A mutual fund stocks up money from different investors and invests in a group of assets known as securities such as stocks and bonds. There are professionals who manage the holdings which make up the fund’s portfolio. Investors buy shares based on the performance of the fund’s underlying securities. Mutual fund investors own shares in a company whose business is buying shares in other companies (or in government bonds, or other securities). Mutual fund investors don’t directly own the stock in the companies the fund purchases, but share equally in the profits or losses of the fund’s total holdings — hence the “mutual” in “mutual funds.” They are. Broadly classified into Equity based Funds and Debt Based Funds.
Equity based funds will have a portfolio relying more on equity. But not all equity based mutual funds are same. Equity based funds is further divided into –
Investment is done only in those companies which are part of a particular index. The share of companies added are in same proportion as their weight age in the index.
Multi Cap funds has the maximum range of investment options, as they can be invested in all type of stocks. The sector or the size of companies is not a hurdle for them.
Here the investment is done to a great extent only in Large Blue chip stocks. Blue Chip stocks represent stable business with predictable future earnings.
Here the mutual funds invest in relatively smaller companies. As they are neither too big nor too small, they provide a better prospect of future growth. Though there is the chance of these companies being relatively riskier than large cap stocks.
As the name suggests, investment is done in smaller companies and they can grow really fast. But small-cap stocks pose significantly higher risk than other stocks as it also includes penny stocks.
These funds buy stocks from a specific sector. For example, FMCG based sector fund will buy stocks of only FMCG companies. If an individual is bullish on a particular sector he can invest majorly in the stock from that sector.
ELSS Funds are alike to multi cap funds in terms of portfolio management. The difference being that, ELSS saves tax u/s 80C and it has a lock –in period of 3 yrs.
Additional Reading: Does size of mutual fund really matter?
As the name states, debt based funds will have a portfolio which invests largely in debt instruments. The returns from these funds though more assured are much lower, compared to Equity based funds. Debt based funds are further divided into Short Term and Long Term and has following sub types –
These are suitable for investors whose investment horizon is one year or less. They are a good alternative for people who want to invest but would like safety like bank’s savings account. These funds invest majorly in T-Bills, Repos, Certificate of Deposits, commercial papers etc. The income earned is usually in the form of “interest”.
Liquid funds is similar to Money Market Funds, the only exception being its objective, which is to emulate the bank’s savings account. These funds can also offer linked Debit Cards etc.
GILT funds are considered the best in terms of quality of portfolio as they only invest in high quality government bonds as a result there is almost negligible chance of default even in long term. Though the returns are comparatively less than Equity funds, it is a much safer investment.
These type of mutual funds invest in debt instruments which only has floating interest rates like bank loans, bonds etc. When interest rate falls or rises, interest paid by these funds also falls and rises.
Though they are similar to banks fixed deposits, in reality they aren’t because their returns are not fixed. Over a period of time they can give as much returns as fixed deposits but net of tax returns of FMPs will be better than fixed deposits as they provide indexation benefits.