Equity Funds: Equity funds invest in a portfolio of equity shares and equity related instruments. The return and risk of the fund will be similar to investing in equity. Therefore investors seeking long term growth and capital appreciation can invest in equity funds.
Diversified equity funds: Invest in companies across segments, sectors and sizes of companies. This investment strategy enables participation in growth across the economy. It is not tied down to a particular sector or industry.
- Large-cap equity funds: Invest in stocks of large and liquid blue-chip companies with stable performance and returns.
- Mid-cap funds: Invest in mid-cap companies that have the potential for greater growth and returns.
- Small-cap funds: Invest in companies with small market capitalization with intent of benefitting from the higher gains in the price of stocks of smaller companies they may benefit from newer business opportunities.
- Sector funds: Invest in companies that belong to a particular sector, say technology or banking. Risk in sector funds is high as it is not diversified. Fall in stocks of one sector can lead to significant fall in investments.
- Thematic funds: Invest in stocks of companies which may be defined by a unifying underlying theme. For example, infrastructure funds invest in stocks in the infrastructure sector, across construction, cement, banking and logistics. They are more diversified than sector funds because sector funds might choose to invest only in a single sector, e.g. construction. Equity funds may also feature specific investment strategies. Value funds invest in stocks of good companies selling at cheaper prices; dividend yield funds invest in stocks that pay a regular dividend; special situation funds invest in stocks that show the promise of a turnaround.
Debt Funds: Debt funds invest in fixed income securities like bonds and treasury bills. Debt funds are preferred by individuals not willing to invest in a highly volatile equity market. A debt fund is comparatively less volatile and provides a steady but low income in comparison to equity funds.
- Liquid funds: These funds invest in highly liquid money-market instruments and provide easy liquidity. They invest in securities with a residual maturity of not more than 91 days. Investors can park money in them for a short period of, say, a few days to a few months. Compared to other funds, these funds fluctuate very little.
- Ultra short-term funds: Most ultra short-term funds invest in securities with a residual maturity of not more than one year. These funds are suitable for investors who are ready to take a marginally higher risk for slightly higher returns. Investors can park their short-term surplus for a few months to a year in these funds.
- Short-term funds: These funds invest predominantly in debt securities with an average maturity of one year to 4.5 years. They are suitable for conservative investors with low to moderate risk appetite and an investment horizon of a few years.
- Dynamic bond funds: They invest across all classes of debt and money-market instruments. They invest across various maturities. Their actively managed portfolio varies dynamically with the interest-rate view of the fund manager. They are ideal for investors who don’t want to take a call on future interest-rate movements but still want to benefit from any positive movements.
- Credit-opportunities funds: These funds invest predominantly in corporate bonds and debentures of varying maturities. Investors with a moderate risk appetite can invest in them, with a medium- to long-term investment horizon.
- Income funds: These funds invest in corporate bonds, government bonds and money-market instruments with an average maturity of 4.5 years or more. They are highly vulnerable to the changes in interest rates. They are suitable for investors who are ready to take high risk and have a long-term investment horizon.
- Short-term and medium- and long-term gilt funds: They invest in government securities of short term or medium- to long-term maturities. The average maturity of their holdings can vary widely as per their declared objectives. These funds do not have the default risk since the bonds are issued by the government. The NAVs of these schemes fluctuate according to the changes in interest rates and other economic factors. These funds have a high degree of interest-rate risk, depending on their maturity. The higher the maturity of the instrument the higher the interest-rate risk.
- Fixed-maturity plans (FMPs): These closed-end debt mutual funds work almost like a fixed deposit. They invest in debt instruments with maturities less than or equal to the maturity date of the scheme. FMPs are a good option for conservative investors.
Hybrid Funds: A hybrid fund is a debt and an equity fund, rolled into one. It invests in stocks as well as bonds and hence these mutual funds are highly diversified. The risk associated depends upon the proportion of investments in equity and debt respectively. The higher the equity component in the portfolio, the greater will be the overall risk.
- Equity oriented hybrid fund: These funds have greater proportion of equity than debt in their portfolio. The fixed income derived from debt investments balances the fluctuating and risky returns from equity investments. However, the higher equity component in the portfolio means the fund’s overall returns will depend on the performance of the equity markets.
- Debt oriented hybrid funds: Debt-oriented hybrid funds have a higher proportion of their portfolio allotted to debt investments. The debt returns are fixed and low. However due to a small proportion allotted to equity in these types of funds, the returns from equity investments augment the returns from debt, which will not happen in case of a pure Debt fund.
- Asset allocation Fund: These funds invest in both equity and debt but without a pre-specified allocation (proportion) as in the case of other hybrid funds. The fund manager takes a view on the type of investment and will tilt the allocation towards either asset class. Such funds may also hold 100% in equity or debt. Such funds will have a higher allocation to equity in the initial years and reduce equity exposure and increase debt exposure as the time advances.
- Capital Protection Funds: Capital Protection Funds are closed-end hybrids funds. The objective of this fund is to protect the investment and let it grow as well as receive higher returns. The portfolio is structured such that a portion of the principal amount is invested in debt instruments so that it grows to the principal amount over the term of the fund. For example, Rs.90 may be invested for 3 years to grow into Rs.100 at maturity, thereby protecting capital invested. The remaining portion of the original amount is invested in equity derivatives to earn better return.
Exchange Traded Funds: Exchange traded funds (ETF) are a type of mutual fund that combines features of an open ended fund and a stock. Units are issued directly to investors when the scheme is launched. Units are listed and traded on a stock exchange like a stock. Transactions are done through brokers of the exchange. Investors need a broking account and a demat account to invest in ETFs since the units purchased are credited to the demat account of investor. The prices of the ETF units on the stock exchange will be linked to the NAV of the fund, but prices are available on a real-time basis depending on trading volume on stock exchanges.
International Funds: International funds invest in securities listed on markets outside India. SEBI regulated the type of securities that the fund can invest in. Securities may includes equity shares, debt, units of mutual funds and ETFs issued abroad.
Real Estate Mutual funds: Real estate mutual funds invest in real estate either in the form of physical property or in the form of securities of companies engaged in the real estate business. Real estate mutual funds are an alternative to purchasing investment property, especially if investor wants to limit investment, level of risk and involvement in management of real estate. Assets held by the fund will be valued every 90 days by two valuers accredited by a credit rating agency. The lower of the two values will be taken to calculate the NAV. These funds are closed-end funds and should be listed on a stock exchange.
Infrastructure Debt Funds: Infrastructure Debt Schemes are closed-ended schemes with a tenor of at least five years that invest in debt securities and securitised debt of infrastructure companies. 90% of the fund’s portfolio should be invested in the specified securities. The remaining can be invested in the equity shares of infrastructure companies and in the money market instruments. The NAV of these schemes will be disclosed every 6 months. As a closed-ended scheme the units of the scheme will be listed on a stock exchange.