Mutual funds are an essential financial option for retail investors seeking exposure to capital markets. Their distinct benefits in the form of professional management, easy accessibility, and diversification make them appealing to new and seasoned investors. However, just knowing the benefits is not enough for considering this avenue. To make an informed investment decision, being well-versed about the distinct types of mutual funds is crucial too.
Read on to understand the distinct types of mutual funds based on their asset classes i.e., equity, debt, and hybrid funds –
Types of mutual funds in India –
Equity mutual funds
Equity mutual funds are strategically positioned in the market, with a minimum of 65 per cent of their portfolio allocated to equities. These funds inherently carry higher risk levels, but they also possess the potential to yield remarkable returns. Note that equity funds have distinct categories that differ in terms of their returns and risk exposure.
Based on market capitalisation, distinct equity funds include large-cap, mid-cap, and small-cap. Alternatively, some funds concentrate on specific sectors such as technology or banking, earning them the label of sectoral funds. Furthermore, there are versatile categories that span market caps and sectors, such as flexi-cap funds, focused funds, and multi-cap funds, each catering to unique investment objectives.
Debt mutual funds
Debt mutual funds direct their investments towards fixed-income instruments such as government and corporate bonds, exhibiting more stability compared to equity funds. The inherent risk of debt funds varies extensively, leading to a spectrum of 16 debt fund categories designed to match distinct risk levels and expected returns.
For instance, liquid funds invest in short-term debt and money market securities maturing within 91 days, while ultra short-duration funds focus on securities with average durations of 3-6 months. Further, low-duration funds target average scheme durations of 6-12 months.
However, not all debt fund categories are duration-defined. Corporate bond funds invest predominantly in corporate bonds, constituting over 80 per cent of their total assets. Similarly, banking and PSU funds emphasise investments in securities issued by banks and public sector enterprises, making up 80 per cent of their portfolio.
Hybrid mutual funds
Hybrid mutual funds strike a balance between debt and equity, presenting a diversified portfolio approach. By combining the benefits of asset allocation, these funds provide the potential for higher returns from equities and stability from debt investments, mitigating overall portfolio risk.
Hybrid funds consist of various categories defined by their debt and equity allocations. Aggressive hybrid funds can allocate up to 80 per cent to equities and up to 35 per cent to debt. In contrast, conservative hybrid funds maintain a maximum equity allocation of 25 per cent alongside a significant allocation of up to 90 per cent in debt.
Balanced advantage funds, also known as dynamic asset allocation funds, allow fund managers to dynamically adjust asset allocations amidst market fluctuations. In contrast, multi-asset allocation funds invest in at least three asset classes, each with a minimum allocation of 10 per cent, providing investors with comprehensive diversification.
Mutual funds are categorised based on asset classes, providing retail investors with an array of choices catering to their distinct risk tolerance levels and financial objectives. By understanding the mutual fund asset classes and their distinct scheme categories, retail investors can make well-informed decisions and strategise their investment portfolios well.