What are the types of Mutual funds?
The schemes that invest in government securities , corporate bonds and debentures , treasury bills are called as Debt Funds. They are best suited for the medium to long-term investors who are averse to risk and seeking regular and steady income. Debt Funds are less risky when compared with equity funds.
Debt funds can be further classified as below on the basis of their tenor
Liquid Funds – These include investment in bonds with maturity of less than 91 days.
Ultra short term funds – Denotes investment with a residual maturity of less than one year.
Short term funds - These debt schemes will invest in instruments with a duration between one year and three years.
Medium term funds – When investment is made in instruments with a duration between three years and five years, it falls under medium term funds.
Long Duration funds – Investments in instruments with a duration of greater than seven years are called Long duration funds
The schemes that invest in equity shares of companies are Equity funds. They seek capital appreciation and are beneficial when held for a long term. Equity Funds are high risk funds and their returns are linked to the stock markets. They are best suited for investors who are seeking long term growth.
The below are the types of Equity funds
Diversified equity funds – These equity funds invest in diversified portfolios
Large Cap - Funds that invest in shares of large bluechip companies which has stable performance
Mid Cap – Funds that invest in shares of medium cap companies that have high growth potential and better returns
Small Cap - These equity funds invest in small market capitalization companies with potential of higher gains. The risk is also high.
Sector funds – Equity funds that invests in a particular secor. Eg banking sector, FMCG, Information Technology
Thematic funds – Equity funds that invests in line with a theme. Eg Infrastructure, Construction
ELSS– Equity Linked Saving Schemes are diversified investments that give tax benefits to investors under section 80 C of the Income Tax Act.
These schemes invest in debt , equity and gold.
The risk and return in these scheme will depend upon the allocation to each asset classes and the type of securities in each asset class that are included in the portfolio. The risk is higher if the equity component is higher. The risk is low when the debt component is high.