What are the Different Type of Mutual Funds :
Based on one’s goals and return on the investment horizon, Mutual Funds gives the option to invest money across various asset classes like an equity-oriented mutual fund, debt mutual fund, index fund, etc. A mutual fund allows you to diversify your investments to reduce your portfolio risk.
Before investing in any type of mutual fund one should keep in mind his Risk appetite, time horizon, and expected return. You heard about that word from many people that “high-risk high return ”
Equity Mutual Funds / Growth Mutual Funds
Mutual Funds that invest in equity shares are called equity mutual funds . The objective of equity mutual fund is a capital appreciation of the investment over a medium to long-term.
Equity mutual funds are high-risk funds and their returns are linked to the stock markets. Equity oriented fund is good for investors who are looking for long term growth and have a long time horizon.
There are different types of equity mutual funds such as Diversified mutual funds, Sector-specific mutual funds, and Index-based mutual funds, etc.
Tax applicable on the equity-oriented mutual fund
Mutual funds that invest 65% or more of their funds in equity and equity-related instruments at all times are called equity-oriented mutual funds.
Gains on equity-oriented mutual funds held for less than a year are treated as short-term capital gains and taxed at 15% in India.
Gains on equity-oriented mutual funds whereas holding period for a year or more are treated as long-term capital gains and taxed at 10% for gains exceeding Rs 1 lakh in a year in India.
Classification of Equity oriented mutual fund :
There is a different type of equity-oriented mutual fund scheme in India areas :
- Large-cap Mutual funds
- Mid-cap mutual funds
- Small-cap mutual funds.
- Multicap mutual funds.
- Tax saver ( ELSS ) mutual funds
- Focus mutual fund
- Sector equity mutual funds etc.
- International oriented Mutual Fund
- Emerging market-oriented mutual fund.
- Fund of funds mutual fund
- Value discovery mutual fund
- Balance mutual fund
- Hybrid mutual fund
- Balance advantage mutual funds
The historical average return of the different type of mutual funds.
|Large Cap Fund (Cat Avg)|
|5 Years||10 Years||15 Years|
|Inflation-Adjusted CAGR (%)||8.66||8.41||9.2|
|Mid Cap Fund (Cat Avg)|
|5 Years||10 Years||15 Years|
|Inflation-Adjusted CAGR (%)||15.35||13.44||11.03|
|Small Cap Fund (Cat Avg)|
|5 Years||10 Years||15 Years|
|Inflation-Adjusted CAGR (%)||16.7||12.36||4.18|
Above data are taken from :
Diversified Mutual Funds
These mutual funds provide you the benefit of diversification by investing in companies spread across sectors and market capitalization. They are for investors who want to take exposure across the market and do not want to be restricted to any specific sector.
A diversified mutual fund has the flexibility to increase or decrease its exposure to large-cap, mid-cap and small-cap investment depending on the fund manager’s perception of the market conditions and future market expectations.
Multicap funds are an example of diversified funds in India. Investment return is higher in diversified mutual fund compare to large-cap mutual fund.
The historical return of Diversify mutual fund in India :
|Multi-Cap Fund (Cat Avg)|
|5 Years||10 Years||15 Years|
|Inflation-Adjusted CAGR (%)||11.31||10.89||10.16|
Sector Mutual Funds :
These mutual funds invest primarily in equity of companies in a particular business sector or any specific industry. These mutual funds are high-Risk high return as compared to diversified mutual funds. Investors need to watch on the performance of those sectors/industries and must exit at an appropriate time.
An investor who has knowledge about the economy and the particular sector should only to invest in this type of mutual funds because of if particular sector is not performed or face any cycle problems then your return will turn in negative.
There are many sector funds are available in India areas:
- Pharma fund
- Banking and financial services fund.
- Technology oriented fund
- Consumer sector fund
- Infrastructure fund
- MNC fund
These funds invest in pattern as popular stock market indices like CNX Nifty Index and S&P BSE Sensex.
The value of the index fund changes in proportion to the benchmark index. The net asset value of such mutual fund rise and fall in accordance with the rise and fall in the index.
Index funds have lower expenses ratio and fees compare to actively managed mutual funds. Index funds follow a passive investment strategy
Below is some example of an index fund, only for knowledge and not investment advice :
- Reliance IndexFund – Sensex Plan.
- LIC MF IndexFund
- ICICI Prudential Nifty index fund.
- UTI Nifty index fund.
- Franklin IndiaIndex Fund Nifty Plan.
- SBI Nifty index fund.
- IDBI Nifty index fund.
- Reliance IndexFund – Nifty Plan
Tax Saving Mutual Funds(ELSS)
An Equity Linked Savings Scheme (ELSS) is an open-ended Equity Mutual Fund that doesn’t just help you save tax, but also gives you an opportunity to grow your money. Tax saving mutual funds qualify for tax exemptions under section (u/s) 80C of the Indian Income Tax Act.
ELSS offers tax-saving and equity returns with a lock-in period of just 3 years and tax-free dividends for those who choose the dividend options. Invest in ELSS mutual funds to gain good tax-free returns. You can not withdraw your investment before 3 years in this scheme.
Investments in Tax saving mutual funds qualify for tax deductions of up to Rs 1.5 lakh under Section 80C of the Income Tax Act. If you are looking to save taxes under Section 80C, you may consider investing in these schemes to claim tax deductions.
Balanced Mutual Funds
These types of mutual funds invest both in equity shares and debt (fixed income) instruments and strive to provide both growth and regular income.
Balance mutual funds are ideal for medium- to long-term investors willing to take moderate risks. Balance mutual fund has to invest 65% portion in equity and remaining in debt or other securities.
Exchange-Traded Mutual Funds (ETFs)
Exchange-Traded Mutual Funds are essentially Index Mutual Funds that are listed and traded on exchanges like stocks. An ETF mutual funds are a basket of stocks that reflects the composition of an Index, like Nifty 50.
The exchange-traded mutual fund trading value is based on the net asset value of the underlying stocks that it represents.
International mutual Funds
International mutual funds invest their money in international companies located in other parts of the world. International mutual funds are also known as foreign funds.
The money in international mutual funds not be invested in the investor’s own country.
Emerging Market Mutual Funds
In emerging market mutual funds, the investment is made in the developing countries which are growing economically at a good rate.
These funds are considered risky as a lot of other factors depend on the performance of political and economic situations of the particular developing country.
Debt mutual Fund / Fixed Income mutual Funds
Debt Mutual Funds invest in rated debt securities / fixed income instruments like bonds, debentures, government securities, commercial papers, and money market instruments.
Debt Mutual funds best for the medium to long-term investors who are averse to risk and seeking regular and steady income.
Please note that debt mutual fund is not risk-free there is risk associated with debts mutual fund are interest rate risk and credit risk
When interest goes down return on debt fund will be increased and if the interest rate increase then returns on debt fund will decrease.
Credit risk is also associate with debt fund, debt mutual fund invests money in a corporate bond, debentures, and other debt instrument and if company default in payment then mutual fund NAV also decrease due to adjustment of default loss.
Liquid Mutual Funds / Money Market Mutual Funds
These type of mutual funds invest in highly liquid money market instruments and provide easy liquidity. The period of investment in these mutual funds could be as short as a day.
Debt mutual fund are good for Corporate, institutional investors and business houses who invest their funds for very short periods. Liquid fund and money market fund has very less risk.
Return in liquid and money market fund are equal to your FD return or 1-2% higher than your FD return. This mutual fund is low-Risk low return category.
Gilt Mutual fund Funds :
These type of mutual funds invest in Central and State Government securities and are best suited for the medium to long-term investors who are averse to risk. Government securities have no default risk.
Gilt mutual funds are invested in government securities so there is no credit risk associated with them but one of the major risk associated with gilt mutual fund is Interest rate risk.
Performance of gilt mutual fund depends on the interest rate, if the interest rate is increased then gilt mutual fund return will reduce and vice versa.
There are different types of mutual funds are available in the market . An investor should choose accordingly his goals. Before choosing any mutual fund investor should research about everything like lock-in period, entry load, exit load, expenses ratio, risk and expected returns. If you are new then you should take the advice from your financial advisor before investing.
Disclaimer: This article is only for education purpose, please take your financial advisor before investing.
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