A mutual fund pools money from many investors to purchase a diversified portfolio of stocks, bonds, or other securities. For millions of Americans, these funds are the cornerstone of their retirement savings, offering professional management and built-in diversification that would be difficult to achieve on their own.
In a mutual fund, investors pool their money to buy assets together, benefiting from shared costs and professional expertise. Rather than buying individual stocks or bonds, you buy shares in the fund itself, becoming partial owners of all its holdings.
When you invest in a mutual fund, you’re essentially hiring professional money managers to make investment decisions on your behalf. These managers research opportunities, select securities, and monitor performance according to the fund’s stated objectives—whether that’s aggressive growth, steady income, or matching a market index.
Understanding Mutual Funds
A mutual fund is a collective investment vehicle formed when an asset management company (AMC) pools money from several individual and institutional investors to purchase securities such as stocks, debentures, and other financial assets.
The AMCs have professional fund managers to manage the pooled investment. Fund units are assigned to Mutual fund investors corresponding to their quantum of investment. Investors can purchase or redeem fund units only at the prevailing net asset value (NAV).
Authorities like the Securities and Exchange Board of India (SEBI) regulate mutual funds, ensuring transparency and investor protection.
The beauty of mutual funds lies in their variety. They cater to different risk levels, investment horizons, and financial objectives. Broadly, they’re classified by asset class (equity, debt, hybrid), investment objective (growth, ICDW), and structure (open-ended, closed-ended).
Categories and their Sub-Categories of Mutual Funds
Equity Mutual Funds
Equity mutual funds invest primarily in stocks, making them ideal for those seeking long-term capital growth. They’re riskier due to market fluctuations but offer higher return potential over time.
Large-Cap Funds:
These funds are invested in large, established companies with a proven track record, such as blue-chip firms like Reliance Industries, HDFC, etc. They’re less volatile than smaller stocks, making them a safer bet within the equity category. These funds must invest at least 80% of their assets in equity and equity-related instruments of large-cap companies.
Mid-Cap Funds:
According to market capitalisation, these funds buy stocks of top companies between 101 and 250. They target medium-sized companies and offer a balance of growth and risk with a minimum of 65% of their assets in equity in mid-cap companies. They invest in firms that have outgrown their small-cap phase but aren’t yet giants and expect higher volatility and higher potential returns.
Small-Cap Funds:
These focus on smaller companies between 101 and 250 according to market capitalisation with significant growth potential. They’re the riskiest equity funds due to their sensitivity to market swings but can deliver outsized gains during bull markets. Mid-cap funds must invest at least 65% of their assets in equity and equity-related instruments of mid-cap companies.
Multi-Cap Funds:
Multi-cap funds have no restriction on multi-cap funds to follow an investment strategy which is confined to specific market capitalisation. At least 65% of their assets in equities and equity-related instruments take a diversified approach, spreading investments across large, mid, and small-cap stocks, offering a mix of stability and growth.
Sectoral/Thematic Funds:
These concentrate on specific industries like technology, banking, and defence, as well as themes like sustainability. They’re high-risk because their performance hinges on one sector’s success and is focused on one industry within different diversification of companies.
Dividend Yield Funds:
They invest in companies that pay dividends comparatively frequently, which is why they are called dividend yield funds. These funds target companies that consistently pay high dividends, appealing to investors who want income alongside growth. These funds can also diversify their portfolio since they must invest at least 65% of their corpus into equity and equity-related instruments. In comparison, 35% gives them space for different financial instruments.
Value Funds:
Value funds invested in undervalued stocks in the market have been overlooked. These funds aim for long-term appreciation as their worth is recognised over time.
Growth Funds:
These invest in fast-growing companies, even if their stock prices seem high, betting on future earnings to justify the cost.
Equity-Linked Savings Scheme (ELSS):
Popular in India, ELSS funds offer tax benefits under Section 80C with a 3-year lock-in, blending equity growth with tax savings.
Debt Mutual Funds
Debt funds invest in fixed-income securities like bonds, treasury bills, and money market instruments. They’re less risky than equity funds and suit investors prioritising safety and steady income.
Liquid Funds:
These invest in ultra-short-term instruments (maturity up to 91 days), offering high liquidity and minimal risk—perfect for parking surplus cash.
Ultra-Short Duration Funds:
With 3–6 months maturities, these funds provide slightly higher returns than liquid funds while keeping risk low.
Low Duration Funds:
Low-duration funds invest in financial instruments in debt. Maturing in 6–12 months, they balance returns and interest rate risk.
Short Duration Funds:
Short-duration funds are invested in financial instruments in debt. These have a 1–3 year horizon, offering moderate returns with manageable ris3-year
Medium Duration Funds:
Medium-duration funds invest in financial instruments in debt. With 3–4-year maturities, they’re sensitive to interest rate changes but offer higher yields.
Long Duration Funds:
Long-duration funds invest in financial instruments in debt. Targeting securities with over 7 years to maturity, these suit long-term investors who are comfortable with interest rate fluctuations.
Dynamic Bond Funds:
These adjust their portfolio duration based on interest rate trends, aiming to optimise returns.
Corporate Bond Funds:
Investing in high-rated corporate bonds offers better yields than government securities with moderate risk.
Gilt Funds:
These focus on government bonds, virtually eliminating credit risk but exposing investors to interest rate movements.
Hybrid Mutual Funds
Hybrid funds combine equity and debt, balancing risk and reward based on the investor’s preference.
Aggressive Hybrid Funds:
Aggressive funds invests 65–80% equity and 20–35% debt, these lean toward growth with moderate stability.
Conservative Hybrid Funds:
conservative funds works on allocating 10–25% to equity and 75–90% to debt, they prioritise safety with a touch of growth.
Balanced Hybrid Funds:
the name itself says that the balanced funds are balanced they offer a middle ground by splitting 40–60% between equity and debt.
Dynamic Asset Allocation Funds:
These dynamic funds shifts between equity and debt are based on market conditions and adaptation to volatility.
Multi-Asset Allocation Funds:
Beyond equity and debt, they include assets like gold or real estate for broader diversification.
Arbitrage Funds:
These exploit price differences in equity markets (e.g., cash vs. futures), delivering low-risk, tax-efficient returns.
Solution-Oriented Funds
These funds are designed for specific life goals and have lock-in periods to encourage disciplined investing.
Retirement Funds:
These build a corpus for post-retirement life, often with a 5-year lock-in, blending equity and debt.
Children’s Funds:
Aimed at goals like education or marriage, they mix growth and safety with a lock-in period.
Other Funds
Index Funds:
These index funds passively track indices, like the Sensex or Nifty 50, and offer low-cost exposure to the market.
Fund of Funds (FoF):
These funds of funds invest in other top-performing mutual funds, providing instant diversification.
International Funds:
These tap into global markets such as the U.S. and Europe, diversifying beyond domestic risks.
FAQs
Who should invest in Equity Mutual Funds?
Equity mutual funds are ideal for investors with a higher risk tolerance seeking long-term capital growth. These funds invest primarily in stocks and are suitable for those with a five to seven years or more time horizon.
Considerations:
- Risk Tolerance: Equity funds are subject to market volatility. Investors should be comfortable with short-term fluctuations in their investment value.
- Investment Horizon: A longer time frame (5+ years) can help mitigate the risks associated with stock market investments.
- Financial Goals: Ideal for goals like retirement, buying a house, or funding children’s education, where substantial growth is desired over the long term.
What type of mutual fund is best?
The best type of mutual fund for investment is the one providing high liquidity rates and returns. When it comes to investing in mutual funds, it is important to look for a scheme that provides the right combination of growth, stability and income, keeping your risk appetite in mind.
