Mutual Funds Categories
Equity - Tax Saving Mutual Funds
Under Sec 80C of the Income Tax Act of India, you can claim deductions from your taxable income by investing in equity oriented funds.
Among these most popular are the ELSS or commonly known as Equity Linked Savings Scheme, where you can save up to 1.5 lakhs in taxes. However, all the investment have minimum three years lock-in period, but on the bright side, the government allows you to enjoy returns tax-free.
Purpose: As explained above, investing in this category can help you with your tax savings and long term capital growth.
Equity - Multi Cap
Multi Cap Equity funds are type of mutual funds that ommonly known for investing across different segments of companies categorized into small, mid and large caps. Small size companies fall under small cap whereas other go for medium or large cap companies depending on the amount of value they have in stock markets.
Equity Multi Cap funds are also known as diversified funds and are suitable for first-time investors. Equity Multi Cap funds are relatively less risky compared to a pure mid cap or small cap funds as the risk is distributed well over all the market.
It has returns that are taxed at 15% if sold before one year, post this period no tax is imposed on profits.
Purpose: If you are new-bee in investment realm, try out this fund to get a good returns with an average risk.
Equity - Large Cap
The reverse of the small cap is a large cap where the funds invest in companies that have capital worth 20,000 crores or more. They are more trusted and stable compared to all other businesses in the market, and the funds that invest in these tend to provide stable returns. Returns are taxed at 15% if sold before one year and zero tax post one year.
Purpose: Among equity funds, these funds carry lesser risk and hence suitable for moderate risk in the long term.
Equity - Mid Cap
Mid Cap Equity funds category invest mostly in the stocks of mid cap companies. They carry a higher risk factor but provide better returns. However, one should be aware of the fact that these funds are very volatile and could become a reason for loss if invested for a shorter period.
Returns are taxed at 15% if sold before one year and no tax afterward.
Purpose: A good fund category if you are a risk taker in investment and looking for a high-rise in the long term.
Equity - Small Cap
Equity Small cap funds invest in the companies that are very small in the market but have a potential to favor attractive returns. This fund also holds the companies that have smaller market capital. Returns are taxed at 15% if sold before one year and zero if sold after one year.
Purpose: Recommended only for long term investing. These funds can be clubbed with low risk – low return funds to average out your portfolio risk and return.
Equity - Sector
Sector funds are relatively riskier than diversified funds as these invest in companies in a particular area or theme like banking, PSU, Infra, Rural, etc. These funds are most volatile due to holdings in a sector. PSU funds primarily invest in stocks of Public Sector Units like NTPC, HDFC, Pharma, etc. Returns are taxed at 15% if sold before one year and zero tax post one year.
To summarize it in a better way, these funds are theme oriented and invest only in a particular sector. These are best when there are high chances that a particular area is going to get great gains in the coming year. For example, the banking sector is performing well on the market these days and hence providing good returns to the investors of banking sector funds.
Purpose: Investment in these funds could give huge return if an investor is aware of the market trend in each area.
Equity - Index
Index funds are investment funds that are created to replicate the performance of market benchmark or index. These are like market index tracker and invest in the same ration as a particular index like Nifty, Sensex, etc. These funds provide lower turnover along with a lower expense ratio.
Purpose: Invest if you are looking for a safe side of investment which mimics the returns of the market index. These funds are not meant to beat the market but achieve the same gains that markets get.
Debt – Liquid Funds
These invest in short term (90 days) bonds and other similar instruments. One can use them as an emergency fund. These are meant for parking your money and keep it handy so that you can redeem it as and when required. Returns are taxed as per your income tax slab if sold before three years.
Purpose: Invest in these funds if you want to park your money as an emergency fund, and redeem as per need.
Debt – Ultra Short Term Funds
These funds invest in short term (one year) bonds. If you are saving for very short-term goals like a vacation or buying an automobile, then this category is ideal for gains within one year. It is also an excellent resort to park your money until you decide where to invest or spend next. Returns are taxed as per your income tax slab if sold before three years and have negligible tax post that period.
Purpose: Invest here for your short term goals like a vacation, buying a bike, jewelry or expensive gadget.
Debt – Short Term Funds
Short term funds are similar to ultra-short term investments but with a duration of approximately three years. If your goals are to manage expenses while buying a house or planning a marriage within one to three years, then this category can help you with decent returns without any risk factors. Returns are taxed as per your income tax slab if sold before three years and have negligible tax (20% with indexation benefit) post that period.
Purpose: Invest in these funds if you are aiming to buy a house or plan a wedding within three years.
Debt - Dynamic Mutual Funds
These funds switch aggressively between short term and long term debt funds with a real opportunistic performance. These invest in a nutshell to long term bonds, etc. with an objective to generate regular income by changing allocation across different segments. Returns are taxed as per your income tax slab if sold before three years. After three years, long term capital gains tax apply (negligible).
Purpose: Invest in these funds with an objective to generate regular dividend/income.
Debt – Credit Opportunities
These funds show similar action like Debt – Dynamic by investing in debt ranging from short to long term with an objective to generate high-interest income, but the investment goes to low-grade corporate bonds. If you are willing to take the risk for higher gains, then this category is something you should look at. These funds are suitable for Monthly Income Plans(MIP) funds to invest in Medium to Long term bonds.
Purpose: Invest in these funds when you are ready to risk your monthly income generation plan. The category can be clubbed with debt- dynamic to lower down the risk factor.
Debt – MIP (Monthly Income Plans)
MIP (Monthly Income Plan) invests a small portion of the portfolio in equities (10-20%) and rest in the fixed income securities. Their objective is to generate regular monthly income. Monthly Income Plans funds invest in Medium to Long term bonds, etc. with an aim to produce a monthly dividend. Returns are taxed as per your income tax slab if sold before three years and have negligible tax (20% with indexation benefit) post that period.
Purpose: Invest in these funds if you are looking to generate monthly income with little risk.
Debt - Gilt
If you are a kind of a person who would want to go for funds that are safe and provide high returns than Debt Gilt is something which you shouldn’t avoid. These funds invest in the fixed income securities issued by Government of India with almost zero risks to the investor. The returns range from anything between 10 percent to 13 percent or more depending on the area of investment.
Returns are taxed as per your income slab if sold before three years and post that negligible tax (20% indexation benefit) post three years.
Purpose: Invest to gain good returns without taking much of risks.
Debt - Income
So we described Dynamic Funds and explained how they change their investment to maximize the profit, similarly in the debt income funds, the investments are made in the bonds to generate regular sources of revenue without much of risk. They change allocation among different debt segments to maximize the returns.
The risk is low, and returns are good ranging from 9 to 10 percent. Returns are taxed as per your salary slab if sold before three years post that negligible tax (20% with indexation benefit) post three years.
Purpose: To generate secondary sources of income from investments without taking much of risks.
Hybrid – Equity Oriented or Balanced Fund
If we allocate 65 to 80 percent of a fund to equity and assign remaining to debt and similar instruments, then what we get in return is a Hybrid-Equity fund. These funds allow you to enjoy good returns and low-risk rates courtesy their significant allocation in debt funds. Market gurus believe that it is better to invest in these than to go for an equity-debt portfolio as there is no tax imposed on the debt funds in the mix. Returns are taxed at 15% if sold before one year and no tax afterward.
Purpose: Invest in these funds instead of buying a different kind of equity-debt funds with 60-40 allocations. These funds are best to moderate your risk with a fair return in the high-risk portfolio.
Hybrid – Debt Oriented
These funds majorly invest in debt with a small allocation to equity investments. People who are not much inclined to take risks can happily invest in these funds as they primarily put debt instruments in focus combined with a smaller percentage of equity funds to promote good returns. Returns are taxed as per your income tax slab if sold before three years and have negligible tax (20% with indexation benefit) post that period.
Purpose: Anyone looking for good returns without putting the hard earned money to market risks.
Hybrid - Arbitrage Funds
The word arbitrage defines simultaneous selling and buying of securities, currencies, etc. in different markets to gain maximum profits. Hybrid Arbitrage funds perform in the same way and are composed of only debt and cash securities. These are the ones that are very stable and offer little risk along with a three year annualized return ranging from 6 percent to 8 percent. It might go up to 9 percent depending on the market conditions.
However, these funds do come with an expense ratio, and if sold before three years 15 percent tax is imposed. Post that; there’s no fee on returns.
Purpose: Securely park your money without any fear of loss of money and gain returns that are equivalent to fixed deposits.
Hybrid - Asset Allocation
Hybrid Asset Allocation funds are actively managed by the fund managers and provide a portfolio with either a fix or variable securities such as cash, bonds, stocks, etc. Most of the time the allocation remains same, however, under some conditions to maximize the profit or to minimize the loss, the fund managers alter the percentage of an asset in the portfolio. For example, under low market conditions, the percentage of cash equivalents can go up to minimize the loss whereas in the high market conditions for a maximum profit equity gets a more share.
Returns are imposed with a 15 percent tax if sold in one year, whereas after three years profits are tax-free.
Purpose: These funds are for people who are looking to gain solid returns on their long term investment. The risk is relatively small compared to other equity funds.
Gold - Funds of Funds
This category is pretty much self-explanatory as the funds in this section invest in gold ETFs or Exchange Traded Funds. These rely on the instruments that are directly linked to the prices of gold and invest in gold bullion. Returns are aligned with the price of gold.
Purpose: Someone who wants to invest in Gold in a paperless way.
Funds of Funds - Domestic
If we club some of our favorite domestically available funds into one category and start investing into it, then this newly generated portfolio would be known as Domestic Funds folio. Earlier we discussed individual investment in the different type of resources; however, this category has funds that have other MFs but not the cash, equity, and other market assets. It’s similar to the systematic investment plans, and the returns are based on the type of funds that are in the cluster.
Funds of Funds - Global
You must have heard of global equity funds. Similarly, there are global funds which focus not only investing in the international equities but also in other financial assets such as cash, bonds and more. These funds help you with foreign investments by expanding your portfolio with top foreign companies and businesses, capital assets, mutual funds and more.
Purpose: For expanding investments to foreign markets which in turn appreciate your wealth over a period.
Equity - Others
Investment funds that cannot be classified into any other category come under the umbrella of Others. There aren’t many funds under this section, but all of them give a significant share to the equity investments and at about 5-10 percent of cash and other debt related assets. For a long term investment, these funds provide a capital appreciation.
Returns are taxed at 15 percent if sold before one year and post that there’s no tax.
Purpose: It is a right category for those who are looking at wealth appreciation with long term investment plans.
As the name suggests, Global funds have an investment beyond our national borders and have stakes in stocks of larger multinational and fortune 500 companies listed on NASDAQ, NYSE, etc. If you are willing to expand investment beyond NSE/BSE, then this is the category that should attract you.
Purpose: Since investing directly in global equities is not that easy, buying units from such funds can be helpful.