Their accessible structure, liquidity and potential to generate inflation-beating returns make mutual funds a popular avenue today for passive wealth creation in India alongside other routes like direct equity, bonds or bank deposits. However, navigating the versatile menu spanning categories, styles and risk profiles warrants an informed orientation guiding suitable selections.
In this article, we will learn the fundamental types of mutual fund in India, their ideal usage scenarios and key pointers to consider when planning fund investments as a retail participant.
There are 4 types of mutual funds in India - Equity funds, Debt funds, Hybrid funds, and Solution-oriented funds. Each carries unique risk-return profiles catering to investors with specific priorities.
Equity or growth mutual funds primarily buy shares of publicly listed companies across market capitalisations to build a stock portfolio. Based on the focus area, these include:
Large-cap Equity Funds: Invest mostly in established blue chip companies judged by the stability of sizable market capitalisation exceeding Rs 20,000 crore plus proven dividend track records. Lower risk appetite with moderate growth expectations finds best expression in large-cap funds.
Mid/Small Cap Equity Funds: Cater to risk-tolerant investors possessing higher return expectations by investing predominantly in medium or smaller firms compared to large-cap funds. Volatility stays higher given still-maturing businesses. Necessitate longer investment horizons allowing growth stories to flourish.
Sectoral/Thematic Equity Funds: Concentrate capital deployment into specific high-conviction sectors expected to outperform broader markets over medium-to-long horizons. Illustrative sectors include banking, IT, infrastructure, manufacturing and energy, among others. Need disciplined tracking of business cycles, policy impacts etc.
Debt funds invest collected resources into fixed-income instruments like government securities, corporate bonds, etc., issued by Central/State governance bodies, PSU entities, infrastructure agencies and financial institutions primarily. The main debt fund types are:
Corporate Bond Funds: Channel monies towards high-rated corporate bonds across tenures to earn coupon interest payouts. Suit stability-prioritising investors given reasonable returns predictability against the volatility of equity funds, albeit with some credit risk exposure.
Government Securities (Gilt) Funds: Invest purely in sovereign bonds or state development loans, providing superior safety given government backing but marginally trails corporate bonds on returns. Ideal for conservative investors above bank fixed deposits.
Liquid/Overnight Funds: Deploy investors' capital predominantly into very short-term instruments like treasury bills, commercial papers and certificates of deposit maturing under 91 days. Offer reasonable returns up to 6% per annum against reliable liquidity needed for contingency funds or tactical parking of surpluses.
Hybrid funds tactically balance both equity and debt allocations, trying to blend the best aspects of solid growth prospects from share market participation while anchoring some stability via fixed income components to enable wealth creation for common investors with balanced risk appetite. Based on equity contribution, hybrids have three classifications:
Aggressive Hybrid Funds (65-80% Equity): Offer higher growth potential for investors wanting the lion's share of risk-reward from participating predominantly in equities while partially insulating against intermittent shocks via income assets.
Balanced Hybrid Funds (Equity & Debt balanced 50:50): Allow partaking in upside potential while also maintaining stability needed to mitigate volatility when markets turn bearish. It is ideal for novices starting mutual fund journeys seeking the best of both opportunities.
Conservative Hybrid Funds (20-35% Equity): Primarily stick to lower-risk debt and money market assets, limiting equity directionally to prudent minority allocation targeting stability-focused investors close to retirement who cannot stomach wild fluctuations eroding wealth. Provide stable cash flows.
Beyond conventional fund categories, specialised solution-oriented funds cater to specific financial goals, making targeted investing easier.
Set clearly defined money targets linked to life milestones like retirement, children's education, wedding expenses, or dream home purchases. Quantify desired corpus value and timeline.
Evaluate funds specifically created to meet similar goals through customised investment mandates and risk management.
For instance, Retirement Funds adopt evolving asset allocations matching changing risk capacity over advancing age to accumulate adequate retirement savings.
Similarly, Children's Gift Funds build required education expenses corpus through balanced equity and debt picking, maximising long-horizon growth while containing interim volatility risks via prudent diversification.
Commit to investing fixed amounts monthly or quarterly to achieve the pre-quantified wealth target systematically over a defined timeline ranging from 5 years to 20 years through the specialised solution fund selected.
Periodically monitor fund NAV movement and portfolio rebalancing activities, adjusting to evolving financial situations over the years while staying invested for goal achievement.
By investing globally towards common milestones, these thematic solution funds enhance wealth creation journeys through focus and customisation for retail investors in India.
India's mutual fund industry equips investors to participate in rewarding capital market opportunities through varied avenues customised to individual risk appetites and return expectations. Determine personal priorities and partner with optimal funds, striding growth towards financial freedom.
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