Understanding the different types and benefits of mutual funds

    In the current age and time, the Indian investor is spoilt for choices. For some, the idea of having multiple choices can be overwhelming whereas for others, making an investment decision can get a tad confusing. Whether you are a first time investor or a seasoned one, you need to know all the different types of investments available and also the kind of risks they possess so that depending on your risk tolerance, investment objective, and investment horizon you are able to make the right investment decision.

    These days, a lot of individuals are investing in mutual funds after realizing the kind of returns they have the potential of delivering in the long run. Under the mutual fund gamut, there are several product categories and subcategories. So, if you want to target your life’s short term, medium, or long term financial goals with mutual funds, you should be aware of all the different mutual fund schemes available and the benefits that they offer.

    What is a mutual fund?

    A mutual fund is an investment vehicle that pools financial resources from investors sharing a common investment objective and invests the accumulated sum across various money market instruments and asset classes.

    What are the different types of mutual funds?

    Mutual funds can be largely categorized as equity, debt, hybrid, ETFs/index funds, solution oriented, and international. Let us understand each of these and focus on their benefits.

    Equity funds

    Mutual funds that invest a minimum of 65 percent of their total investible corpus in equity and equity related instruments of companies are deemed as equity mutual funds. Equity mutual funds can be categorized based on the market cap that they choose to invest in and also depending on the sector or theme that they focus on for building their portfolio. Some of the most sought after equity funds are large cap funds, mid cap funds, flexi cap funds, small cap funds, and multi cap funds. Some investors can even save tax by investing in Equity Linked Savings Scheme (ELSS) a tax saving scheme that invests a minimum of 80 percent of its portfolio in equity and equity related instruments. Mutual funds that only invest in stocks of companies belonging to a certain sector, industry, or theme are referred to as sectoral/thematic funds. Equity funds offer risk adjusted returns over the long run and are considered by investors to have a very high risk appetite.

    Debt funds

    Debt funds are those mutual funds that invest in fixed income securities and debt related instruments. They may not generate returns like equity schemes but are known to offer a cushion to an equity heavy portfolio. Debt funds like liquid funds, overnight funds, or ultra short term funds/low durations funds can be considered those who wish to build an emergency fund to tackle life’s unforeseen exigencies. They try to generate stable returns with minimum investment risk.

    Hybrid funds

    Hybrid funds invest in both equity and debt asset classes. Their main benefit is that they offer the best of both asset classes through one single investment.

    Solution oriented funds

    Mutual fund schemes like retirement savings funds or children’s gift funds that aim at helping investors build a corpus for their retirement for or for their child’s future are referred to as solution oriented funds. These funds may come with a lock-in period.

    ETFs/Index funds

    ETFs and index funds are passive mutual funds that try to generate returns by replicating the performance of their underlying portfolio or benchmark. Since these funds follow a passive investment strategy, they carry a very low expense ratio and hence are considered to be a cost effective investment option.

    International funds

    As the name suggests, international funds are those mutual funds that invest in foreign company stocks. Investors get exposure to stocks and growth potential of various companies like Tesla, Apple, Microsoft, Facebook, etc. that are listed outside India.