So, have you started thinking about investing your money? As you move deeper in planning and executing your investment plan, you would have realised there are many mutual funds to invest in.
Mutual fund companies have created many funds with different risk categories, returns, and assets. Many people thought mutual funds were only available for equity investments, but no. There are debt mutual funds also, and hybrid funds are also available.
In this blog, we will discuss the types of mutual funds available and their investment use case.
Estimated read time: 3 minutes and 54 seconds
Buckle up, here we go!
At the top, mutual funds are a mix of equity and debt investments. Equity mutual funds are usually for long-term investment plans, like above 5 years. And debt mutual funds are for short-term investment plans for below 3 years.
We also have hybrid funds, a combination of equity and debt investments used for medium and long-term plans, basically above 3 years.
Let’s first check out the types of equity mutual funds.
Types of Equity Mutual Funds
A basic intro for beginners. Equity investments are where you invest in companies to own a part of that company. Now that company can be big like Reliance or small, like a new ice-cream parlour around your house. Now, we differentiate companies into large, medium and small based on their market capitalisation.
Market capitalisation is the total worth of the company’s total share. For example, you bought a share of that ice cream company at ₹100 per share, and that company has a total of 1 lakh shares. Then the ice cream company is worth ₹1 crore (price per share multiplied by total no. of shares).
In the Indian stock market, we categorise any company with a market cap of below ₹5,000 crores as a small cap, a market cap between ₹5,000 crores and ₹20,000 crores as mid-cap and any company with a market cap above ₹20,000 crores as a large cap.
Based on this categorisation, you can predict that a small-cap company may be new to the market. They have great potential to grow in the future with an enormous risk associated with it.
And a large cap company is a pretty mature company compared to others. Their scope of growth is less and thus less risky. Mid-cap companies fall between large and small-cap companies.
There are a lot of “it depends” for these companies’ growth, risk, returns, etc. We are not focusing on these to keep the explanation simple.
Now moving forward with the type of equity mutual funds. Equity mutual funds are categorised into –
- Large Cap
- Mid Cap
- Small Cap
- Multi Cap
- Sector oriented funds
- Solution-oriented funds
The first four types are self-explanatory. A large-cap fund invests in the top 100 companies in India, based on market capitalisation. And multi or Flexi cap funds invest across all three – large, mid and small-cap companies.
Sector-oriented mutual funds invest in companies in particular sectors like IT, pharma, finance, etc. If you want your investment to be more concentrated in a selected sector, you can invest in these funds.
Solution-oriented funds focus on a particular set like dividend companies, value companies, ESG companies, etc. Tax-saving ELSS funds are also there.
Types of Debt Mutual Funds
Unlike equity, debt funds are categorised based on their maturity. You see, companies gave you ownership in equity investments, but here they promise to pay back the money with interest in debt investments. Also, you can lend money to the Government with debt mutual funds.
Based on their need, the Government and companies borrow money with different maturity dates, starting from 1 day to 10 years.
Mutual fund companies have created many debt funds based on the maturity period of the debt and the lenders. You can invest in a debt fund that only lends to lenders that promise to pay back in 3 months. Or you can choose a fund that only lends to the Government or banks, etc.
Based on these, the major debt mutual funds are –
- Liquid Fund
- Ultra-short duration Fund
- Short Duration Fund
- Medium Duration fund
- Banking and PSU Debt Fund
- Gilt Fund
Liquid funds lend money to debt instruments having a maturity period of under 91 days. So you can invest in liquid funds if you want to park your funds for less than 1 year.
Ultra-short duration funds can be used to park your funds for 1-2 years. And short and medium-duration funds are for over 2-3 years. Banking and PSU funds only lend to bank and public sector units.
The Gilt funds only invests in government bonds and should be invested only if you want to park your funds for 8-10 years.
Apart from the Gilt funds, the returns on debt funds increase as the duration of maturity and risk increases. The average returns can be between 4 to 8%.
Moving on to hybrid funds.
Types of Hybrid Funds
As you might have guessed, hybrid funds are a combination of equity and debt. They are categorised based on the percentage of funds invested in equity or debt. Major hybrid funds are –
- Conservative Hybrid
- Balanced / Aggressive Hybrid
- Dynamic Asset Allocation Fund
- Multi-Asset Fund
Conservative funds invest heavily in debt instruments, and aggressive funds invest more in equity instruments. Dynamic assets shift their debt and equity proportion based on market conditions.
Multi-asset fund invests in at least 3 asset classes, like equity, debt, gold, real estate, etc. We have covered a lot more topics in our mutual fund series, check it out here.
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