What are mutual funds? Its types and sub-types explained!

Posted by swarali chavan on April 21st, 2019

When you talk about investments, mutual funds top the list. From beginners to retiring individuals prefer mutual funds. It is the place where a bunch of investors pool in money. It later gets invested in a basket of securities such as equity, debt, and other money market instruments. The major reason why mutual funds are in demand is because professional fund managers handle the account on your behalf.

Analysts and researchers support these fund managers. The fund managers distribute the profit, losses, income, and expenses related to the mutual fund scheme proportionally amongst the investors. Another crucial feature of this investment is you get to invest in different types of funds be it equity, debt, hybrid, solution-oriented, and other schemes.

What is large-cap fund? Or What is gilt funds? Or What are arbitrage funds? Each of them is a sub-type of the classified mutual funds.

Let us understand large-cap funds and other such funds in detail:  

1)      Equity funds: Equity funds are high-risk funds. Nevertheless, they offer high returns. There are in total of 11 types of equity funds as per SEBI. However, the popular ones are –

• ELSS: It is a tax-saving investment option. Under section 80C, it offers a tax deduction of up to INR 1.5 lakh as per the Income Tax Act, 1961. ELSS have a lock-in period of 3 years.
• Large-cap funds: Large-cap mutual funds invest at least 80 per cent of its assets in large-cap companies’ shares. They are relatively safer than mid-cap and small-cap funds as these funds primarily focus on blue-chip companies.
• Small-cap funds: Also known as multi-bagger funds, small-cap invests 65 per cent of its assets in the shares of small cap companies. They, however, carry high risk.

2)      Debt funds: Such funds focus on fixed-income instruments which include Government securities, corporate bonds, deposit certificates, etc. They are relatively slower than equity funds and offer lesser returns. There are in total 16 debt funds, and the most popular ones are –

• Low duration funds: They invest in debt and money market instruments whose portfolio holds a Macaulay duration of 6 months to 12 months. The risk levels are low as well as the maturity of securities is short.
• Money market fund: Such funds invest in money market instruments such as certificate deposits, commercial papers, treasury bills, etc. who hold a maturity of 1 year.
• Gilt funds: They invest 80 per cent of their assets in Government securities. The risk levels are low since the returns are relatively low than other funds.

3)      Hybrid schemes: These funds invest in two or more asset classes which include equities, debt instruments, gold, etc. Hybrid funds are meant to balance out the portfolio. There are 7 types of hybrid funds as per SEBI, but the ones in demand are –

• Dynamic Asset Allocation Funds: These funds invest in both equities and debts or either of the assets. Dynamic funds invest in these assets depending on their performance.
• Arbitrage funds: This type of fund must invest 65 per cent of its assets in equity and equity related instruments. Arbitrage funds carry a lower risk as it balances the risk owing to equity investments.
• Balanced hybrid funds: These funds should invest 40 per cent and 60 per cent of its assets in equity and debt respectively.