We all know investing in mutual funds can be advantageous for us. It is naturally evident with all the recent mutual fund campaigns and the increasing awareness about benefits of early investment. However, there are different types of mutual funds available in the market. And at times, it can become confusing to understand their investment objectives and how can they fit in your investment portfolio.
However, you need not worry about it much, as we have got you covered on that point. Here’s a quick guide about all the different types of mutual funds.
Recently SEBI launched a new categorization of mutual fund to help investors understand the different types of mutual fund schemes and invest accordingly.
As per the new categorization the mutual fund schemes can be divided into five categories:
- Equity Funds
- Debt Funds
- Hybrid Funds
- Solution Oriented Funds
- Other Funds
Let us now look at each of these fund types in brief:
- Equity Funds:
As the name suggests, equity funds invests money in equity and equity related instruments. This is the reason why equity funds trade in stock market. Their primary objective is to gain capital appreciation by investing in equity related securities. Due to their investment nature, these funds come with a high risk. However, they generate better returns than rest of types of mutual funds. There are further 10 sub-categories or different types of equity mutual funds. They are: - Large-cap funds
- Mid-cap funds
- Small-cap funds
- Multi-cap funds
- Large & Mid-cap funds
- Value fund
- Dividend yield fund
- Focused fund
- Sectoral or Thematic funds
- Equity linked savings scheme or ELSS
- Debt Funds: These funds invest money in debt related instruments such as government bonds, debentures, corporate bonds & papers, and other fixed income assets. These investments involve lower risk and experience less market fluctuations. There are 16 sub-categories of debt fund, as per the new SEBI regulation:
- Money market fund
- Liquid fund
- Low duration fund
- Overnight fund
- Long duration fund
- Medium duration fund
- Medium to long duration fund
- Short duration fund
- Ultra-short duration fund
- Dynamic bond fund
- Corporate bond fund
- Gilt fund
- Banking & PSU fund
- Floater fund
- Gilt fund with 10 year constant duration
- Credit risk fund
- Hybrid Funds: Hybrid fund is another important type of mutual fund. Hybrid fund is a combination of equity and debt fund. It is further divided into 6 sub-types:
- Aggressive hybrid fund
- Conservative hybrid fund
- Balanced hybrid fund
- Balanced advantage fund
- Arbitrage fund
- Equity savings fund
- Multi-asset allocation fund
- Solution oriented funds: These funds cater to a specific objective right from the start and have a lock-in period of minimum five years. There are 2 sub-types:
- Children’s fund
- Retirement fund
- Other Funds: All the different types of mutual funds that are not covered in the above 4 categories can be put into this category. There are 2 sub-categories:
- Fund of funds
- Index funds
All the above-mentioned types of mutual funds cater to the need of reaching your financial goals. Investing in each type of mutual funds comes with different set of risks and advantages.
We hope that this small brief about different types of mutual funds will help you in choosing the right mutual fund for your investment.