Investing your hard-earned money is like planting a seed for a future harvest. However, just as a wise gardener carefully selects the right soil and nourishment for each plant, you need to choose the right avenues to nurture their financial goals. This is where mutual funds can emerge as a fertile ground for wealth creation, offering a diversified approach that caters to various risk appetites and investment objectives.
Amidst the diverse landscape of mutual funds in India, you need to deal with a spectrum of opportunities, which is where understanding the different types of
mutual funds
becomes not just a choice but a strategic advantage. Whether you're aiming to build wealth over time, invest for a specific goal, or simply stay ahead of inflation, having a grasp of these mutual fund variants can set you on a well-informed path towards financial success. .
Mutual Fund Types by Structure
There are different types of mutual fund schemes when classified based on their structure. These include the following:
1.Open-ended mutual funds
An open-ended fund refers to a mutual fund scheme that allows buying or selling at any time. In simple terms, units of open-ended fund schemes can be bought or sold at any point, and these funds do not have a fixed maturity period. Investors can choose to remain invested in the scheme for as long as they wish, with the flexibility to sell units at any time after making an investment.
2.Close-ended funds
A closed-end mutual fund refers to a debt or equity fund where a fund house issues a specified number of units during its launch. Once the
New Fund Offer (NFO)
period concludes, investors can no longer redeem or purchase units of the closed-end mutual fund. Typically introduced through the NFO, these funds are later traded on the stock market and come with a predetermined maturity time. The Net Asset Value (NAV) helps determine the actual price, which may trade below or above the NAV depending on unit supply and demand. In essence, closed-end mutual funds close after their launch period until maturity, allowing the fund manager to adhere to the fund's investment objectives..
3.Interval funds
Interval Funds have the flexibility to invest in equity, debt, or a combination of both. Investors can buy or redeem units exclusively during specific time intervals, as determined by the fund house. These intervals, declared by the fund house, allow investors to sell or buy units. This structure is reminiscent of closed-ended funds, which also restrict frequent buying or redeeming of units. .
Types of Mutual Funds based on Asset Classes
Equity Mutual Funds
are a versatile category of mutual funds that invest primarily in equity shares, offering investors the potential for capital appreciation. Within the equity mutual fund category, there are various subtypes, each with its own investment strategy and risk profile. Let's explore some of the common types of equity mutual funds:
Multi-Cap Fund:
Multi-cap funds are open-ended equity schemes that invest in a mix of large-cap, mid-cap, and small-cap stocks. These funds provide diversification across different market segments, offering a balanced approach to risk and return. With a minimum of 75% 65% of assets allocated to equities, multi-cap funds are suitable for long-term wealth creation.
Large Cap Fund:
Large-cap mutual funds predominantly invest in stocks of large-cap companies. These companies may be typically stable, with a proven track record of financial performance. Large-cap funds allocate at least 80% of their assets to large-cap equities, making them potentially lower risk option in comparison to mid/small cap
Large & Mid Cap Fund:
This type of fund combines the benefits of large-cap and mid-cap investing. With a minimum allocation of 35% to large-cap stocks and another 35% to mid-cap stocks, these funds offer a blend of stability and growth potential. Investors can benefit from both established and large companies.
Mid Cap Fund:
Mid-cap mutual funds primarily invest in shares of mid-cap companies. These companies are in a growth phase, and mid-cap funds have a minimum of 65% of assets allocated to mid-cap equities. While they offer higher return potential, mid-cap funds come with a higher level of risk due to their focus on mid-sized companies.
Small Cap Fund:
Small-cap funds focus on small-cap stocks, which have high growth potential but also higher risk. These funds allocate at least 65% of their assets to small-cap equities, making small-cap funds suitable for investors willing to take on more risk for the potential of higher returns.
Value Fund:
Value funds follow a value investment strategy, focusing on undervalued stocks. These funds construct their portfolios based on value investing principles, with a minimum of 65% of assets invested in equities. Value funds offer opportunities for long-term wealth creation by capitalizing on value stocks.
Contra Fund:
Contra funds follow a contrarian investment strategy, meaning they buy and sell opposite to prevailing market sentiments. These funds allocate a minimum of 65% of assets to equities. Contra funds allow investors to benefit from contrarian theories and capitalize on changing market conditions.
Sectoral/Thematic Fund:
Sectoral funds focus on a particular sector, such as pharma, auto, or IT, while thematic funds follow a specific theme across various sectors. Sectoral funds invest a minimum of 80% of assets in stocks related to a specific sector, and thematic funds allocate 80% of assets to equities related to a particular theme. These funds come with higher risks due to the sector-specific focus but offer the potential for high returns.
Equity Linked Savings Scheme (ELSS) :
ELSS is a tax-saving mutual fund with a lock-in period of three years. It invests a minimum of 80% of its assets in equities. ELSS funds offer tax deductions of Rs 150,000/- p.a. under Section 80C of the Income Tax Act 1961 and have one of the shortest lock-in periods among tax-saving options. To claim deduction, investor need to opt for old tax regime. They combine tax planning with the potential for higher returns, making them a popular choice for investors.
Focussed Equity Fund:
A focused equity fund is a type of mutual fund that follows a concentrated investment strategy, typically by investing in a limited number of stocks. These funds typically have a smaller number of holdings compared to traditional diversified equity funds, which may hold a more focused portfolio of stocks. This number as defined by SEBI is a maximum of 30 funds, and not more.
Overnight Fund:
These open-ended debt schemes invest in overnight securities with a maturity of one day, such as TREPS and REPO. Overnight funds comparatively provides a safe and highly liquid avenue for short-term parking of funds, often strive to yield returns higher than traditional savings accounts.
Liquid Fund:
Liquid funds
invest in highly liquid money market instruments with a maturity of up to 91 days. Examples include TREPS, call money, and commercial papers. These funds are ideal for short-term investments, serving as a relatively secure option for managing monthly expenses and creating an emergency fund.
Ultra Short Duration Fund:
These funds invest in debt instruments with Macaulay duration between 3 to 6 months. They offer an intermediate investment horizon, allowing for a stable income and reinvestment opportunities. Investors can use them for specific goals, like purchasing a vehicle or paying off short-term loans.
Short Duration Fund:
Short duration funds have a Macaulay duration of 1 to 3 years.
Medium Duration Fund:
Medium duration funds have Macaulay duration between 3 to 4 years.
Long Duration Fund:
Long duration funds invest primarily in debt instruments with a Macaulay duration greater than 7 years. These funds may be best suited for investors in falling interest rate scenarios, as they aim to benefit from higher yields. However, they also carry higher interest rate risk.
Dynamic Bond Fund:
Dynamic bond funds offer flexibility in managing duration based on market conditions. They adjust their portfolio maturity in response to changing interest rates.
Corporate Bond Fund:
Corporate bond funds predominantly invest in the highest-rated corporate bonds, typically AAA-rated bonds from well-established companies. These funds allocate at least 80% of their assets to these high-quality assets, aiming to offering risk adjusted returns.
Credit Risk Fund:
Credit risk funds invest in corporate bonds with ratings below the highest grade. These funds allocate a minimum of 65% of assets to debentures, commercial papers, and bonds of companies with ratings below the highest level, offering the potential for higher returns but with increased credit risk.
Banking and PSU Fund:
These funds primarily invest in debt instruments issued by banks, Public Sector Undertakings (PSUs), and Public Financial Institutions. A minimum of 80% of the fund's assets are allocated to debt instruments of banks and PSUs.
Money Market Mutual Funds:
Money market mutual funds invest in liquid assets, such as government securities and certificates of deposit having maturity upto 1 year. They are suitable for short-term parking of excess funds and are highly liquid, making them eligible for those looking to preserve capital.
Debt mutual funds:
provide a wide range of options for investors to tailor their portfolios based on their risk tolerance, investment horizon, and income objectives. It's essential to match your investment goals with the appropriate type of debt mutual fund to optimize your returns while managing risk.
Balanced advantages/ Hybrid Fund
Balanced mutual funds, also known as hybrid funds, combine a mix of assets, including both bonds and stocks.
Here are different types of balanced mutual funds in India: .
Conservative Hybrid Fund:
These funds allocate at least 10% to 25% of their assets to equity and equity-related instruments, while the majority, ranging from 75% to 90%, goes into debt instruments.
Balanced Hybrid Fund:
Balanced hybrid funds maintain a balance by investing at least 40% to 60% in equity and equity-related instruments and an equivalent percentage, ranging from 40% to 60%, in debt instruments.
Aggressive Hybrid Fund:
These funds take a more aggressive approach by investing in equity and equity-related instruments within the range of 65% to 80%, while allocating 20% to 35% to debt instruments.
Dynamic Asset Allocation or Balanced Advantage Fund:
Dynamic asset allocation funds are flexible in their approach, with the ability to invest dynamically in both equity and debt. Their allocation can range from 0% to 100% in equity and equity-related instruments, as well as 0% to 100% in debt instruments, allowing for strategic adjustments.
Multi-Asset Allocation Fund:
Multi-asset funds diversify across at least three asset classes, with a minimum allocation of 10% in each asset class. This approach aims to enhance diversification and risk management.
Arbitrage Fund:
Arbitrage funds follow an arbitrage strategy and invest a minimum of 65% in equity and equity-related instruments. They aim to benefit from price differentials in different markets or instruments.
Equity Savings:
Equity savings funds allocate a minimum of 65% to equity and equity-related instruments and a minimum of 10% to debt instruments, along with the use of derivatives..
Balanced mutual funds:
provide investors with a range of options to tailor their portfolios based on their risk tolerance and investment objectives. These funds tend to offer the advantage of diversification and risk management by blending different asset classes. Investors can choose the type of balanced fund that aligns with their financial goals and risk preferences.
Mutual fund based on Investment Goals
Mutual funds can also be classified in terms of distinct investment goals. The classification of mutual funds based on such goals includes:
Types of Mutual Funds based on investment goals
Very Short Term
OVER Night Fund –
A type of Debt fund which invested in debt securities maturing the next day. The securities in the portfolio mature every day. As they are open ended debt schemes investors can invest there money just for a day.
Short Term –
Liquid Mutual Fund - Liquid funds are debt mutual fund schemes that primarily invest in debt or money market instruments with maturities within 91 days. These funds serve as a short-term investment option, allowing investors to park surplus funds for periods ranging from a few weeks to a few months. Liquid funds typically offer yields that are higher than the interest rates provided by savings bank accounts.
Money Market Fund –
Money Market Funds are investment vehicles specializing in short-term debt instruments. These funds allocate capital to diverse money market instruments, aiming to provide good returns within a one-year timeframe while prioritizing significant liquidity. The typical average maturity for Money Market Funds is set at one year.
Short Term
Debt Mutual Funds
Debt Mutual Funds
are a category of mutual funds that primarily invest in fixed income securities, offering a more stable and income-focused investment approach. These funds are suitable for investors seeking safety and regular income from their investments. Here's an overview of various types of debt mutual funds:
Medium Term
Equity Hybrid Mutual Fund - These funds seek to strike a balance between risk and returns through investments in equity, derivatives, and debt. Utilizing derivatives helps mitigate directional equity exposure, leading to decreased volatility and the generation of a consistent, stable return. The equity component contributes to growth, while the inclusion of debt and derivatives ensures a steady, regular return. Typically, these schemes allocate 65 to 100 percent of their portfolio to equity assets and 0 to 35 percent to debt asset classes.
Long Term
Diversified Equity Mutual funds - A diversified equity fund allocates investments across companies without regard to their size or sector. The objective is to spread investments across the entire stock market, aiming to maximize gains for investors. These funds are available through various investment vehicles such as unit-linked insurance plans (ULIPs), mutual funds, and other investment firms.
Very Long Term
Diversified Mid Cap and Small Cap funds - Large and mid-cap funds allocate investments across both large and mid-cap stocks, falling under the category of diversified equity funds. These funds have a minimum investment requirement, mandating that at least 35% of total assets be invested in large-cap companies and another 35% in mid-cap companies. By diversifying investments across both large and mid-cap stocks, these funds introduce a level of risk slightly higher than that associated with pure large-cap funds.
Sector Mutual Funds - A sectoral fund is an equity fund that channels investors' funds into businesses within a particular industry or sector. These funds enable investors to gain exposure to specific sectors of the economy by concentrating their investments in companies operating within the same sector.
Mutual Funds Based on Risk
(Explain the concept of risk o meter, below is not valid as a category).
Mutual funds also present a diverse array of types, each with different risk profiles. Understanding these risk levels is pivotal in making informed investment decisions. Let's embark on a journey through mutual funds based on their risk characteristics.
1. Index Mutual Funds & ETF’s
Index Mutual Funds: Index Funds are passive mutual funds that aim to replicate market indices. In this approach, the Fund Manager does not actively engage in selecting securities to construct the fund's portfolio. Instead, the manager invests in all the securities comprising the schemes’ benchmark index. The allocation of stocks in the fund closely mirrors the weightage of each stock in the index. This strategy constitutes passive investment, wherein the fund manager essentially replicates the index while constructing the portfolio, striving to keep it consistently in alignment with the chosen benchmark index.
ETFs:
An ETF, or Exchange Traded Fund, is a tradable security that follows an index akin to an index fund. In essence, ETFs track indexes like Nifty 50, S&P BSE Sensex, etc. Purchasing shares/units means acquiring a portfolio mirroring the yield and return of its underlying index. ETFs aim not to outperform but to replicate the performance of the index.
Notably, while both ETFs and Index Funds track indices,
ETFs
are traded on stock exchanges. Being passive schemes, ETFs & Index Funds offer cost-efficient investment options as there are no research costs and these schemes typically seek to replicate the underlying benchmark index.
ETFs and Index Funds both have same objective to replicate their benchmark index. Thus, in both the funds, the performance will be aligned with the scheme’s benchmark index, subject to expense ratio & tracking error.
In order to purchase an ETF, an investor requires demat account because ETFs are traded on the exchange unlike any other mutual fund categories.
Fund of Funds (FoFs):
A
Fund Of Fund’ (FOF)
is an investment strategy of holding a portfolio of other investment funds rather than investing directly in stocks, bonds or other securities. A FOF Scheme primarily invests in the units of another Mutual Fund scheme. This type of investing is often referred to as multi-manager investment FOF can also invest in a single fund, depending upon the objective.
Investing in Gold & Silver
An investor has an option of
investing in Gold fund
or Silver via ETFs or FOFs which invest in physical gold / silver as underlying assets. They are aligned as per the movement of the gold or silver. Under FOFs, a fund may invest in Gold ETF as well as Silver ETF.
Multi Asset Allocation Funds:
These mutual funds optimize asset allocation by combining minimum of three asset classes including debt, equity, international equity and commodities. Their flexibility allows for different asset allocation based on market trends, predetermined formulas, or the fund manager's expertise. Despite some similarities to Hybrid Funds, Asset Allocation Funds require in-depth fund manager knowledge to select and allocate bonds and stocks effectively. .
Retirement Funds:
These hybrid funds primarily invest in equities for long-term wealth accumulation aimed at retirement. They focus on providing both capital appreciation and income for retirement years. Offering convenient withdrawal options, they are often referred to as pension funds.
Retirement funds
come with a lock-in period of 5 years or until retirement age, aiming to provide a dedicated vehicle to fund post-retirement lifestyle expenses.
Children's Funds:
Open-ended funds designed for children with a minimum lock-in period of 5 years or until the child reaches the age of majority. These hybrid funds feature exposure to both equity and debt instruments, discouraging premature withdrawals. They are ideal for building a financial foundation for children's future needs, such as higher education and marriage expenses.
These specialty funds offer a diverse array of investment choices, catering to specific financial goals and risk preferences. Whether you seek to track market indices, diversify your portfolio, explore commodity investments, optimize asset allocation, plan for retirement, or secure a child's financial future, these specialized funds provide tailored solutions to meet your varied investment needs.
Conclusion
In the world of investment avenues, mutual funds stand as a versatile and dynamic vehicle offering a multitude of options to align with diverse financial goals and risk preferences. Here, you've explored the specialised avenues that beckon different types of investors seeking growth, stability, or a blend of both.
Yet, among this diversified landscape, a common thread emerges - the importance of aligning investment choices with personal goals, aspirations, and time horizons. As you embark on your mutual fund journey, meticulous research, an understanding of market dynamics, and consideration of your risk appetite will serve as your compass. Invest right with Nippon India Mutual Funds.
Disclaimer:
The information herein is meant only for general reading purposes and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or as a professional guide for the readers. The document has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. The sponsor, the Investment Manager, the Trustee or any of their directors, employees, associates or representatives (“entities & their associates”) do not assume any responsibility for, or warrant the accuracy, completeness, adequacy and reliability of such information. Recipients of this information are advised to rely on their own analysis, interpretations & investigations. Readers are also advised to seek independent professional advice in order to arrive at an informed investment decision. Entities & their affiliates including persons involved in the preparation or issuance of this material shall not be liable in any way for any direct, indirect, special, incidental, consequential, punitive or exemplary damages, including on account of lost profits arising from the information contained in this material. Recipient alone shall be fully responsible for any decision taken on the basis of this document.
Mutual Fund Investments are subject to market risks, read all the scheme related documents carefully.
