Saving Taxes!
Mutual funds are diversified investment products. They don’t only invest in stocks. They diversify their funds across various investment products to ensure diversification over the funds, as classified by the SEBI. Mutual funds invest in Stocks, BONDS, G-sec, floating rate instruments, Debt AND Money Market instruments such as Commercial papers and T-bills. Mainly, mutual funds are classified into five different schemes with different investment characteristics, such as,
1)Equity Schemes
2) Debt Schemes
3) Hybrid Schemes
3) Hybrid Schemes
4) Solution Oriented Schemes
5) Other Schemes
These five schemes are again divided into different sub-categories based on the categorisation and rationalisation of SEBI.
As per SEBI Categorization and Rationalization, Mutual funds are classified into different types, as mentioned below.
Equity Schemes invest the majority of the funds in Equity. Funds that have invested at least 65% in equity will qualify as equity schemes. These funds provide capital appreciation over time, and investors can park their money for mid- and long-term returns.
Equity funds are classified into different types based on their characteristics and their investment style, such as
Large-cap funds are open-ended funds offering stable returns in terms of capital appreciation. They invest 80% of their funds in large-cap stocks, which are determined by the market capitalisation of the top 1-100 companies.
Midcap funds are open-ended funds that offer returns on growth in mid-cap stocks. They have a minimum exposure of 65% to Mid-cap companies, determined by the market cap of the top 101-250 companies.
Small-cap funds are open-ended funds that offer the chance to capture the rapid growth of small-cap stocks where their exposure to small-cap stocks is not less than 65%. These stocks are determined by the market cap of the top 250 and below companies, respectively.
Large and Mid-cap funds combine stocks of large-cap and mid-cap companies from the top 1 to 250 companies.
These funds have a minimum equity exposure of 35% in Large-cap and another 35% in mid-cap, which combines to make a minimum of 70% of the funds invested in equity.
Multi-cap funds are open-ended funds that invest in a minimum of 65% of the asset class in equity across large, mid, and small–cap funds, where the remaining can be any debt product.
Multi-cap funds offer higher returns and diversification across different Market caps, allowing you to enjoy the returns of equity growth on all Market caps.
Dividend yield funds are open-ended funds whose focus lies on investing in high dividend yield stocks, where they invest a minimum of not less than 65% in dividend stocks.
These dividend funds capture the dividends of high dividend-yield stocks and their growth in terms of capital appreciation.
Value funds are Open-Ended funds that invest in undervalued stocks with a minimum equity exposure of at least 65%.
These funds identify undervalued stocks with high growth potential and try to capture that growth by investing in them at an early stage.
Contra Funds are Open-Ended funds that invest using a contrarian investment strategy with a minimum of 65% exposure in equity.
These contra funds are invested in currently underperforming companies by predicting they will generate high growth in the future.
Focused funds are Open-Ended funds that invest in focused stocks limited to 30 scripts. These scripts are selected at the time of fund launch and make wise changes.
These funds have an equity exposure of at least 65%. They primarily target pre-selected stocks and make investment decisions based on the trends of the 30 stocks in which they invested.
Sectoral/ Thematic funds are Open-ended equity schemes investing in a particular sector of a minimum of 80% of equity and equity-related investments.
These sectoral or Thematic funds are only focused on one sector, whereas entire equity holdings are found to be totally concentrated on one industry.
ELSS (Equity Linked Saving Scheme) is an Open-Ended scheme having a minimum 3-year lock-in period from the time of investment.
ELSS are only funds which come under the tax saving option of section 80C of the Income Tax Act.
ELSS funds are invested in equity, which is a minimum of 80% of funds.
Debt funds ensure that most of the funds are invested in debt instruments such as bonds, debentures, Government securities, and money market instruments to deliver safer returns. These debt funds aim to provide safe and secure returns to investors by investing in low-risk debt products.
Overnight funds are open-ended debt funds that are invested in overnight securities, where the maturity period of the securities is one day.
These funds have no interest rate risk except credit risk.
Liquid Funds open-ended liquid schemes that invest in debt and money market securities which have a maturity of 91 days.
Ultra-short duration Funds are open-ended funds that invest in Debt and Money market instruments with a Macaulay duration of 3 months—6 months.
This means their maturity duration is 3 to 6 months, making them ideal for investors with an Ultra-Short investment horizon.
Low-duration funds are Open-Ended funds that primarily invest in Debt schemes with a duration between 6 months and 12 months.
This means their maturity duration is 6-12 Months, making them ideal for low-duration debt investments.
Money Market Funds are open-ended funds that invest in Money Market instruments having a maturity of up to 1 year.
This means their maturity duration is 12 Months, which makes them ideal for safe debt investments.
Short-duration funds are open-ended funds that invest in Debt and Money market instruments whose Macaulay duration is between 1 and 3 years.
The debt instruments in which they are investing have a maturity period of 1-3 years, which makes them ideal for short-term debt investment.
Medium-duration funds are open-ended funds that invest in Debt and Money market instruments with a Macaulay duration between 3 and 4 years.
The debt instruments in which they are investing have a maturity period of 3 years – 4 years, which makes them ideal for Mid-term debt investment.
Medium to long-term duration funds are Open-Ended funds that invest in Debt and Money market instruments with a Macaulay duration of 4 – 7 years.
The debt instruments in which they are investing have a maturity period of 4 years – 7 years, which makes them ideal for Mid-term debt investment.
Long-duration funds are Open-Ended funds that invest in Debt and Money market instruments with a Macaulay duration of more than 7 years.
The debt instruments in which they are investing have a maturity period of more than 7 years, which makes them ideal for Long-term debt investment.
Dynamic bond funds are open-ended debt funds that invest in bonds across durations between long-term and short-term bonds.
Corporate Bond Funds are open-ended funds that predominantly invest in highly rated corporate bonds, with exposure of at least 80% of the assets.
Credit Risk Funds are open-ended funds that invest a minimum of 65% of assets in corporate bonds rated below the highest-rated bonds.
Banking and PSU funds are open-ended debt schemes that invest in Debt instruments of banks, Public Sector Undertakings, and Public Financial Institutions, with a minimum exposure of 80% to these debt products.
Glit funds are open-ended funds where they invest a minimum of 80% of their assets in G-secs across different government securities across maturity.
Glit funds, with a 10-year constant duration, are open-ended funds that invest a minimum of 80% of their assets in G-secs across different government securities. Macaulay's duration is 10 years.
Floater Funds are open-ended debt schemes where they invest a minimum of 65% in floating-rate instruments.
Hybrid funds are hybrid in the name itself, where these funds invest in diversified equity and debt to ensure a perfect balance in diversifying their funds. They create a balanced portfolio with a blend of equity and debt in terms of growth and stability.
Hybrid funds are a type of mutual fund that balances its portfolio by investing in Equity and debt products. They are classified into different types, as mentioned below.
Conservative Hybrid Funds are open-ended funds in which equity and equity-related instruments account for 10% to 25% of total assets, with a minimum exposure to Debt instruments at 75% to 90%.
Balanced Equity funds are open-ended funds in which Equity & Equity-related instruments account for 40% to 60,% whereas the remaining invested in Debt instruments for 40% to 60%
Aggressive Hybrid Funds are open-ended funds in which Equity and equity-related instruments account for 65% to 80%, while the remaining 20% to 35% are held in Debt instruments.
Dynamic Asset Allocation or Balanced Advantage funds are Open-Ended funds in which the fund manager manages the equity/debt dynamically.
In these funds, the fund manager can neither invest in equity nor debt, according to his view, but can invest 100% of the funds in one asset class as well.
Multi-asset allocation funds are Open-Ended funds that can invest in a minimum of 3 different allocations at a minimum exposure of 10% each.
In these funds, the fund manager can invest a minimum of 10% each in 3 different classes, and the remaining funds can be invested independently in any one asset class or debt product.
Arbitrage Funds are open-ended funds that follow a unique investing arbitrage strategy. The minimum equity and equity-related exposure is at least 65%.
Equity savings funds are open-ended funds that invest in equity, arbitrage, and debt products.
Their equity & equity-related instruments are 65% and 10% in Debt, respectively, and the Minimum hedged & unhedged have been stated in the SID (scheme information document).
Solution-oriented funds are diversified into different types. Their main aim is to create an investment in one thing, such as retirement and children's plans, where they work for retirement and children's higher studies, and others.
Retirement Funds are open-ended funds that invest in a retirement solution-oriented way. They are locked in for at least 5 years or until retirement age, whichever is earlier.
Children’s Funds are Open-Ended mutual funds that are invested in children. They are locked in for at least 5 years or until the child attains the age of majority, whichever is earlier.
Index funds are entirely Open-Ended funds that follow a particular index and invest in its scripts. The equity exposure should be a minimum of 95% on that underlying index.
ETF funds stand for Exchange Traded Funds, which are entirely Open-Ended funds that follow a particular index and invest in its scripts. The equity exposure should be a minimum of 95% on that underlying index.
The FoF stands for Fund of Funds, which are totally open-ended funds that invest in different top mutual funds with a minimum exposure of 95%.
With a wide range of mutual funds available in the market, investors should assess their requirements based on their risk profile, investment horizon, and goals before they choose to invest in any mutual fund.
This is very important as investing in the wrong mutual fund may lead to large financial difficulties when funds are needed in any kind of emergency.
Mutual funds don’t invest only in stocks. As mentioned above, they also invest in debt securities. There are many mutual funds that suit different requirements, risk levels, and investment horizons.
Therefore, investors must know what they are looking for before investing in any mutual fund scheme.