Thanks to the immense amount of marketing, advertisement and the performance of the category over the last 2 decades, mutual funds aren’t an alien concept even to a young 20-year-old something, just graduating out of college. India is one of the youngest demographics in the world, and mutual funds as a category are only beginning to etch their presence in the savings and investment landscape.
However, for a majority of individuals, Mutual funds somehow are synonymous with Equity Mutual funds, which is like saying Chocolate bars are the same as Cadbury (which was pretty much the case until two decades ago).
Mutual Funds only refer to the ecosystem of individuals handing over their small savings to professionals who in turn manage crores of rupees to generate better returns for their clients, given the objective of Investment.
Once the objective is established (high growth, capital protection, etc), one moves to picking the specific category of funds (Diversified Equity, Short-term debt, etc), then chooses Scheme (say, Birla Sun Life Frontline Equity), then option for the scheme (Dividend, growth, etc), and then finally the mode of payment (Lumpsum, sip)
The objective of Investment: This is one of the basic information about a scheme that determines how your money will be managed and hence its expected outcome. Not everyone invests with the same objective. Some young individuals may want to invest in high risk, high growth companies, while others nearing their retirement just want to beat better the inflation that eats up their retirement savings. It is with this view all Mutual Funds companies, as known as Asset Management Companies (AMCs) offer various schemes with different objectives. It easy to get confused between the nomenclature of various schemes, but here is a broad classification to serve as a guide as you invest those hard earned Savings.
(These is just a factual broad classification of various mutual funds that exist in the market. We do not recommend any specific category of funds over other)
Of course, this is a category most understood. You hand over money to a manager to invest in stocks and make money. But even here, there are various categories of funds to watch out for
- Based on market segment – These funds primarily filter their investment selection based on market capital or generally speaking size of the company invested in.
- Small Cap – Invested in companies with market capital usually less than 1000 crore. The risks associated with companies are very high
- Mid Cap – Invested in companies with market cap usually less than 5000 crore.
- Large Cap- Invested in companies invested with high market cap, usually termed as the blue chip companies
- Diversified – Invested in companies across sectors, market caps, etc.
- Sector Funds – These funds invest with an objective to invest funds in specific sectors such as banking funds, technology funds etc.
- Thematic Funds – These funds invest with an objective to gain from a particular view on the economy, such as a make in India fund to invest in companies that would benefit out of make in India schemes.
- Investment Style – Some funds invest very actively in growth companies, while others try to pick undervalued companies, also called as value funds.
- Tax Saving Funds – Also called ELSS, these are one of the most popular tax-saving tools to gain benefit under section 80C of the IT Act.
Its a sorry state of affairs that most individuals do not look beyond Savings account, Fixed deposits and PPF accounts.
The less understood yet highly beneficial category of funds is debt funds. Actually, debt funds attract more money than equity funds do, though most of the interest comes from companies and institutions who realize the power of debt markets. Its a sorry state of affairs that most individuals do not look beyond Savings account, Fixed deposits and PPF accounts. The broad categories of funds and their objectives in decreasing (usually) order of expected returns are –
- Long-term Funds – Usually, long-term debt gives better returns and it is the primary objective of all different kinds of long-term funds
- Income Funds – An income fund is a debt fund which invests in both short and long-term debt securities of the Government, public sector and private sector companies with a view to generate income.
- Long Term Gilt Funds – These funds invest in long and medium dated maturities of government securities with no default risk
- Dynamic Funds – These funds have no restrictions with respect to security types or maturity profiles that they invest in, but actively manage risks to give returns
- Credit opportunities Funds – These funds invest in various non-government securities to get a better return while managing various risks associated with the debt.
- Fixed Maturity Plans (FMPs)– Simple explained, these are equivalent to your FDs. They are issued with a maturity, say 10 years, and within this tenure, these funds invest in various securities so as to give better returns.
- Short Terms Funds – The focus of these funds is to ensure minimize risk of the investments included in the fund
- Short Term Income Funds – These funds invest in short-term debt instruments with some allocation to long term debt to earn bettern return.
- Ultra Short Term Debt Funds – Usually these funds invests in securities with maturity upto 1 year
- Money-Market / Liquid Funds – These funds usually invest in maturities up to 91 days in highly liquid, less risky instruments.
Instead of a user choosing to invest in Equities and Debt, these funds invest with an objective to invest in both the asset in order to neither take an extreme risky equity position while giving better returns than debt instruments. Primarily these are either
Equity oriented Balanced Funds – The overall allocation to debt does not exceed 35% in these schemes
Debt oriented Balanced Funds – The overall allocation of Equities does not exceed 30% in these schemes
There are other special kind of funds as well that do not fit in any of the descriptions above –
ETFs – Gold ETFs, Index ETFs etc. are various instruments which are traded on stock exchanges just like any other stock. However, these funds are managed passively to track the index or gold price as may be the prime instruments specified by the ETF
Fund of Funds – These funds invest directly in various other mutual funds with a view to selecting a well performing portfolio. Some of these FoF also invest in international equities with a view to giving some global exposure to the investor portfolio