Mutual funds offer a range of options that can cater to the various investment needs of investors.Depending on their need,suitability and risk profile,investors can select funds best suited to them.Based on the asset class they invest in,mutual funds can be categorized as follows:
Equity-oriented funds
These funds invest in shares enabling investors to benefit from investment opportunities in the stock market.They tend to be high risk-high return investment propositions.There are various types of equity funds.
Large-cap :
These funds primarily invest in the shares of well-established companies.Broadly speaking,the top 100 companies by market capitalization would form the investment universe for these funds.
Mid/small-cap :
These funds target companies whose market capitalization is lower than that of large cap companies.Prices of mid/small cap stocks tend to be more volatile than those of their large cap peers.
Equity-linked savings scheme (ELSS):
These are equity funds offering taxbenefits.Investments of up to Rs 1 lakh in a financial year are eligible for tax sops under Section 80C of the Income Tax Act.ELSS investments are subject to a lock-in of three years.
Index funds:
They try to replicate the performance of a chosen benchmark index such as S&P BSE Sensex or CNX Nifty,by investing in the stocks that constitute the index and in exactly the way these stocks have their weight in the index.
Sector funds:
These funds focus only on stocks from a certain sector such as healthcare,technology,financial services etc.These funds perform at their best when the targeted sector is in favour.
Debt-oriented funds
These funds invest in fixed income instruments such as bonds,debentures and government securities.From the risk-return perspective they are less risky and have lower return potential than equityoriented funds over the longterm.There are different types of debt funds which are categorized based on their investment tenure.
Liquid funds:
These funds primarily invest in money market instruments with maturities of up to 91 days.Liquid funds expose investors to low interest rate risk and are apt for parking monies over shorter time periods.A similar category is that of Ultra short term bond funds.The primary difference between liquid and ultra short term funds is that the latter types hold slightly longer tenured instruments and are apt for investors with an investment horizon of upto a year.
Bond funds:
These funds invest a bulk of their assets in bonds and debentures,and could make smaller allocations to money market instruments and government securities.Bond funds can expose investors to credit and interest rate risks.Investors can select an apt variant based on their investment horizon: Short-term bond funds (1-3 years); Intermediate bond funds (3-7 years) and Longterm bond funds (over 7 years).
Government bond funds:
These funds primarily invest in securities issued by the central and state governments.Unlike bond funds,investors here are only exposed to interest rate risks.Investors can select between Short-ter m gover nment bond,Intermediate government bond and Long-Term government bond funds.
Fixed maturity plans:
FMPs are close-ended debt funds with a fixed time to mature.They invest in a host of debt instruments whose maturity is either lower than or coincides with that of the FMP.They are best suited for investors whose investment horizon matches the FMPs tenure.
Allocation funds
These funds provide benefits of asset allocation by investing across asset classes.The most popular variants are balanced funds and monthly income plans (MIPs).
Balanced funds typically invest at least 65% of their assets in equities and the balance in debt,mainly to take some tax advantages.MIPs on the other hand invest roughly around 70%-80 % of their assets in debt instruments and the balance 20%- 30% in equities.
Finally in recent years,Gold funds have attracted a lot of investor interest.Simply put,these are funds investing in units of gold exchange traded funds (ETFs),offering exposure to gold via the mutual fund route.
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