Investors face a problem in selecting a financial stream that aligns with their time, and risks giving them good financial returns as well. With numerous options available understanding each of them could be very tedious and time-consuming.
Mutual funds present varied investment options customized to the desires and concerns of the Indian investor. Therefore, an in-depth analysis of the characteristics and perks of different types of mutual funds allows Indian investors to make informed decisions on the best investment options to add to their portfolios.
In this blog fully explores 3 types of mutual funds in India understanding them also discussing and distinguishing about their salient features. This will help them find which is useful for you.
What Are Mutual Funds?
A Mutual Fund is an investment instrument where big AMCs, i.e. asset management companies, take money from investors like you and me and then invest that money in different stocks.
Because these AMCs are very experienced, they have a lot of knowledge, they have a lot of advanced tools, that’s why they invest your money in the best place from where you can get more returns. Now let’s talk about Which is the best Mutual Fund? and Which Mutual Fund to invest in.
Mutual Funds have a lot of schemes. Every week, every month, new Mutual Funds are launched. That’s why it is not possible for every Mutual Fund to be made according to your goal and your risk.
What Are The Main 3 Types Of Mutual Funds
Mutual Funds are mainly of 3 types. There are many other ways, but here we are talking about the 3 most important Mutual Funds and these are:
- Equity Funds
- Debt Funds
- Hybrid Funds
Debt Funds
Debt Funds have very little risk in Debt Funds because here your money is invested in Corporate and Government Bonds which give fixed returns. But where the risk is less, the returns are also less. That’s why Debt Funds generally don’t give a lot of returns.
Hybrid Funds
Hybrid Funds are a mix of Equity and Debt. That is why it is often called a Mixed Asset Fund. Now Hybrid Funds are also of different types where equity and Debt have different percentages such as:
- Aggressive Hybrid Fund
- Conservative Hybrid Fund
- Balanced Hybrid Fund
Equity Funds
Equity Funds from the name of Equity that your money is invested in Equity, that is, in the stocks of different companies. Now we can divide this Equity Fund into 6 types and these are:
- Index Fund
- Large Cap Fund
- Mid Cap Fund
- Small Cap Fund
- Multi Cap Fund
- Flexi Cap Fund
Index Fund
The first type of Equity Fund in this is the Index Fund the name of this Index Fund is that the AMC, that is, the Asset Management Company, directly invests your money in indices such as Nifty 50 or Sensex.
And the investment done in this is done in the same percentage in which the stock has a weightage in the indices. Suppose if Reliance’s Nifty 50 has a weightage of 10.28%, then in this case, the Index Fund will also invest 10.28% of its total fund in Reliance’s stock.
Similarly, the amount of weightage of each stock in the index, the fund will invest its money in that stock in the same percentage.
So the faster the index increases in this, the more returns the Index Fund will generate for you. Now because the index performs well in the long term, that’s why the Index Fund also gives good returns in the long term.
And because the fund manager here, that is, the one who manages the fund, does not need to actively manage the fund, that’s why it is also called a passive fund because everything is fixed here.
Large Cap Fund
The second type of Equity Mutual Fund is the Large Cap Fund. And in this, your money is invested in those stocks or companies that are India’s top 100 companies on the basis of market capitalization.
That means the fund manager here can invest your money in any of India’s top 100 companies.
Mid Cap Fund
The third type of fund is the Mid Cap Fund. The money in this is invested in mid-cap companies, that is, such companies that according to market capitalization or according to their size, come from 101 to 250.
Small Cap Fund
The fourth fund is the Small Cap Fund. The money in this is invested in those companies which are very small and their size is very small. That means your money in this is invested in other companies other than India’s top 250 companies.
Multi Cap Fund
The fifth type of fund is the Multi Cap Fund. As understood from its name that your money in this is invested in three types of companies:
- Small Cap Companies
- Large Cap Companies
- Mid Cap Companies
So that you get the benefit of all three funds. But here it is a rule that to make any fund a multi-cap fund, the asset management company has to invest 25% of money in all three funds. That means 25% in Small Cap, 25% in Mid Cap, and 25% in Large Cap. So here there is a restriction on fund houses.
Flexi Cap Fund
The sixth type of fund, which is the Flexi Cap Fund, removes this restriction. In this too, the fund manager invests money in three types of companies they are: Mid Cap, Small Cap, and Large Cap Companies.
But here there is no foundation on the fund manager as to how much money he will invest where. So in this way, the fund manager has the freedom that if he feels that any year Mid Cap Companies are going to perform well, then he invests more money in Mid Cap Stocks that year.
And if he sees uncertainty in the market any year, then he can take out all that money and invest it in Large Cap Companies. With which the fund manager can manage your money in his own way.