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What are the different types of mutual funds in India?
SEBI had announced the re-categorization of mutual fund plans on October 6, 2017. It was intended to bring about similarities as the mutual fund houses introduced a number of mutual fund schemes. You can find investing in mutual funds very easy after this move, as investors invest in mutual fund programs such as their investment objectives and risk tolerance. Investors used to struggle to choose the right mutual fund as the AMCs introduced a number of similar mutual fund plans.
SEBI has divided the funds into the following categories:
- Equity Funds:
SEBI has categorised equity funds into eleven broad categories- Large Cap Fund: It invests at least 80% of the total assets in equity and equity-related instruments of large-cap companies.
- Large & Mid Cap Fund: It invests 35% of the total assets in equity and equity-related instruments of large-cap companies. It also invests 35% of total assets in equity and equity-related instruments of mid-cap firms.
- Mid Cap Fund: It invests at least 65% of the total assets in equity and equity-related instruments of mid-cap companies.
- Small Cap Fund: It invests at least 65% of the total assets in equity and equity-related instruments of small-cap companies.
- Multi Cap Fund: It invests a minimum of 65% of the total assets in equity and equity-related instruments.
- Dividend Yield Fund: It invests mainly in dividend-yielding stocks and has a minimum of 65% of the total assets in equity.
- Value Fund: It follows a value investment strategy and has at least 65% of the total assets in equity.
- Contra Fund: It follows a contrarian investment strategy and has at least 65% of total assets in equity and equity-related instruments.
- Focused Fund: It focuses on a maximum of 30 stocks. It has at least 65% of total assets in equity and equity-related instruments.
- Sectoral/Thematic Fund: It invests a minimum of 80% of total assets in equity and equity-related instruments of a particular sector or a particular theme.
- ELSS: It invests a minimum of 80% of total assets in equity and equity-related instruments (In accordance with Equity Linked Saving Scheme, 2005 notified by the Ministry of Finance).
- Debt Funds
SEBI has categorised debt funds into sixteen broad categories.- Overnight Fund: It invests in overnight securities with maturity of one day.
- Liquid Fund: It invests in debt and money market securities with a maturity of up to 91 days.
- Ultra Short Duration Fund: It invests in debt and money market instruments where the Macaulay duration of the portfolio is between three months to six months.
- Low Duration Fund: It invests in debt and money market instruments where the Macaulay duration of the portfolio is between six months to twelve months.
- Money Market Fund: It invests in money market instruments with a maturity of up to one year.
- Short Duration Fund: It invests in debt and money market instruments where the Macaulay duration of the portfolio is between one year to three years.
- Medium Duration Fund: It invests in debt and money market instruments where the Macaulay duration of the portfolio is between three years to four years.
- Medium to Long Duration Fund: It invests in debt and money market instruments where the Macaulay duration of the portfolio is between four years to seven years.
- Long Duration Fund: It invests in debt and money market instruments where the Macaulay duration of the portfolio is above seven years.
- Dynamic Fund: It invests across duration.
- Corporate Bond Fund: It invests at least 80% of the total assets in corporate bonds of the highest rating.
- Credit Risk Fund: t invests at least 65% of total assets in corporate bonds (Investment in below rated highest instruments).
- Banking and PSU Fund: It invests a minimum of 80% of total assets in debt instruments of banks, PSUs and Public Financial Institutions.
- Gilt Fund: It invests a minimum of 80% of total assets in Gsecs across maturity.
- Gilt Fund with 10-year constant duration: It invests a minimum of 80% of total assets in GSecs where the Macaulay duration of the portfolio is ten years.
- Floater Fund: It invests a minimum of 65% of total assets in floating rate instruments.
- Hybrid Funds
SEBI has categorised hybrid funds into seven broad categories.- Conservative Hybrid Fund: It invests between 10% and 25% of the total assets in equity and equity-related instruments. It invests between 75% to 90% of the total assets in debt instruments.
- Balanced Hybrid Fund: It invests between 40% and 60% of the total assets in equity and equity-related instruments. It invests between 40% to 60% of the total assets in debt instruments. No arbitrage is allowed in this scheme.
- Aggressive Hybrid Fund: It invests between 65% and 80% of the total assets in equity and equity-related instruments. It invests between 20% to 35% of the total assets in debt instruments.
- Dynamic Asset Allocation or Balanced Advantage: It invests in equity or debt that is managed dynamically.
- Multi-Asset Allocation: It invests in a minimum of three asset classes with an allocation of at least 10% each in all three asset classes.
- Arbitrage Fund: It invests a minimum of 65% of total assets in equity and equity-related instruments. The scheme follows an arbitrage strategy.
- Equity Savings: It invests a minimum of 65% of total assets in equity and equity-related instruments. It invests a minimum of 10% of total assets in debt instruments. The minimum hedged and unhedged would be stated in the SID.
- Solution-oriented schemes:
- Retirement Fund: You may fund these schemes having a lock-in of at least five years or till the retirement age, whichever is earlier.
- Children’s Fund: The scheme would have a lock-in of at least five years or till the child attains majority age whichever comes earlier.
- Other Schemes:
- Index Funds/ETFs: It should invest at least 95% of total assets in securities of a particular index.
- FoFs (Domestic/Overseas): It invests a minimum of 95% of total assets in the underlying fund.
Common Types of Mutual Funds
Based on Asset Class
Equity Funds
Equity funds primarily invest in stocks, and hence go by the name of stock funds as well. They invest the money pooled in from various investors from diverse backgrounds into shares/stocks of different companies. The gains and losses associated with these funds depend solely on how the invested shares perform (price-hikes or price-drops) in the stock market. Also, equity funds have the potential to generate significant returns over a period. Hence, the risk associated with these funds also tends to be comparatively higher.
Debt Funds
Debt funds invest primarily in fixed-income securities such as bonds, securities and treasury bills. They invest in various fixed income instruments such as Fixed Maturity Plans (FMPs), Gilt Funds, Liquid Funds, Short-Term Plans, Long-Term Bonds and Monthly Income Plans, among others. Since the investments come with a fixed interest rate and maturity date, it can be a great option for passive investors looking for regular income (interest and capital appreciation) with minimal risks.
Money Market Funds
Investors trade stocks in the stock market. In the same way, investors also invest in the money market, also known as capital market or cash market. The government runs it in association with banks, financial institutions and other corporations by issuing money market securities like bonds, T-bills, dated securities and certificates of deposits, among others. The fund manager invests your money and disburses regular dividends in return. Opting for a short-term plan (not more than 13 months) can lower the risk of investment considerably on such funds.
Hybrid Funds
As the name suggests, hybrid funds (Balanced Funds) is an optimum mix of bonds and stocks, thereby bridging the gap between equity funds and debt funds. The ratio can either be variable or fixed. In short, it takes the best of two mutual funds by distributing, say, 60% of assets in stocks and the rest in bonds or vice versa. Hybrid funds are suitable for investors looking to take more risks for ‘debt plus returns’ benefit rather than sticking to lower but steady income schemes.
Based on Investment Goals
Growth Funds
Growth funds usually allocate a considerable portion in shares and growth sectors, suitable for investors (mostly Millennials) who have a surplus of idle money to be distributed in riskier plans (albeit with possibly high returns) or are positive about the scheme.
Income Funds
Income funds belong to the family of debt mutual funds that distribute their money in a mix of bonds, certificate of deposits and securities among others. Helmed by skilled fund managers who keep the portfolio in tandem with the rate fluctuations without compromising on the portfolio’s creditworthiness, income funds have historically earned investors better returns than deposits. They are best suited for risk-averse investors with a 2-3 years perspective.
Liquid Funds
Like income funds, liquid funds also belong to the debt fund category as they invest in debt instruments and money market with a tenure of up to 91 days. The maximum sum allowed to invest is Rs 10 lakh. A highlighting feature that differentiates liquid funds from other debt funds is the way the Net Asset Value is calculated. The NAV of liquid funds is calculated for 365 days (including Sundays) while for others, only business days are considered.
Tax-Saving Funds
ELSS or Equity Linked Saving Scheme, over the years, have climbed up the ranks among all categories of investors. Not only do they offer the benefit of wealth maximisation while allowing you to save on taxes, but they also come with the lowest lock-in period of only three years. Investing predominantly in equity (and related products), they are known to generate non-taxed returns in the range 14-16%. These funds are best-suited for salaried investors with a long-term investment horizon.
Aggressive Growth Funds
Slightly on the riskier side when choosing where to invest in, the Aggressive Growth Fund is designed to make steep monetary gains. Though susceptible to market volatility, one can decide on the fund as per the beta (the tool to gauge the fund’s movement in comparison with the market). Example, if the market shows a beta of 1, an aggressive growth fund will reflect a higher beta, say, 1.10 or above.
Capital Protection Funds
If protecting the principal is the priority, Capital Protection Funds serves the purpose while earning relatively smaller returns (12% at best). The fund manager invests a portion of the money in bonds or Certificates of Deposits and the rest towards equities. Though the probability of incurring any loss is quite low, it is advised to stay invested for at least three years (closed-ended) to safeguard your money, and also the returns are taxable.
Fixed Maturity Funds
Many investors choose to invest towards the of the FY ends to take advantage of triple indexation, thereby bringing down tax burden. If uncomfortable with the debt market trends and related risks, Fixed Maturity Plans (FMP) – which invest in bonds, securities, money market etc. – present a great opportunity. As a close-ended plan, FMP functions on a fixed maturity period, which could range from one month to five years (like FDs). The fund manager ensures that the money is allocated to an investment with the same tenure, to reap accrual interest at the time of FMP maturity.
Pension Funds
Putting away a portion of your income in a chosen pension fund to accrue over a long period to secure you and your family’s financial future after retiring from regular employment can take care of most contingencies (like a medical emergency or children’s wedding). Relying solely on savings to get through your golden years is not recommended as savings (no matter how big) get used up. EPF is an example, but there are many lucrative schemes offered by banks, insurance firms etc.
Based on Structure
Mutual funds are also categorised based on different attributes (like risk profile, asset class, etc.). The structural classification – open-ended funds, close-ended funds, and interval funds – is quite broad, and the differentiation primarily depends on the flexibility to purchase and sell the individual mutual fund units.
Open-Ended Funds
Open-ended funds do not have any particular constraint such as a specific period or the number of units which can be traded. These funds allow investors to trade funds at their convenience and exit when required at the prevailing NAV (Net Asset Value). This is the sole reason why the unit capital continually changes with new entries and exits. An open-ended fund can also decide to stop taking in new investors if they do not want to (or cannot manage significant funds).
Closed-Ended Funds
In closed-ended funds, the unit capital to invest is pre-defined. Meaning the fund company cannot sell more than the pre-agreed number of units. Some funds also come with a New Fund Offer (NFO) period; wherein there is a deadline to buy units. NFOs comes with a pre-defined maturity tenure with fund managers open to any fund size. Hence, SEBI has mandated that investors be given the option to either repurchase option or list the funds on stock exchanges to exit the schemes.
Interval Funds
Interval funds have traits of both open-ended and closed-ended funds. These funds are open for purchase or redemption only during specific intervals (decided by the fund house) and closed the rest of the time. Also, no transactions will be permitted for at least two years. These funds are suitable for investors looking to save a lump sum amount for a short-term financial goal, say, in 3-12 months.
Based on Risk
Very Low-Risk Funds
Liquid funds and ultra-short-term funds (one month to one year) are known for its low risk, and understandably their returns are also low (6% at best). Investors choose this to fulfil their short-term financial goals and to keep their money safe through these funds.
Low-Risk Funds
In the event of rupee depreciation or unexpected national crisis, investors are unsure about investing in riskier funds. In such cases, fund managers recommend putting money in either one or a combination of liquid, ultra short-term or arbitrage funds. Returns could be 6-8%, but the investors are free to switch when valuations become more stable.
Medium-risk Funds
Here, the risk factor is of medium level as the fund manager invests a portion in debt and the rest in equity funds. The NAV is not that volatile, and the average returns could be 9-12%.
High-Risk Funds
Suitable for investors with no risk aversion and aiming for huge returns in the form of interest and dividends, high-risk mutual funds need active fund management. Regular performance reviews are mandatory as they are susceptible to market volatility. You can expect 15% returns, though most high-risk funds generally provide up to 20% returns.
Specialized Mutual Funds
Sector Funds
Sector funds invest solely in one specific sector, theme-based mutual funds. As these funds invest only in specific sectors with only a few stocks, the risk factor is on the higher side. Investors are advised to keep track of the various sector-related trends. Sector funds also deliver great returns. Some areas of banking, IT and pharma have witnessed huge and consistent growth in the recent past and are predicted to be promising in future as well.
Index Funds
Suited best for passive investors, index funds put money in an index. A fund manager does not manage it. An index fund identifies stocks and their corresponding ratio in the market index and put the money in similar proportion in similar stocks. Even if they cannot outdo the market (which is the reason why they are not popular in India), they play it safe by mimicking the index performance.
Funds of Funds
A diversified mutual fund investment portfolio offers a slew of benefits, and ‘Funds of Funds’ also known as multi-manager mutual funds are made to exploit this to the tilt – by putting their money in diverse fund categories. In short, buying one fund that invests in many funds rather than investing in several achieves diversification while keeping the cost down at the same time.
Emerging market Funds
To invest in developing markets is considered a risky bet, and it has undergone negative returns too. India, in itself, is a dynamic and emerging market where investors earn high returns from the domestic stock market. Like all markets, they are also prone to market fluctuations. Also, from a longer-term perspective, emerging economies are expected to contribute to the majority of global growth in the following decades.
International/ Foreign Funds
Favoured by investors looking to spread their investment to other countries, foreign mutual funds can get investors good returns even when the Indian Stock Markets perform well. An investor can employ a hybrid approach (say, 60% in domestic equities and the rest in overseas funds) or a feeder approach (getting local funds to place them in foreign stocks) or a theme-based allocation (e.g., gold mining).
Global Funds
Aside from the same lexical meaning, global funds are quite different from International Funds. While a global fund chiefly invests in markets worldwide, it also includes investment in your home country. The International Funds concentrate solely on foreign markets. Diverse and universal in approach, global funds can be quite risky to owing to different policies, market and currency variations, though it does work as a break against inflation and long-term returns have been historically high.
Real Estate Funds
Despite the real estate boom in India, many investors are still hesitant to invest in such projects due to its multiple risks. Real estate fund can be a perfect alternative as the investor will be an indirect participant by putting their money in established real estate companies/trusts rather than projects. A long-term investment negates risks and legal hassles when it comes to purchasing a property as well as provide liquidity to some extent.
Commodity-focused Stock Funds
These funds are ideal for investors with sufficient risk-appetite and looking to diversify their portfolio. Commodity-focused stock funds give a chance to dabble in multiple and diverse trades. Returns, however, may not be periodic and are either based on the performance of the stock company or the commodity itself. Gold is the only commodity in which mutual funds can invest directly in India. The rest purchase fund units or shares from commodity businesses.
Market Neutral Funds
For investors seeking protection from unfavourable market tendencies while sustaining good returns, market-neutral funds meet the purpose (like a hedge fund). With better risk-adaptability, these funds give high returns where even small investors can outstrip the market without stretching the portfolio limits.
Inverse/Leveraged Funds
While a regular index fund moves in tandem with the benchmark index, the returns of an inverse index fund shift in the opposite direction. It is nothing but selling your shares when the stock goes down, only to repurchase them at an even lesser cost (to hold until the price goes up again).
Asset Allocation Funds
Combining debt, equity and even gold in an optimum ratio, this is a greatly flexible fund. Based on a pre-set formula or fund manager’s inferences based on the current market trends, asset allocation funds can regulate the equity-debt distribution. It is almost like hybrid funds but requires great expertise in choosing and allocation of the bonds and stocks from the fund manager.
Gift Funds
Yes, you can also gift a mutual fund or a SIP to your loved ones to secure their financial future.
Exchange-traded Funds
It belongs to the index funds family and is bought and sold on exchanges. Exchange-traded Funds have unlocked a new world of investment prospects, enabling investors to gain extensive exposure to stock markets abroad as well as specialised sectors. An ETF is like a mutual fund that can be traded in real-time at a price that may rise or fall many times in a day.
Mutual Fund Terminologies
1. Net Asset Value (NAV)
NAV the per-unit value or per-unit price of a particular mutual fund scheme. It is the price at which the units of that fund are purchased/ sold and is derived by dividing the AUM with the number of units issued by the fund. The change in NAV over a period tells you the fund’s gain or loss and how it is performing. When the current NAV of your fund is higher than the one at which you bought it, then it is performing well and you are in profit, and vice versa.
2. Expense Ratio
Expense ratio represents the percentage of fund’s assets that is paid out in expenses in relation to running/operating the fund annually. These expenses may include administration expenses, fund management or advertising related expenses, audit fees, insurance premium paid by the fund. Total expense ratio= (Total expenses during an accounting period) * 100 / Total net assets of the fund.
3. Assets Under Management (AUM)
AUM is the total market value of the investments (assets like shares, gold, cash,bonds etc) that an asset management company is managing on behalf of its investors. It is basically the total of NAV (on that particular day) multiplied with the total number of units. A mutual fund with a big AUM size can have two implications- either a good performance by the fund or just the presence of a large number of investors in that fund.
4. Asset Management Company (AMC)
Registered under SEBI, an AMC is a firm that manages the investor’s money, by carrying out all purchase and sale of the portfolio’s securities in the portfolio of various mutual fund schemes.
5. Systematic Investment Plan (SIP)
SIP is a mode/route of investing in mutual funds which involves investment of a fixed sum at regular intervals in a mutual fund scheme. It allows the investor to buy units of the fund/scheme on a predetermined date on periodic intervals like weekly, monthly, quarterly etc.Investing through SIPs ensures one remains invested in both the bullish and bearish market conditions and does not have to time the market.
6. Systematic Transfer Plan (STP)
STP is a strategy/facility that allows an investor to instruct the fund to transfer a certain amount from one scheme to another scheme of an AMC, at regular intervals.
As the name suggests, SWP is a facility/strategy that enables investors from accumulated funds, to withdraw a fixed amount at regular intervals , like monthly, bi-monthly, quarterly etc.
8. Asset allocation
Asset allocation is the process/strategy of diversifying your investment portfolio across various asset categories such as equity, bonds, cash, gold etc, as per his/her risk appetite, financial goals, income, lifestyle,age etc.An efficient asset allocation strategy steadies the ship for the investor in both bullish and bearish market conditions, and is usually aimed to minimize volatility and maximize returns from the investment portfolio.
9. Bonds
Bonds are fixed income financial instruments that bear a promise of paying the interest to the investor (also known as lenders). These are debt securities issued by government, corporations or other organizations, and sold to investors, with the obligation to pay them back a specified sum of money due on the maturity date in the future.
10. Bear Market
The period in which the market corrections happen continuously as the investors/market participants are on a selling spree. This activity results in a declining share price over a stretched period.
11. Bull Market
The period during which the price of stock keeps rising, and investors/participants are on a continuous buying spree. The period generally results in a rising price for the shares.
12. Benchmark
Benchmarks are the parameters against which you can compare your mutual fund schemes’ returns to check its performance. Typical benchmarks are indices like Sensex and Nifty. Ideally, a mutual fund scheme outperforming its benchmark index indicates a good performance.
13. New Fund Offer (NFO)
New Fund Offer occurs when a mutual fund company offers a first time subscription of its new scheme, aimed to raise capital for purchasing securities. It is a limited period offer put forth the public at relatively cheaper rates than the existing funds, as the scheme is new to the market and aims to attract investors in order to raise funds.
14. Capital Gains
Capital gains are the profit realized upon the sale of securities, and other capital assets such as mutual fund units. These gains are classified as short-term capital gain or long-term capital gain depending on the period of holding the instrument invested in. For instance, debt fund investments redeemed within 3 years of holding are termed as short term, whereas equity fund investments redeemed within 1 year of holding are termed as short term. Based on the holding period, applicable capital gains tax is levied on the investments redeemed.
15. Debt Funds
Debt funds are a type of mutual funds that invest in fixed income securities such as corporate bonds, treasury bills, commercial papers, government securities, and numerous other money market instruments. Each of these instruments involve a pre-decided maturity date as well as interest rate which the investor can earn on maturity.
16. Equity Mutual Funds
Equity mutual funds are funds that predominantly invest in the shares of different companies. Funds that invest at least 65% of their total asset into equity or equity-oriented securities, are deemed as equity-oriented funds. Categories/Types of Equity funds include Large cap funds, mid cap funds, multi cap funds, small cap funds etc.
17. Exit Load
Exit load is the charge/fee levied by a fund house when an investor redeems the investment from that fund. Paying an exit load lowers the NAV, as it commonly expressed as a percentage of NAV, like 1% of NAV. The primary reason for fund houses to levy exit load is to discourage investors from backing out and pulling out their investments, especially before the lock-in period is over.
18. Liquid Funds
These funds invest predominantly in short-term fixed income money market instruments like commercial paper, treasury bills, certificates of deposit etc. which have residual maturity of up to 91 days, hence providing high degree of liquidity.
19. Lock-In Period
This is the period during which the investor is not allowed to redeem/sell their investment. For example, as ELSS involved lock in period of 3 years, if you had invested in an ELSS on 1st February 2020, you cannot redeem it until 1st February 2023, ie. until the completion of lock in period of three years.
20. Cut-off Time
Cut-off time is the time before which any transaction made by an investor in that fund is executed the same day as per that day’s NAV. The trades placed post-cut-off time are completed the next day at the next day’s NAV. Primary implication of cut off time is to determine the applicable NAV for that mutual fund transaction.
