We know that every person whether a rich or poor saves some amount of their earnings for future use. But nowadays people are more keen on investments so they are taking interest in various funds. They invest their money in different bonds and the stock market. Mutual Fund is a type of fund for investment which gives a better return. A mutual fund is simply a collection of money from many investors and uses it to buy other securities, usually stocks and bonds.

Mutual funds offer a wide variety of investment choices. We can choose them on the basis of our risk appetite, financial goals, and time horizon. Here in this article, we are going to discuss topics such as Market Capitalisation, Mutual Funds, and their Types. We also discuss in brief about Equity, Debt, Hybrid Mutual Funds, and their types. Also, we share Types of Mutual Fund according to their Structure and their Management. We will provide a short discussion on other Mutual Funds also but not in detail.

What are Mutual Funds?

The mutual fund is simply a collection of money from investors. The amount of money is further used to invest in securities such as stocks, bonds, money market instruments, and other assets. It divided into several kinds of categories, representing the kinds of securities they invest in, their investment objectives, and the type of returns they seek.

Types of Mutual Fund as per Assets

On the basis of the type of assets, there are three types of mutual funds

  • Equity Mutual Funds
  • Debt Mutual Funds
  • Hybrid Mutual Funds

Equity Mutual Funds

Equity mutual funds are those funds which invested in the stock markets. There are different types of equity funds

  • Large Cap Fund
  • Mid Cap Fund
  • Small Cap Fund
  • Sector Fund
  • Diversified Equity Fund
  • Dividend Yield Schemes
  • ELSS
  • Thematic Fund

Large Cap, Mid Cap, and Small Cap Funds

Before going for the discussion of these funds we need to know about the Market Capitalisation.

Market Capitalisation

Market capitalization simply defines the size of the company. It means it helps to differentiate between big and small companies. Market Capitalisation has divided the company into three types

  • Large Cap Company
  • Mid Cap Company
  • Small Cap Company

Usually, small-cap companies are those whose market capitalization is below Rs. 5000 Crores. The companies which lie in between market capitalization value of Rs. 5000 to 100000 Crores are called Mid Cap companies. And the companies which have market capitalization value above Rs 100000 Crores are known as Large Cap Companies.

There are no fixed criteria of small cap, mid cap, and large cap. As some years before the company which has market capitalization value of Rs. 50000 Crores comes in Large Cap. On the other hand, the same company today comes in Mid Cap.

Large Cap companies are big and well-established and have a strong market presence. Almost all companies are the leading companies in their particular sector. Large Cap companies have good financial strength to survive in a bad time. It also has less risk factor as compared to Small and Mid Cap companies. Larsen & Turbo, Reliance, TCS are examples of Large Cap companies.

Small cap companies are the developing countries and have a high possibility of growth. There is always chances of failure in these companies so the risk rate is high.

We can say the funds which are invested in Large Cap Companies are known as Large Cap Funds. Similarly invested funds in Mid Cap and Small Cap companies are respectively the Mid Cap and Small Cap Funds.

Sector Funds

Sector Funds are the funds invests in companies of a specific sector. For example, Reliance Media and Entertainment Fund is a sector fund which only invests in the media and entertainment sector companies. SBI Pharma Fund is another example of a sector fund which only invests in the pharma sector companies.

Diversified Equity Fund

A diversified equity fund invests in the companies regardless of size and sector. Simply, a diversified equity fund invests in companies across sectors, industries and market capitalizations. This way it can participate in growth across the economy and is not tied down to a particular sector or industries.

Dividend Yield Fund

The company shares a part of its profit to its shareholder which is called Dividend. It is not compulsory to give a dividend to its shareholders. The decision depends on the Board of Directors of the company. Dividend Yield Fund invests in those company which is stable, safe, consistent and low volatile and provide a good regular dividend.

Equity Link Savings Scheme( ELSS )

It is a tax saver mutual fund scheme. In this, the investments are locked for the time period of 3 years. Under section 80C, ELSS provides a rebate amount of Rs 1.5 lakhs on tax.

Thematic Fund

Thematic funds invest in themes like Rural India Theme, E-Commerce Theme, etc. For example, HDFC Housing Opportunities Fund is a thematic fund whose theme is housing. This fund purchase stock of the housing-related company such as Cement Company, Construction Company, Metal & Paints Company.

Debt Fund

The government or companies borrow money through debt instruments and return the money with interest. The fund invests in debt instruments like Debentures, Bond, Certificate of Deposit, etc are called Debt fund. Debt fund has less risk and gives a low return as compared to an equity fund. There are basically four types of Debt Fund

  • Gilt Fund
  • Junk Bond Scheme
  • Fixed Maturity Plans
  • Liquid Schemes

Gilt Fund

The fund invests only in government securities are called Gilt Fund. The government securities are issued by the government that’s why the default risk is zero. There are two types of Gilt Fund

  • Short Term
  • Long Term

Junk Bond Schemes

Junk bond has a high default risk and also have a high rate of interest. The debt fund invests in junk bonds are called Junk Bond Schemes.

Fixed Maturity Plans

Fixed Maturity Plans has predefined maturity as like Bank Fixed Deposits. It usually invests in Certificate of Deposit, Commercial Papers, Corporate Bonds, etc. Fixed Maturity Plans have better returns as compare to bank FD.

Liquid Fund

Liquid fund is the debt fund invests in money market instruments. The money market consists of such financial instruments through which company borrow money for short term. So liquid fund invests in money market instruments of very short term maturity such as Certificate of Deposits, Treasury Bills, Commercial Papers, Term Deposits, etc. Liquid Fund provides more return than a bank savings account. Liquid Funds are low volatile and have less risk. So liquid funds are the best option for short term investment. We can withdraw our money from liquid funds at any time.

Hybrid Fund

Hybrid funds are the funds invests in more than one asset class. It invests in both equity and debt. Generally, there are three types of hybrid fund

  • Monthly Income Plan
  • Balanced Fund
  • Arbitrage Fund

Monthly Income Plan( MIP)

In MIP 60 -90% of funds portion are invested in debt instruments and rest invested in equity. In terms of safety, MIP is better than equity because most of the part of the fund is invested in debt. Some part of MIP is also invested in equity which means there is also chances of risk but are less as compared to equity.

Balanced Fund

In Balanced Fund, 65 – 85% portion of the fund is invested in equity and the rest portion is in debt. Here on, equity helps in bringing good returns and the same debt helps in minimizes the risk of the Balanced Fund.

Arbitrage Fund

In this fund, more than 65% of the fund invests in equity. The investment money is safe but returns may vary in the Arbitrage Fund. It generally has 6-10% interest. Arbitrage Fund is considered as the Equity Fund for taxation.

Types of Mutual Fund as per Structure

On the basis of the structure, the mutual fund is further divided into three parts

  • Open Ended Fund
  • Close Ended Fund
  • Interval Fund

Open Ended Fund

In the open-ended fund, investors can buy or sell mutual fund units at any time. The open-ended fund issues multiple numbers of units. Most of the mutual fund schemes are open-ended.

Close Ended Fund

In the close-ended fund, we can only invest in the fund for a specific time period. These funds offer NFO (New Fund Offer) for the start of investment and after this, we can not sell the unit of the fund until its maturity. Close-ended funds are listed in the stock exchange. After NFO either we want to invest in the close-ended fund or sell the units before maturity. So we can easily sell or buy the units at the stock exchange. But generally, there are less number os buyer or seller of the close-ended fund. The close-ended fund has fixed numbers of units.

Types of Mutual Fund as per Management

There are basically two types of a mutual fund on the basis of management

  • Actively Managed Fund
  • Passively Managed Fund

Actively Managed Fund

In these funds, the fund managers are actively involved in the investment decisions of the fund. The fund manager decides whether the investment is in the stock or debt instruments.

Passively Managed Fund

In Passively Managed Fund, fund managers are not involved in investment decisions. For example, if a passively managed fund tracks Nifty, so it invests in the stock present in Nifty in same proportion due to which the return of funds is equal to the return rate of Nifty. So in this fund manager is not deciding about the investment he simply invests in the stock of Nifty in the same proportion.

There are more types of mutual funds such as

  • International Fund
  • Real Estate Funds
  • Gold Fund
  • Exchange Traded Fund

Credit: FinnovationZ.com

We hope you liked this article and grabbed more knowledge about different types of Mutual Funds. If you have any queries please drop them in the comment section below.