Introducing Mutual Funds
A mutual fund is a professionally managed investment vehicle that pools money from multiple investors to invest in a diversified portfolio of assets. These assets may include equities (stocks), bonds, money market instruments, and other securities, depending on the fund’s investment objectives (Investopedia: What is a Mutual Fund?). Mutual fund investors acquire units proportionally to their holdings.
Investors are protected by strong mutual fund regulation. For example, in India, they are regulated by the Securities and Exchange Board of India (SEBI), while in the United States, they are governed by the Securities and Exchange Commission (SEC).
Developed economies need strong, broad financial markets. In 1963, the Government of India and Reserve Bank of India established Unit Trust of India (UTI), India’s first mutual fund, “with a view to encouraging saving and investment and participation in the income, profits, and gains accruing to the Corporation from the acquisition, holding, management, and disposal of securities.”
Mutual Funds in India are established in the form of a Trust under Indian Trust Act, 1882, in accordance with SEBI (Mutual Funds) Regulations, 1996.
Types of Mutual Funds
As per SEBI guidelines on Categorization and Rationalization of schemes issued in October 2017, mutual fund schemes are classified as
01
Equity Funds
An equity scheme is a fund that primarily invests in equities and equity-related instruments.
02
debt funds
A debt fund is a fund that invests primarily in bonds or other debt securities.
03
hybrid funds
Hybrid funds Invest in a mix of equities and debt securities
04
Solution Oriented Schemes
For Retirement and Children
Equity Funds/ Schemes
| Categorisation | Name | Description |
|---|---|---|
| Market Capitalisation | Large Cap Funds | At least 80% investment in large-cap stocks. |
| Mid Cap Funds | At least 65% investment in mid-cap stocks. | |
| Small Cap Funds | At least 65% investment in small-cap stocks | |
| Large & Mid Cap Funds | At least 35% investment in large cap stocks and 35% in mid cap stocks. | |
| Tax Saving | ELSS Funds | Equity Linked Savings Scheme (ELSS) funds represent tax-saving mutual funds available in India. These investments integrate the advantages of equity investments with tax deductions as stipulated in Section 80C. Equity-Linked Savings Schemes (ELSS) are characterised by a mandatory lock-in period of three years. Upon the conclusion of the lock-in period, investors may redeem their units or initiate a switch. According to CBDT regulations, ELSS must maintain a minimum investment of 80% in equity and equity-related securities. All ELSS schemes must invest in equities, which are inherently subject to volatility. ELSS schemes represent a suitable choice; however, investors in mutual funds must thoroughly evaluate their risk tolerance, investment objectives, and time horizon. |
| Diversification | Multi-Cap Funds | Multi-cap equity funds invest in companies of all sizes and across sectors. |
| Flexi Cap Funds | Flexi Cap funds invest in companies of all sizes and across sectors. | |
| Factor Funds | Factor funds use a set of rules to choose a portfolio of companies. Among many commonly popular factors are Momentum, Low Volatility, Quality and Value. | |
| Contra Funds | The scheme follows a contrarian investment strategy with at least 65% in stocks. | |
| Value Oriented Funds | Value investment strategy, with at least 65% in stocks that are currently trading. | |
| International Funds | Invest in companies listed outside of India. | |
| Focused Funds | Focused on the number of stocks (maximum 30) with at least 65% in equity & equity-related instruments. | |
| Sector | Sectoral Technology Funds | Invests primarily in companies belonging to a specific sector. |
| Consumption Index Funds | An open-ended scheme tracking Nifty India Consumption Index. | |
| Sectoral Banking Funds | Invest primarily in stocks of companies operating within the banking and financial services sector. | |
| Sectoral Infrastructure Funds | Invest in the infrastructure sector. These funds target companies involved in infrastructure development. | |
| Sectoral Pharma Funds | Invest in healthcare and pharma companies. | |
| Thematic | PSU Thematic Funds | Invest in PSU stocks. |
| Energy Thematic Funds | Invest in Energy stocks. | |
| Dividend Yield Funds | Invest in stocks of companies that declare dividends | |
| Consumption Thematic Funds | Invest in stocks related to consumer goods and services. | |
| MNC Thematic Funds | Invests in stocks of MNCs having operations in the domestic Indian markets. | |
| ESG Thematic Funds | Investing in companies that prioritise sustainability and ethical practices. | |
| Business Cycle Funds | Investing according to economic trends and cycles. | |
| Quant Funds | A quant fund is an investment fund that uses mathematical and statistical techniques together with automated algorithms and advanced quantitative models to make investment decisions and execute trades. | |
| Thematic Funds | Thematic funds are equity mutual funds that invest in stocks tied to a theme. |
Debt Funds/ Schemes
| Categorisation | Name | Description |
|---|---|---|
| Funds to Park Money | Overnight Fund | Overnight securities having maturity of 1 day |
| Liquid Fund | Debt and money market securities with maturity of upto 91 days only | |
| Ultra Short Duration Fund | Debt & Money Market instruments with Macaulay duration of the portfolio between 3 months – 6 months | |
| Short Duration | Low Duration Fund | Investment in Debt & Money Market instruments with Macaulay duration portfolio between 6 months- 12 months |
| Money Market Fund | Investment in Money Market instruments having maturity upto 1 Year | |
| Short Duration Fund | Investment in Debt & Money Market instruments with Macaulay duration of the portfolio between 1 year – 3 years | |
| Medium-term debt | Medium Duration Fund | Investment in Debt & Money Market instruments with Macaulay duration of portfolio between 3 years – 4 years |
| Corporate Bond Fund | Minimum 80% investment in corporate bonds only in AA+ and above rated corporate bonds | |
| Banking and PSU Fund | Minimum 80% in Debt instruments of banks, Public Sector Undertakings, Public Financial Institutions and Municipal Bonds | |
| Long-term debt | Medium to Long Duration Fund | Investment in Debt & Money Market instruments with Macaulay duration of the portfolio between 4 – 7 years |
| Long Duration Fund | Investment in Debt & Money Market Instruments with Macaulay duration of the portfolio greater than 7 years | |
| Dynamic Bond | Investment across duration | |
| Government Backed | Gilt Fund | Minimum 80% in G-secs, across maturity |
| Gilt Fund with 10 year constant Duration | Minimum 80% in G-secs, such that the Macaulay duration of the portfolio is equal to 10 years | |
| Others | Credit Risk Fund | Minimum 65% in floating rate instruments (including fixed rate instruments converted to floating rate exposures using swaps/derivatives) |
| Floater Fund | Minimum 65% in floating rate instruments (including fixed rate instruments converted to floating rate exposures using swaps/ derivatives) | |
| Target Maturity Fund | Minimum 80% investment in corporate bonds only in AA+ and above-rated corporate bonds |
Hybrid Funds/ Schemes
| Categorisation | Name | Description |
|---|---|---|
| Short Term | Conservative Hybrid Fund | Scheme following arbitrage strategy, with minimum 65% investment in equity & equity-related instruments |
| Arbitrage Fund | 40% to 60% investment in equity & equity-related instruments; and 40% to 60% in Debt instruments | |
| Medium to Long Term | Balanced Hybrid Fund | 65% to 80% investment in equity & equity-related instruments; and 20% to 35% in Debt instruments |
| Aggressive Hybrid Fund | Investment in equity/debt that is managed dynamically (0% to 100% in equity & equity related instruments; and 0% to 100% in Debt instruments) | |
| Dynamic Asset Allocation Fund or Balanced Advantage Fund | Investment in equity/debt that is managed dynamically (0% to 100% in equity & equity-related instruments; and 0% to 100% in Debt instruments) | |
| Multi Asset Allocation Fund | Investment in at least 3 asset classes with a minimum allocation of at least 10% in each asset class | |
| Equity Savings Fund | Investment in equity/debt that is managed dynamically (0% to 100% in equity & equity-related instruments; and 0% to 100% in Debt instruments) |
Solution Oriented Schemes
| Categorisation | Name | Description |
|---|---|---|
| Long Term | Retirement Fund | Lock-in for at least 5 years or till retirement age whichever is earlier |
| Children’s Fund | Lock-in for at least 5 years or till retirement age, whichever is earlier |
Other Schemes
| Index Funds/ETFs Index funds are one of the most popular types of investments due to their simplicity, low cost, and diversification benefits. Minimum 95% investment in securities of a particular index | ||
| Different Index Funds | ||
| Total Stock Market Index Fund | A Broad Market Index Fund tries to replicate a large segment of the investible stock market. For instance, an Index Fund tracking the NIFTY 500 index is a Broad Market Index Fund because it gives investors exposure to stocks across different sectors and market caps. | |
| Market Capitalisation Fund | Large Cap Index Fund | These funds track different large-cap indices such as NIFTY 50, SENSEX, NIFTY Next 50, NIFTY 100, etc. These are low-cost index funds that track and mirror the underlying index. |
| Multi Cap Index Fund | These funds track indices that include large-cap, mid-cap, and small-cap companies. | |
| Mid Cap Index Fund | Replicate the performance of mid-cap indices like NIFTY Midcap 150 by holding the same stocks as the index in the same proportions. | |
| Small Cap Index Fund | These funds aim to replicate the performance of small-cap indices like NIFTY Smallcap 250, BSE 250 Smallcap, etc. The idea is to invest in the same stocks as the index in the same proportions. | |
| Large & MidCap Index Fund | These funds track the top 250 companies by market cap. These include the top 100 large caps and the 150 mid-cap companies. | |
| Nifty Next 50 Index Fund | Invest in new and emerging companies in India, ranking between 51st and 100th position in the Nifty Index. | |
| Global Index Funds | These funds aim to track the performance of global indexes, offering exposure to the world’s leading companies. | |
| Sectoral Index Funds | Focus on specific industries, such as technology, IT, finance, or healthcare. | |
| Debt Index Funds | Debt index funds, commonly referred to as bond index funds, are investment funds that seek to duplicate the performance of a specific fixed-income index. | |
| Strategy Index Funds | Strategy index funds, also known as thematic index funds, are a form of investment vehicle that tracks an index built on a particular investment theme or approach. | |
| Factor-based or Smart Beta Index Funds | Factor-based index funds, also known as smart beta index funds, are a type of investment vehicle that tracks an index developed using specific factors or investment strategies. These funds depart from typical market capitalisation-weighted indexes in order to capture desirable characteristics such as value, growth, low volatility, quality, or momentum. | |
| Equal Weight Index Funds | Equal-weight index funds allocate an equal weight to all index components. By doing so, they mitigate the risk of over-concentration in a few large-cap stocks. | |
| Fund of Funds (Overseas/ Domestic) Minimum 95% investment in the underlying fund(s) | ||
| Different Fund of Funds | ||
| Equity Domestic FoF | Equity Domestic FoFs don’t invest in stocks directly. Instead, they allocate money to a portfolio of different mutual fund schemes and exchange-traded funds (ETFs). | |
| Hybrid Domestic FoF | A Hybrid Domestic Fund of Funds (FoF) invests in a mix of equity and debt schemes and Exchange Traded Funds (ETFs). | |
| Commodity FoF | A commodity fund is a type of mutual fund that invests in commodities such as gold, silver, and real estate that offer capital appreciation and a hedge against inflation. Commodity FoFs invest at least 95% of their net assets in physical commodities or commodity ETFs. The remaining assets are kept in liquid assets, cash, and other debt and money market instruments. | |