Investing in mutual funds?, are you planning to invest in mutual fund. In this post we will share A to Z information about the mutual funds investing from different sources.
b) Investment Amount
c) Investment period
a) Large and Multi Cap
b) Mid and Small Cap
c) Balanced Funds
d) Debt Funds
e) Liquid Funds
f) ELSS Funds
You can have a look at all these mutual fund in details and their returns in this section: What are different kinds of Mutual Fund?. How much you can earn from Mutual Funds? .
There are various types of Mutual Funds that exist. Giving a birds-eye view of the entire spectrum would be a great starting point to explain the various types of funds including the queries raised above.
Open-ended :- These can be purchased and redeemed anytime, hence “open”.
Closed-ended:- These funds are open for subscription for a limited period and then no further investors can buy units, hence “closed”.
Equity funds - Equity funds make money for investors by investing in the equity stock market. Equity funds may be classified into further types of mutual funds, large cap funds , mid-cap funds, small-cap funds and sector/thematic Funds. There are further types called multi-cap funds and balanced funds too, however these are just variants.
1) Large-cap funds - Invest into large-sized companies Lower risk within equity category
Large-cap funds are funds which invest a large part of their assets in the equity shares of very large companies. Large -cap funds invest in companies which have a large market capitalization (hence the name large), usually, these are very large companies established players, with a large workforce e.g Unilever, Reliance, Infosys, etc
2. Mid-cap Funds - Invest into mid-sized companies Relatively higher risk than large-cap
Mid-cap funds invest in mid-sized companies, these companies by being mid-sized can provide good returns. There are various definitions of mid-caps funds in the market, one could be companies with a market capitalization of INR 500 Cr to INR 10,000 Cr another could be companies beyond the first top 50 companies (so excluding Nifty 50) to the 250th company (infact, this is the constitution of the CNX mid-cap index). From a standpoint of the investor, the investing period of mid-cap funds should be much higher than large-caps due to the nature of the companies.
3. Small-cap funds -Invest into small-sized companies, Highest risk within equity category Small cap companies include firms that are in their early stage of development with small revenues. Small caps are typically defined as firms with a market capitalization of less than INR 500 Crore. l. Since, small cap stocks give high growth potential and are companies in their early stage of development, they have a chance of giving high returns. But, the risk of failure is higher with small caps compared to large and mid-caps.
4. Thematic Funds -Invest into themes/sectors Highest risk since industry specific exposure
Thematic funds invest into a particular sector like infrastructure, Power, media & entertainment etc. Some of the mutual funds provide thematic funds, for e.g Reliance Mutual Fund provides exposure to thematic funds via its Power Sector Fund, Media and Entertainment Fund etc.
5. ELSS funds - Can invest across market-caps Risk in the lower end in equity category. These are equity funds with a 3 years lock-in, and additionally, these provide benefits of section 80c to investors to the tune of 1.5 lakhs.
6. International Equity Funds - Invest in international equity, Risk as the same as equity investment
International Mutual Funds are funds that invest in foreign markets.
7. Hybrid Funds - Hybrid funds are mutual funds that have a mix of debt and equity. The proportion of debt and equity changes. There are broadly 2 types of hybrid funds, i.e. Balanced funds & Monthly Income Plans (MIPs).
a) Balanced Funds - Balanced Funds are mutual funds with more than 65% in equity Rest being in debt.These are for investors with a long term view in mind, i.e. more than 3 years. Since there is a large equity exposure, I would suggest a 5 year view would be appropriate. Taxation is as per equity mutual funds due to the more than 65% equity allocation.
b) Monthly Income Plans - Less than 65% equity holding Rest is debt. There are various kinds of MIPs that exist, the differentiation being the percentage of equity in the fund. MIPs, as the name goes, started off to provide monthly income, they were seen as annuity products in the Indian market. Investing in these funds could give a monthly income to housewives or even retired persons. However, most funds do not do this now. Taxation is like debt mutual funds for MIPs.
7. Debt Funds - Debt funds invests in fixed income instruments. They invest in fixed income securities like bonds, etc. Debt mutual funds mainly invest in a mix of debt or fixed income securities like Government securities, Treasury bills, Corporate bonds, etc. Debt funds are preferred by those who are looking for steady income with relatively lower risks. There are various types of debt funds :
a) Gilt Funds - Invest in govt back instruments Can carry high-risk Gilt funds are mutual funds that invest in government securities issued by RBI. As the papers are backed by the government these schemes are relatively safer. Depending on their maturity profile, gilt funds carry interest rate risk.
b) Long term Income funds - Invest in corporate bonds/long dated G-secs Carry high risk within debt category Long term income funds invest in Corporate bonds and Government of India bonds that have a long-term maturity period. Long term income funds usually benefit when the interest rates are moving downwards.
c) Short term Income funds - Invest in corporate bonds/short dated G-secs Carry lower risk within debt category Short term funds mainly invest in Commercial Papers, Certificate of Deposits, Money Market instruments, etc. The average maturity period of short-term funds is usually between 6 months to 12 months. They may provide a higher level of return than ultra short term and liquid funds but will be exposed to higher risks.
d) Dynamic Bond Funds - Invest in papers across maturities Risk is relatively higher in debt category This is a hybrid category of debt funds which invests in fixed income instruments of various maturities depending on market conditions, these can be short term or long term instruments.
Money Market Funds - While a subcategory of debt funds, these funds invest in instruments of very short tenor/maturity, from a couple of months to less than 91 days. These are of 2 types, liquid funds and ultra-short term funds.
i. Liquid Funds - Invest in short-term money market instruments Invest in treasury bills, commercial papers, term deposits, etc. Lowest risk Liquid funds invest in securities that have lower maturity period, usually less than 91 days. Liquid funds provide easy liquidity and are less volatile than the other types of debt instruments.
ii. Ultra-short term funds - Invest in fixed income instruments Instruments have a maturity period of around 6 months or lower Low-risk Ultra short-term funds help investors avoid interest rate risks and also offer better returns compared to liquid debt funds.
Risk of investing across various mutual funds has been explained in above chart. Happy Investing.
There are various types of mutual fund in India, you have to choose depending upon:
a) Financial Goalsb) Investment Amount
c) Investment period
Types of mutual funds |
b) Mid and Small Cap
c) Balanced Funds
d) Debt Funds
e) Liquid Funds
f) ELSS Funds
You can have a look at all these mutual fund in details and their returns in this section: What are different kinds of Mutual Fund?. How much you can earn from Mutual Funds? .
There are various types of Mutual Funds that exist. Giving a birds-eye view of the entire spectrum would be a great starting point to explain the various types of funds including the queries raised above.
We broadly classify Mutual funds by 2 categories:
Category 1: By StructureOpen-ended :- These can be purchased and redeemed anytime, hence “open”.
Closed-ended:- These funds are open for subscription for a limited period and then no further investors can buy units, hence “closed”.
Category 2: By investment Objective
With the type of investment objective and the underlying investments, is how typically mutual funds are named. For e.g if the fund invests predominantly in equity, then it's called an equity fund. The various categories by objective are described below :Equity funds - Equity funds make money for investors by investing in the equity stock market. Equity funds may be classified into further types of mutual funds, large cap funds , mid-cap funds, small-cap funds and sector/thematic Funds. There are further types called multi-cap funds and balanced funds too, however these are just variants.
1) Large-cap funds - Invest into large-sized companies Lower risk within equity category
Large-cap funds are funds which invest a large part of their assets in the equity shares of very large companies. Large -cap funds invest in companies which have a large market capitalization (hence the name large), usually, these are very large companies established players, with a large workforce e.g Unilever, Reliance, Infosys, etc
2. Mid-cap Funds - Invest into mid-sized companies Relatively higher risk than large-cap
Mid-cap funds invest in mid-sized companies, these companies by being mid-sized can provide good returns. There are various definitions of mid-caps funds in the market, one could be companies with a market capitalization of INR 500 Cr to INR 10,000 Cr another could be companies beyond the first top 50 companies (so excluding Nifty 50) to the 250th company (infact, this is the constitution of the CNX mid-cap index). From a standpoint of the investor, the investing period of mid-cap funds should be much higher than large-caps due to the nature of the companies.
3. Small-cap funds -Invest into small-sized companies, Highest risk within equity category Small cap companies include firms that are in their early stage of development with small revenues. Small caps are typically defined as firms with a market capitalization of less than INR 500 Crore. l. Since, small cap stocks give high growth potential and are companies in their early stage of development, they have a chance of giving high returns. But, the risk of failure is higher with small caps compared to large and mid-caps.
4. Thematic Funds -Invest into themes/sectors Highest risk since industry specific exposure
Thematic funds invest into a particular sector like infrastructure, Power, media & entertainment etc. Some of the mutual funds provide thematic funds, for e.g Reliance Mutual Fund provides exposure to thematic funds via its Power Sector Fund, Media and Entertainment Fund etc.
5. ELSS funds - Can invest across market-caps Risk in the lower end in equity category. These are equity funds with a 3 years lock-in, and additionally, these provide benefits of section 80c to investors to the tune of 1.5 lakhs.
6. International Equity Funds - Invest in international equity, Risk as the same as equity investment
International Mutual Funds are funds that invest in foreign markets.
7. Hybrid Funds - Hybrid funds are mutual funds that have a mix of debt and equity. The proportion of debt and equity changes. There are broadly 2 types of hybrid funds, i.e. Balanced funds & Monthly Income Plans (MIPs).
a) Balanced Funds - Balanced Funds are mutual funds with more than 65% in equity Rest being in debt.These are for investors with a long term view in mind, i.e. more than 3 years. Since there is a large equity exposure, I would suggest a 5 year view would be appropriate. Taxation is as per equity mutual funds due to the more than 65% equity allocation.
b) Monthly Income Plans - Less than 65% equity holding Rest is debt. There are various kinds of MIPs that exist, the differentiation being the percentage of equity in the fund. MIPs, as the name goes, started off to provide monthly income, they were seen as annuity products in the Indian market. Investing in these funds could give a monthly income to housewives or even retired persons. However, most funds do not do this now. Taxation is like debt mutual funds for MIPs.
7. Debt Funds - Debt funds invests in fixed income instruments. They invest in fixed income securities like bonds, etc. Debt mutual funds mainly invest in a mix of debt or fixed income securities like Government securities, Treasury bills, Corporate bonds, etc. Debt funds are preferred by those who are looking for steady income with relatively lower risks. There are various types of debt funds :
a) Gilt Funds - Invest in govt back instruments Can carry high-risk Gilt funds are mutual funds that invest in government securities issued by RBI. As the papers are backed by the government these schemes are relatively safer. Depending on their maturity profile, gilt funds carry interest rate risk.
b) Long term Income funds - Invest in corporate bonds/long dated G-secs Carry high risk within debt category Long term income funds invest in Corporate bonds and Government of India bonds that have a long-term maturity period. Long term income funds usually benefit when the interest rates are moving downwards.
c) Short term Income funds - Invest in corporate bonds/short dated G-secs Carry lower risk within debt category Short term funds mainly invest in Commercial Papers, Certificate of Deposits, Money Market instruments, etc. The average maturity period of short-term funds is usually between 6 months to 12 months. They may provide a higher level of return than ultra short term and liquid funds but will be exposed to higher risks.
d) Dynamic Bond Funds - Invest in papers across maturities Risk is relatively higher in debt category This is a hybrid category of debt funds which invests in fixed income instruments of various maturities depending on market conditions, these can be short term or long term instruments.
Money Market Funds - While a subcategory of debt funds, these funds invest in instruments of very short tenor/maturity, from a couple of months to less than 91 days. These are of 2 types, liquid funds and ultra-short term funds.
i. Liquid Funds - Invest in short-term money market instruments Invest in treasury bills, commercial papers, term deposits, etc. Lowest risk Liquid funds invest in securities that have lower maturity period, usually less than 91 days. Liquid funds provide easy liquidity and are less volatile than the other types of debt instruments.
ii. Ultra-short term funds - Invest in fixed income instruments Instruments have a maturity period of around 6 months or lower Low-risk Ultra short-term funds help investors avoid interest rate risks and also offer better returns compared to liquid debt funds.
Risk across various funds
“Risk comes from not knowing what you’re doing.”Risk of investing across various mutual funds has been explained in above chart. Happy Investing.