Different Types of Equity Mutual Funds

Are you confused about different types of mutual funds? Learn more about mutual funds, their functioning, different types of equity mutual funds, etc. In this article, different types of equity mutual funds have been explained from a common investor's perspective.

What is Mutual Fund?

A mutual fund is a professionally-managed trust that pools the savings of many investors and invests the pooled amount in securities like stocks, bonds, short-term money market instruments and commodities like precious metals. Investors in a mutual fund have common financial goal and their money is invested in different assets classes in accordance with the fund's pre-determined investment objective. Investments in mutual funds require comparatively small amount, giving retail investors the advantage of having professionals decide their investment.

Mutual funds are pooled investment vehicles actively managed either by professional fund managers or passively tracked by an index or industry. The funds are generally well diversified to offset potential losses. They offer an attractive way for savings to be managed in a passive manner without paying high fees or requiring constant attention from individual investors. Mutual funds present an option for investors who lack the time or knowledge to make complex investment decisions.

Different types of Mutual Funds:

A common investor gets confused about various types of mutual fund. He cannot differentiate between various types of mutual funds with fancy names which create more confusion. Mutual funds can be broadly classified into various categories according to types of investments. These are:
  • Equity Mutual Fund:- These funds invest in various equities (shares) of Limited Companies and underlying derivatives.
  • Debt Mutual Fund:- These funds invest in various bonds like bonds issued by Central Government, State Governments, Public Sector Undertakings and various corporates. Some debt funds also invest in money market investments.
  • Hybrid Mutual Fund:- These funds invest in both equity and debt instruments. If the equity component is more than 65%, then these funds are called equity-based hybrid funds. If the percentage of debt component is more, then such funds are called debt- based hybrid funds.
  • Commodity Mutual Fund:- These funds invest in various commodities. In India, commodity funds generally invest in gold.
  • Various Types of Equity Mutual Funds:-
    All equity mutual funds are similar in nature. In this article, we are going to discuss various types of equity mutual funds in common man's language.
  • Large-cap funds: - These funds invest in shares of major companies. These funds are also known as blue chip funds. In Indian contest, such funds invest in companies like Reliance, ONGC, Infosys, TCS, Wipro, ITC, Tata Steel, etc.
  • Mid-cap funds: - These types of funds invest in companies which are medium sized and have potential to become large-cap companies in future.
  • Small-Cap funds: - Such funds invest in small companies. These small companies are more likely to be bankrupt. So the risk associated with this category of equity mutual fund is very high.
  • Diversified equity funds:- This type of funds invest in all types of companies, i.e., large-cap, mid-cap and small-cap companies.
  • Sectoral funds:- These funds invest in companies in a particular sector. For example:- Pharma funds invest in scripts of pharmaceutical companies. FMCG funds invest in FMCG companies. The risk profile of sectoral funds is much more than diversified equity funds.
  • Index funds:- these funds invest in companies included in a particular index. For example, Sensex funds invest in such companies which are included in the Sensex. Nifty funds invest in companies included in Nifty.
  • ELSS funds:- these funds are tax-saving schemes. An investor in these funds have to remain invested for at least three years. Such funds provide tax benefits under Section 80C of Income Tax Act.
  • A prudent investor must consider his own risk profile and time-horizon for investment. After ascertaining these factors, he should select and invest in equity funds (compatible to his own circumstances) under Systematic Investment Plan (SIP) mode for a longer period. This strategy gives better return than fixed rate of investment, even after adjustment against rate of inflation and tax deduction.

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    Author: Bhuvan27 Oct 2015 Member Level: Gold   Points : 3

    Good article showing the difference between different types of mutual funds. Just I wanted to add more to it. Before investing in a particular mutual fund, generally people will go through the star ratings provided by popular financial websites and they try to invest in 5-star or 4-star rating mutual funds. But before doing that I would suggest to just look at the total assets of that particular fund. Do not invest in the funds in which total assets are very less or very huge. Very less asset mutual funds can't sustain if there happens to be huge redemption. Very huge asset mutual funds will have excess money and their excess money goes after very few stocks. So, choose a medium asset mutual fund.

    Author: Kailash Kumar27 Oct 2015 Member Level: Platinum   Points : 1

    There are two more common terms. Open ended funds which means that the investors can enter or exit the fund scheme anytime by buying/selling fund units at its NAV. The close ended funds are those funds in which redemption can take place only when the period of the scheme is over. However such funds are listed on stock exchanges and buyers/sellers can trade units in secondary market.

    Author: Partha K.27 Oct 2015 Member Level: Diamond   Points : 0

    Thanks for two excellent responses from two Members of ISC! These responses definitely supplement the main article. I only want to add that not only star-rating, before investment in a particular fund, an experienced investor checks the alpha, beta, r-square and standard deviation of a particular scheme and compare these ratios with other schemes of that particular category. So far as the issue raised by Mr. Kailash Kumar is concerned, I would like to state that in this article, I have discussed only the open-ended funds. So far as closed-ended funds are concerned, except FMPs, closed-ended funds are not advisable for a new investor.

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