There are over three dozen mutual fund categories defined by SEBI, and it can get very confusing when it comes to picking where to invest. But you don't need to know all categories of mutual funds. In this video, we explain all the important mutual fund categories a Mutual Fund investor should know. From low-risk debt funds to ELSS to high-risk equity funds, we cover the entire gamut. We also tell the ideal investment horizon for each of these categories. So no more confusing
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Mutual Funds are of many types, and if you want to invest then so many options can confuse you.
But don’t worry, to invest in Mutual Funds you just need to know about some types, and in this video, you will get information about all these categories.
Most mutual funds invest in two broad categories of asset classes-
Equity
Debt
Equity Funds invest in companies by buying shares of companies.
And Debt funds lend money to companies and generate returns.
So keeping this in mind, let us take a look at the different types of funds now.
Low-Risk Funds Surprised? Yes, there are mutual funds that are low risk.
And these funds are in the Debt funds category. They lend money only to Top-rated companies, that too only for a short period. And that’s why the two risks debt funds face — credit risk and interest rate risks — are minimal for them.
These funds are ideal if you are looking to put aside money for a period of 1 day to 3 years.
There are 3 types of funds under this category:
A. Liquid Funds - These funds buy bonds whose maturity is within the next 91 days.
B. Ultra Short Duration Fund s- These funds buy bonds that mature in the next 3–6 months.
C. Low Duration Funds - These funds buy bonds that mature in the next 6–12 months.
In all these cases, the borrower gives the money back at the time of bond maturity and till that time, gives interest on the money lent to them.
2.Tax-saving Mutual Funds
Known as ELSS or Equity Linked Savings Scheme mutual funds, Tax Saving Mutual Funds lets you save tax while giving you a chance to grow your money.
By investing in these funds you can every year save up to Rs. 46,800 tax under Section 80 C.
ELSS fund’s 3-year lock-in period is the shortest amongst all tax-saving options. And their returns are also tax-efficient.
3. Moderate Risk Funds
Some debt funds fall into this category, but if you are willing to take moderate risks, Hybrid funds may be a better category to look at.
Hybrid funds are a category of funds that invest in both equity and debt. Here are some categories you can consider:
A: Aggressive Hybrid Funds:
These funds allocate more in equity and try to grow their money, and put a little money in debt to provide stability.
B. Dynamic Asset Allocation Funds:
Dynamic Asset Allocation Funds are different from other Hybrid Funds because they don’t have a limit on equity and debt portions
Hybrid funds are ideal for medium-term goals which are 3–5 years away.
High-risk Funds
While we are giving them a high-risk classification, don’t get scared of them, this just means that you need to invest for at least 5 years.
With this minimum tenure, you are giving your investments enough time to ride through the ups and downs and show real growth potential.
If you want to invest in pure equity funds then you can consider one of these categories:
A. Multi cap Funds - These invest in companies of all sizes and sectors and therefore have a diversified portfolio.
They are flexible enough to change the portfolio composition as per the market conditions and hence they are better equipped to take advantage of emerging opportunities.
B. Large-cap Funds - These funds invest the majority of their money in large companies in India.
These are the Top 100 companies in India and are some of the biggest brands in our country. The returns from these funds are relatively stable.
C. Large and Mid Cap Funds - This fund category invests in a combination of large and mid-sized companies in India. So what you get is a portfolio of leaders of today and the potential leaders of tomorrow.
5. Very High-Risk Funds
These funds, due to their investment style, or where they invest, tend to have very high risk.
A. Mid Cap Funds - These funds invest the majority of their money in mid-sized companies of India.
These companies are some of the fastest-growing companies and so these funds tend to outperform other categories over the long term,
but because of their size, they tend to get affected more by adverse market conditions.
B. Small-Cap Funds - These funds invest the majority of their money in the small companies of India. These companies are beyond the Top 250 companies by market capitalization but can grow to even become mid-caps and large caps in the future.
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