Mutual fund is a financial instrument, which are constituted as a ‘trust’ in India. It accumulates the savings of a number of investors and may invest the money in different financial instruments like stocks, bonds, Government Securities, gold etc. or a combination of these.
Mutual funds are professionally managed and each investor is entitled to profits as well as losses as they are the owners of mutual fund schemes. Each investor owns units of the fund, representing a portion of holdings of the MF scheme. Profits or income generated and the profits made, as a result of the investment is shared with the scheme unit holders in proportion to the number of units owned by them.
There are different types of mutual fund schemes depending on their structure, investment objectives, tax benefits etc. and based on that, they can broadly classified in 5 different categories –
Equity Schemes
Debt Schemes
Hybrid Schemes
Solution Oriented Schemes
Other Schemes
Also, all the above broad category of mutual funds, there will be different mutual fund investment plans. Example – Regular and Direct plans. While regular mutual fund schemes can be bought through mutual fund distributors, the direct plan scheme can be bought directly from the fund houses or through the registered investment advisors (RIA). Within the regular and direct plans, the investor can choose growth option or dividend option and under the dividend option, investor can also opt for dividend payout or dividend reinvestment plan.
Let us now see what are these 5 broad category of mutual funds?
Equity mutual Funds: Equity mutual fund schemes align underlying investments in equity and equity related securities. Under the equity funds category, there are various kinds of funds, like large cap, midcap, small cap, large & midcap, value, flexi-cap, multi-cap, dividend yield, ELSS, sector and thematic funds etc.
Debt Funds: Debt mutual funds invest in debt market securities which includes, money market instruments, commercial papers, certificates of deposits (CDs), treasury bills and also in government securities and non-convertible debentures etc.
Debt funds are further sub-categorized depending on the nature of their investment and their respective maturity periods. For example - Liquid funds, overnight funds, ultra short term funds, short duration funds, medium term fund and long term funds, etc. Debt funds can provide you investment solution from 1 day to many years.
Hybrid mutual funds: These mutual fund schemes invest in both, equities as well as debt instruments. The percentage allocation to equity and debt varies depending on whether they are equity oriented hybrid funds or debt oriented hybrid mutual funds.
Solution oriented funds: Solution oriented mutual fund investment plans are of two types - Retirement funds and Children’s Funds. These mutual funds are open ended plans with minimum 5 years of lock-in period or till retirement age whichever is earlier (in case of Retirement Funds) and / or till the child attains age of majority whichever is earlier (in case of Children’s Fund)
Other schemes: These funds consists of fund categories like - Index funds, ETFs, Fund-of-Funds, etc.
We discussed what mutual funds are and the different types of mutual fund schemes. Please note each mutual fund scheme has different risk profile and investment objectives. You should choose a mutual fund investment plan based on your investment objective, investment time period and your risk taking ability.