Let the fun begin,
The information available on the internet is overwhelming. There are so many different types of funds available based on different categories. Someone needs to simplify them for you. Well, you are in the right place. We are going to simplify the types in their nutshell. I feel the fund should be chosen based on your own investment potential. We need to understand our own healthy investment capital, appetite for risk, and time frame needed, etc. Once these things are clear, all we need to do is match the fund that has a very similar profile. So let’s understand what I meant by that.
We need to have a clear vision of our financial goals. Target date, time frame, and return expectations. Otherwise, you will stop or exit at the wrong time and even forget about the investment. (Believe me, that happens!)
Short term goals: Utility goods, buying a house, a trip.
Long term goals: Retirement, college fund, marriage fund, etc.
Analyze your risk potential and loss capacity and match it with the mutual fund’s risk profile.
Basic Types of the Mutual Funds
At least 60% of assets in equity shares. Up’s and down’s in the short term but capital appreciation over a long period. Aggressive investor. Long time investment. Capital appreciation Higher risk Returns in the mid-long term
Investment strategy categorization
Theme and sectoral funds:
Follows a specific sector(pharma, IT) or a theme(emerging markets, international market).
Risky, since the sectors can get affected.
Focused Equity funds:
Specific market cap companies.
Contraband equity funds:
Analyze and look for underperforming stocks that have potential in the long run.
Market cap based categorization.
|Large-cap funds:More than 80% of assets in large-cap companies(top 100).Considered less risky and stable.||Mid-cap funds:Around 65% in midcap(101-250th)More returns but also more volatile as compared to large-cap.|
|Small-cap funds:Around 65% in small-cap(market cap rank > 251)Even more possible returns. Also more volatile than the other two.||Multi-cap funds:About 65% of assets in (large-mid-low) cap.Fund-managers rearrange the portfolio based on the market condition.|
|Large and mid-cap fund:35% in large and 35% in mid-cap.Lower volatility.Better returns.|
Equity-linked saving scheme(ELSS)
A fund that provides tax benefits up to 1.5 lacks.
Min 80% of assets in equity.
3-year lock-in period.
Features of equity funds
Diverse portfolio even for low investments. Investment is managed by experts. It is cost-efficient. Offers flexibility and liquidity. Cap opt of SIP(systematic investment)
|If invested for less than 12 months, called Short term capital gain(STCG). The tax, in this case, is 15%.||If invested for more than 12 months, called Long term capital gain(LTCG). The tax, in this case, is 10% if the gain is more than 1 lack.|
Less risky and more stable. Conservative investor who wants to play safe and enjoy steady returns The investor is aware of the returns at the beginning. Gov & Corporate bonds, debt securities, money market instruments, treasury bills, commercial papers.
Note: Debt securities have credit rating that tells if the security is good or bad. Higher the rating, it is less likely to default.
Types of investors
Short term investors: Good liquidity(3 – 12 months), and 7 – 9 % returns.
Medium-term investors: (3 – 5 years) Better returns than FD. I can opt for a monthly income plan.
Types based on maturity
|Liquid Funds Max 91 days maturity.Better than saving account returns.Good for short term investment.||Money Market fundsMax maturity of 1 year.Money market instruments.Low risk.|
|Dynamic bond funds3 – 4 years of investmentModerate risk tolerance.Varying maturity based on the interest rate regime.||Corporate bond fundsMin of 80% in corporate bonds with the highest ratings. Lower risk.|
|Banking and PSU fundsMin 80% in debt securities of PSU’s and banks.||Guilt fundsMin of 80% in gov securities across varying maturities. No credit risk. High-interest rate risk(economic factors)|
|Credit risk fundsMin 65% in corp bonds with lower ratings.Credit risk.Better returns compare to highest rated.||Floater fundsMin 65% in floating rate interest. Lower interest risk.|
|Overnight fundMaturity of 1 day.Extremely safe.||Ultra-short duration fundIn money market instruments and debt securities.Macaulay duration: 3 – 6 months|
|Low duration fundIn money market instruments and debt securities.Macaulay duration: 6 – 12 months||Short duration fundsIn money market instruments and debt securities.Macaulay duration: 1 – 3 years|
|Medium duration fundIn money market instruments and debt securities.Macaulay duration: 3 – 4 years||Medium to long durationIn money market instruments and debt securities.Macaulay duration: 4 – 7 years|
|Long duration funds In money market instruments and debt securities.Macaulay duration: more than 7 years||NA|
Risks involved in debs funds
Credit Risk: Issuer not paying principal and interest.
Interest rate risk: Varying interest rates.
Liquidity risk: Fund house going bankrupt or no money for funds redemption
(Ex. Franklin Templeton Funds)
|Short term capital gain Less than 3 years Tax: According to income slab||Long term capital gain More than 3 yearsTax: 20 % with indexation benefits|
Moderate risk. Typically 40:60 equity to fixed-rate return investments. Expected to some volatility. Diverse portfolio.
|Time / Risk||Low Risk||Medium Risk||High Risk|
|Short Duration(up to 3 years)||Liquid funds, Ultra-short duration funds||Short duration funds||Arbitrage funds|
|Medium Duration (3 – 5 years)||Short Duration Funds||Balance Advantage Funds||Equity Hybrid Funds|
|Long Duration (more than 5 years)||Large-cap funds||Multicap funds||Midcap funds, small-cap funds|
Note- Don’t worry about the terminologies yet. We will discuss them as we go along.
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