least 65% of their portfolio into equities and equity-related instruments like most other equity funds. However, they are more focused and can invest in only up to 30 companies.
Also Read - What is Equity Fund?
2. Debt Funds
Any fund that invests more than 35% of the portfolio into debt and debt-related instruments is known as a debt fund. These funds invest majorly into fixed income instruments such as government securities, corporate bonds, treasury bills, money market instruments, etc. These are known for their lower risk. On the flip side, the return potential of these funds can be lower than equity funds. Some popular types of debt funds are mentioned below.
Liquid Funds
Liquid funds invest in short-term debt instruments to generate reasonable returns over a shorter tenure. Investors with a low-risk appetite wanting to park surplus funds for a short period can consider investing in these funds. The maturity of these funds is up to 91 days.
Click here to read about - What are target maturity funds
Money Market Funds
These debt schemes invest majorly in money market instruments and come with a maturity of up to 1-year.
Duration Funds
These funds invest into debt instruments ensuring the Macaulay Duration (MD) of the fund is as per the type of fund. For instance, the ultra-short duration fund comes with an MD of 3-6 months, and the long duration fund comes with an MD of more than 7+ years.
Click Here to Check - What are Ultra Short-Term Mutual Funds?
Gilt Funds
These funds invest at least 80% of their portfolio into government securities.
Also Read - What is Debt Fund?
3. Hybrid Funds
Hybrid funds are another popular classification of mutual funds which invest in a mix of equity and debt instruments. The combination of instruments helps balance out the risk and returns potential of the schemes. Some of the popular ones in this category are mentioned below.
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Aggressive Hybrid Funds
Popularly referred to as equity-oriented hybrid funds, these invest 65% to 80% into equities and equity-related instruments while always maintaining a debt exposure of 20% to 35%.
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Conservative Hybrid Funds
Quite the opposite of Aggressive Hybrid Funds, these must invest at least 75% to 90% of their portfolio into debt instruments and can maintain an equity exposure between 10% to 25%. These are also known as debt-oriented hybrid funds.
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Balanced Hybrid Funds
These funds follow a balanced-style investment and must maintain an equity and debt exposure of 40% to 60% each.
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Multi-Asset Allocation Fund
These funds must invest at least 10% of their portfolio into at least 3 asset classes each.
Also understand : What are Hybrid Funds?
4. Solution-oriented Funds
These funds focus on the particular solution they aim to offer to the investors. The two most popular solution-oriented funds are-
Retirement Fund
True to its name, these funds aim to help investors build a retirement corpus. These funds come with a minimum lock-in period of 5 years unless retirement precedes this period.
Children Fund
As you may have guessed, these funds help investors plan for their child's future by building a corpus for them by the time they become adults. Like retirement funds, these also come with a minimum lock-in of 5 years. However, you can redeem the policy if the child becomes an adult before this period.
5. Other Funds
These include funds such as index funds, ETFs, and Funds of Funds (FOF).
Factors for Selecting Mutual Fund Category
Confused about all the different mutual fund categories? Here are two factors that can help you make a selection-
Investment Objective and Horizon
What do you want to achieve with your mutual fund investment? Is it a long-term goal like retirement planning or a child's education that you'd like to achieve in 15-20 years? Or a short-term goal like buying a new car in 3-5 years?
Equity funds can be a suitable choice for long-term goals. Fund categories like debt, index and balanced can take you closer to your short-term objectives.
Risk Appetite
Your risk appetite is the amount of risk you are willing to take to achieve the investment objective.
Generally, schemes with the highest returns potential, like equity, come with the highest level of risk. Therefore, only choose the equity mutual fund category if you are comfortable with the high level of risk. Debt, liquid, and GILT are some fund categories you can consider if you're a risk-averse investor.
Read about : Benefits of Investing in Mutual Funds
How to Choose the Right Type of Mutual Fund?
Every mutual fund category comes with several scheme options from various fund houses. Once you’ve finalized a fund category, here’s how you can choose a scheme within that category-
Scheme Performance
Start with comparing the long-term performance of the scheme with top performers in the category. Aim for schemes that have delivered consistently good returns over a 5-year and 10-year period.
Fund Manager
The fund manager plays a vital role in the performance of any mutual fund scheme. Ensure that the scheme you choose is managed by an experienced fund manager.
Expense Ratio
The expense ratio is the fee you pay to the fund house for managing your investment. A higher expense ratio means a higher fee charged by the fund house and lower returns on your investment.
Also Read - How to Invest in Mutual Funds?
Selecting the Best Mutual Fund for Your Investment
Now that you know mutual funds, types, and how to choose the right fund category and scheme, the selection should be easier. If you're starting with mutual fund investments, it'd be wise to start small and keep the risk minimal.
You can also consult an investment advisor in case of any queries or if you need more assistance with your mutual fund investments.
Also Learn about : How to Invest in Sip?
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
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