Understanding the Different Categories and Types of Mutual Fund schemes

Mutual funds have become increasingly popular among Indian investors, offering a convenient way to diversify investments and potentially achieve financial goals. For investors in Tier II and Tier III cities (Tier II and Tier III cities in India are the smaller urban centre’s experiencing growth and development, having population of Tier II cities range between 50000 to 99999 and Tier III cities range between 20000 to 49999 ), understanding the various categories and their types of mutual fund schemes is crucial for making informed decisions. This guide aims to educate you on the different categories and types of mutual fund schemes available, helping you navigate the investment landscape with confidence. (You are recommended to seek advice from financial advisor before you take any/refrain from any action)

Equity Mutual Fund Schemes: Investing in Stocks

Equity mutual fund schemes primarily invest in stocks, making them a popular choice for investors seeking relatively better returns. These funds are categorized based on the market capitalization of the companies they invest in:

1. Large-Cap Fund: Invest in ateast 80% investment in large cap stocks.
2. Mid-Cap Fund: Invests in atleast 65% investment in mid cap stocks.
3. Small-Cap Fund: Invests in atleast 65% investment in small cap stocks.
4. Multi-Cap Fund: Invest atleast 75% investment in equity & equity related instruments.
5. Large & Mid Cap Fund: Scheme investing in both large cap and mid cap stocks.
6. Dividend Yield Fund: Scheme predominantly investing in dividend yielding stocks.
7. Value Fund: Scheme following a value investment strategy.
8. Focused Fund: Scheme investing in maximum 30 stocks (mention where the scheme intends to focus, viz., multi cap, large cap, mid cap, small cap).
9. ELSS: A Equity linked saving scheme with a statutory lock in of 3 years and tax benefit.
10. Flexi Cap Fund: Scheme investing across large cap, mid cap, small cap stocks.
11. Sectoral/Thematic Fund: Concentrate on specific sectors or themes, such as technology or healthcare.

Debt Mutual Fund Schemes

Debt mutual fund schemes invest in fixed-income securities like bonds, treasury bills, and other debt instruments. These funds are ideal for conservative investors seeking stable returns with lower risk. Categories of debt mutual funds include:

1. Liquid Fund: Invest in Debt and money market securities with maturity of upto 91 days only.
2. Gilt Fund: Invests in minimum 80% in G-secs, across maturity.
3. Overnight Fund: Scheme investing in overnight securities having maturity of 1 day.
4. Ultra Short Duration Fund: Investing in Debt & Money Market instruments with Macaulay duration of the portfolio between 3 months - 6 months.
5. Low Duration Fund: Scheme investing in Debt & Money Market instruments with Macaulay duration portfolio between 6 months- 12 months.
6. Money Market Fund: Scheme investing in Money Market instruments having maturity upto 1 Year.
7. Medium Duration Fund: Scheme investing in Debt & Money Market instruments with Macaulay duration of portfolio between 3 years - 4 years.
8. Medium to Long Duration Fund: Scheme investing in Debt & Money Market instruments such that the Macaulay duration of the portfolio is between 4 years to 7 years.
9. Long Duration Fund: Scheme investing in Debt & Money Market instruments such that the Macaulay duration of the portfolio is greater than 7 years
10. Dynamic Bond: Scheme investing across duration.
11. Corporate Bond Fund: Scheme predominantly investing minimum 80% investment in corporate bonds in only AA+ and above rated corporate bonds.
12. Credit Risk Fund: Scheme minimum 65% investment in corporate bonds, only in AA and below rated corporate bonds.
13. Banking and PSU Fund: Scheme minimum 80% investment in Debt instruments of banks, Public Sector Undertakings, Public Financial Institutions and Municipal Bonds.
14. Gilt Fund with 10 year constant duration: Scheme investing minimum 80% in G-secs, such that the Macaulay duration of the portfolio is equal to 10 years.
15. Floater Fund: Scheme predominantly investing in floating rate instruments (including fixed rate instruments converted to floating rate exposures using swaps/derivatives).

Hybrid Mutual Fund schemes

Hybrid mutual fund schemes invest in a mix of equity and debt instruments, offering a balanced approach to risk and reward. These funds are designed to provide diversification and flexibility. Categories of hybrid mutual fund schemes include:

1. Balanced Hybrid Fund: Maintain a balanced allocation between equity and debt.
2. Aggressive Hybrid Fund: Have a higher equity component.
3. Conservative Hybrid Fund: Focus more on debt instruments.
4. Dynamic Asset Allocation or Balanced Advantage: Investment in equity/ debt that is managed dynamically.
5. Multi Asset Allocation: Investment in at least 3 asset classes with a minimum allocation of at least 10% in each asset class.
6. Arbitrage Fund: Scheme investing in arbitrage opportunities.
7. Equity Savings: Scheme investing in equity, arbitrage and debt.

(You are recommended to seek advice from financial advisor before you take any/refrain from any action)

Other Schemes

• Index Funds: Passive Investment Strategy

  Index funds aim to replicate the performance of a specific index, such as the Nifty 50 or Sensex. These funds follow a passive investment strategy, meaning they simply track the index rather than actively selecting stocks. Benefits of index funds include:

  1. Lower Costs: Passive management results in lower fees.
  2. Simplicity: Easy to understand and invest in.
  3. Diversification: Exposure to a broad range of companies within the index.

  Index funds are suitable for investors looking for a low-cost, passive investment option with long-term growth potential.

• Solution-Oriented Mutual Fund schemes: Goal-Based Investing

  Solution-oriented mutual fund schemes are designed to meet specific financial goals, such as retirement or children's education. These schemes offer a structured approach to investing, aligning with your long-term objectives. Types of solution-oriented mutual fund schemes include:

  1. Retirement Fund: Focus on building a corpus for retirement, with a mix of equity and debt.
  2. Children's Fund: Aim to secure your child's future education and other needs.

  While the different types of mutual funds have been provided above, for better understanding towards latest SEBI Regulations and investments based on your risk appetite and financial goals, you are recommended to seek advice from your financial advisor. Please note that the types of mutual funds are not exhaustive in nature.

Choosing the Suitable Mutual Fund for Your Needs

Understanding the different types and categories of mutual funds is the first step towards making informed investment decisions. Consider your financial goals, risk tolerance, and investment horizon before choosing a mutual fund. If needed, seek professional financial advice to ensure your investments align with your objectives.

Start Your Mutual Fund Investment Journey Today

Mutual funds offer a versatile and accessible way to invest, catering to various risk profiles and financial goals. Take the first step towards securing your financial future by exploring the different types of mutual funds and choosing the ones that suit your needs.

(You are recommended to seek advice from financial advisor before you take any/refrain from any action)

Additional Links:

SEBI Categorization of Mutual Fund Schemes

Let’s Learn How to Invest in Securities Market

What is a Mutual Fund? - Beginner's Guide to Investing