Skip to content

Categorization of Mutual Fund Schemes

Categorization-of-Mutual
  1. Hybrid Funds
  2. Equity Funds
  3. Debts funds
  4. Corporate bonds funds
  5. Fixed maturity funds
  6. others

Hybrid funds

In order to achieve a balance of income and growth, hybrid mutual funds invest in a combination of equity and debt securities. The fund’s risk and return are determined by the proportion of equity and debt investments specified in scheme documents, which investors can verify. Regular income from debt securities and long-term capital appreciation from equity investments provide stability for the fund.

  • Aggressive hybrid fund
    These funds invest between 65 and 80 percent of their total assets in equity instruments, with the remainder in debt securities. The aggressive fund seeks to generate consistent income while also building long-term wealth. When selecting stocks for the portfolio, the fund manager can choose between a value and a growth strategy.
  • Conservative Hybrid fund
    Conservative funds are mutual funds that invest in both debt and equity securities. Investors with a low-risk tolerance invest in conservative mutual funds. The portfolio invests between 70 and 90 percent of its assets in debt and 10 to 25 percent in equity. The debt investments in the fund generate income, while the equity portion of the fund provides capital appreciation at a lower risk. These funds typically invest in large-cap stocks as well as high-quality debt securities.
  • Arbitrage fund
    Arbitrage is the practice of purchasing cheaper security in one market and selling it at a higher price in another market. The arbitrage fund makes money by leveraging the difference in the prices of securities in the cash and derivative markets. These funds buy stocks in the cash market and sell an equal number of shares in the futures market. In volatile markets, these funds perform well. Because arbitrage opportunities are fleeting and rare, the returns can be unpredictable.
  • Balance fund
    The investments of a balanced fund include both equity and debt securities. These funds are ideal for investors looking for modest capital growth with low risk. As a hybrid fund, it enables the fund manager to make portfolio adjustments based on market conditions and trends. The asset allocation is subject to market fluctuations once the funds are invested. When markets are overvalued, most money is invested in debt securities; when markets are undervalued, most money is invested in equity securities.
  • Dynamic asset allocation funds
    Dynamic asset allocation funds are actively managed strategies that allow fund managers to invest in a mix of debt and equity and adjust based on the stock market’s macro trend and current economic conditions. These funds do not attempt to outperform pure equity strategies. Investors prefer dynamic funds for their consistent returns and asset diversification. Because actively managed funds involve a dedicated professional team in research, they are more expensive to run than passively managed funds.
  • Multi Asset allocation
    Multi Asset Allocation Fund creates a portfolio of assets by combining asset classes. These funds typically invest in equity, debt, gold, and other commodities. The fund benefits from diversification because of the minimum investment criteria. The fund manager’s allocation of funds in multi asset allocation is determined by the economy. In a bullish market, the fund manager can increase the portfolio’s exposure to equity-related instruments while decreasing exposure in a bearish market. Diversification produces risk-adjusted returns and reduces weather volatility.
  • Capital protection fund
    Capital protection funds make investments in fixed income and equity. These are closed-ended hybrid mutual fund schemes with a strong emphasis on debt in order to protect capital. Typically, the allocation of equity and debt is based on the bond yield and the scheme’s term. A substantial portion is invested in high-rated debt securities to earn guaranteed returns, with the remainder invested in equity to earn extra returns. The debt component of the fund is managed in such a way that the returns increase to match the amount of initial capital invested. Capital protection funds typically invest approximately 80%, in highly secure debt instruments such as AAA-rated bonds. The remaining 20% is invested in much riskier investments such as equity. As a result of the fund’s design, regardless of how the equity market performs during economic downturns, the principal amount is protected.

Equity funds

Equity mutual funds are those funds that make investment in the stock market. Equity mutual funds must invest at least 65 percent of their total assets in equity and equity-related securities. These funds have the potential, and the overall goal of such funds is to generate long-term capital appreciation, but they can be volatile in the short term for investors.

  • Large cap
    Choosing an investment vehicle has always been a difficult task; distinguishing risk, returns, time horizon, and liquidity, among other factors, requires considerable effort. A large-cap equity fund is one of many different types of equity funds. Large-cap funds invest in companies that are market leaders. They are the market’s most liquid stocks, with large volumes traded every day, and they provide portfolio stability. This type of investment is appropriate for risk-averse investors seeking consistent returns, long-term capital appreciation, and high liquidity.
  • Mid cap
    The market capitalization of mid-cap companies ranges from Rs 500 to Rs 10,000 Cr. They are ranked 101 to 250 in terms of market capitalization. In the long run, not all mid-cap stocks grow to become large-cap stocks; some even go bankrupt along the way. Mid-cap stocks require a seven to ten-year investment horizon, but they may underperform in the medium term. As a result, they are risky stocks that have the potential to outperform the market over time.
  • Small cap
    Small-cap funds invest in all companies with a market capitalization of less less than 500 cr and companies ranked less than 250th on the stock market. Investing in small-cap funds carries the highest risk and requires a longer investment time horizon than investing in large and medium-cap funds, but small-cap stocks can act as a portfolio cushion and provide high value. Small-cap funds can suffer significant capital erosion when the market begins to fall. (DONE)
  • Multi cap funds
    Multi-cap funds have diverse portfolios because they invest in large, medium, and small businesses. The offer document specifies the fund’s proportion and investment objective. A time horizon of five years is ideal for investing in these types of funds. Because they have small and medium cap stocks in their portfolio, they can also provide losses.
  • Dividend yield
    Investors looking for consistent income should consider investing in a dividend yield fund, which is made up of stocks of companies that pay out regular dividends. The primary goal of dividend yield mutual funds is to invest in stocks that pay out regular dividends to investors rather than to select stocks for capital appreciation. These funds typically invest 75-80 percent of their capital in companies that pay high dividends. As stated in the offer document, the investment objective and portfolio risk may differ.
  • Sector
    Sector-specific mutual funds invest in the specific sector of the economy, such as communication, healthcare, information technology, infrastructure, etc. Because fund performance is highly correlated with sector performance, the timing of investment is critical, particularly if the sector is cyclical. These funds can only diversify among companies within sectors, making them vulnerable to cyclical economic trends and potentially risky.
  • Contra
    Contra funds are funds that bet against market trends by purchasing underperforming stocks at low prices, with the expectation that short-term mispricing will result in better long-term performance and opportunities for investors to generate healthy returns. These funds are highly risky, but they also have the potential for high returns if the fund manager plays his cards correctly. The level of patience and time horizon required to invest and then yield a return is higher in these types of funds.
  • Value
    Value funds are appropriate for investors who are familiar with concept of the following factors.

    Trends in macroeconomics

    Stock’s fundamental characteristics
     Maintain a long-term investment horizon.
     Patience in accepting minor losses in the short term.
    The strategy is based on the idea of purchasing undervalued securities trading at a discount to their intrinsic value and holding them for an extended period of time. The stock may be trading at a discount due to a market trend, misconceptions, investor mispricing, or other factors.
  • Thematic funds
    Thematic funds are well-diversified funds that invest in companies among sectors that fall under a provided theme. They put at least 80% of their money into stocks with a specific theme. An infrastructure theme fund, for example, will invest in stocks of companies related to a specific theme, such as cement, power, steel, and so on.
  • Sector-specific fund
    Sector-specific mutual funds invest in a specific sector of the economy, such as banking, pharmaceuticals, information technology, and infrastructure. Because fund performance is highly correlated with sector performance, timing of investment is critical, especially if the sector is cyclical. These funds can only diversify among companies within sectors, making them vulnerable to cyclical economic trends and potentially risky.

Debt Funds

Bonds and other debt securities are the primary investments of debt mutual funds. Debt mutual funds are also known as income funds. These funds invest in short-term and long-term securities issued by public financial companies and governments, such as high dividend-paying stocks, government securities, and corporate bonds, certificate of deposits, money market instruments, and debentures. These funds provide regular and consistent income while also preserving capital. Income funds are appropriate for investors seeking consistent and predictable income. These funds can be classified based on the maturity of their securities and their management strategies. They are, however, subject to credit risk

  • Low duration
    Low duration funds are open-ended debt funds that invest in short-term debt securities with a macaulay duration of 6 months to 12 months. Low duration funds have a moderate level of interest rate risk because they typically do not hold securities with maturities greater than 12 – 18 months.
  • Dynamic bond fund
    Dynamic funds are open-ended debt mutual funds that invest over different duration. These funds are appropriate for a 3-5 year investment horizon. These funds are able to invest for a variety of time periods. One of the primary objectives is to provide best possible returns in both falling and rising interest rate scenarios. These funds change the duration of the fund based on market conditions. The role of the fund manager is critical because the fund’s performance is entirely dependent on the portfolio manager of the fund house

    Features
    • Role of fund manager
      The fund manager’s judgment and point of view are critical to the fund’s performance. The ability to predict changes in interest rates regime makes the role of fund managers extremely important
    • There is no debt-fund mandate
      The managers of dynamic funds are not bound by any investment mandate. They can even invest in long-term securities for a month. They can invest in any fixed income security based on the movement of interest rates
    • Risk of error
      The primary risk that investors in such funds face is the fund manager’s error of judgement. Managing duration can result in good profits, but a blunder can result in losses.Interest rate
      Bond prices are inversely related to interest rates. In other words, as interest rates rise, the value of the bond falls, and vice versa. Furthermore, if interest rates continue to fall, bond prices will rise due to the remaining maturities.
  • Gilt fund
    Debt funds come in many varieties and with varying risks, but the gilt fund has the lowest risk. Gilt funds only invest in fixed-income securities with medium to long-term maturities issued by state and central governments. The performance of gilt funds is heavily influenced by interest rate movements. When a falling interest rate regime is about to begin, it is the best time to buy gilt funds. Gilt funds are appropriate for investors with a low risk tolerance who want to invest in government securities
  • Liquid funds
    Liquid funds are a class of debt fund that invests in securities with remaining maturities of up to 91 days. Liquid funds’ assets are allocated to certificates of deposit, treasury bills, commercial papers, and so on. The risk levels of liquid funds are low. Because they primarily invest in high-quality fixed-income securities that mature soon, liquid funds are regarded as the least risky of all debt fund classes. This means that the net asset value (NAV) of liquid funds is more stable than that of other types of debt funds. As a result, these funds are appropriate for risk-averse investors
  • Credit risk funds
    Credit risk funds invest in fixed income securities with ratings of AA or lower. They invest roughly 65 percent of the funds in bonds with ratings lower than AA. Because of the borrower’s lower credit rating, the interest rate must be higher to compensate investors for taking on more risk. These schemes typically provide higher long-term returns to investors, with an investment horizon of 3-5 years. Aside from good returns, there is a good chance that the rating will be downgraded rather than upgraded. As a result, high-risk investors should consider investing in a credit risk fund
  • Ultra short funds
    These funds make investments in fixed-income instruments with maturities of up to six months. These funds provide more liquidity than any other type of long-term investment fund. The investment horizon for these ultra-short-term funds typically ranges from a week to about 18 months. Because of the short maturity of their underlying assets, these funds are somewhat immune to interest rate risk
  • Overnight fund
    Overnight funds are open-ended mutual fund schemes considered to be the safest of all mutual funds. They are debt schemes that invest in debt securities such as reverse repo, collateralized Borrowing and Lending Obligation (CBLO), and other debt assets that mature the next day. Overnight funds make money by receiving interest on debt they hold. Overnight funds are ideal for entrepreneurs and business owners who want to temporarily park large sums of money before directing them to a specific project. These funds have a low entry cost and a variable holding period
  • Money market fund
    Money Market Funds are short-term debt funds that lend to businesses for up to a year. These Funds are structured in such a way that the fund manager can generate higher returns while keeping risk under control by adjusting lending duration. Longer loan terms usually result in higher returns. Money market participants typically include banks and other financial institutions, institutional investors, corporations, and so on. Overnight securities such as Tri-Party Repos, Commercial Papers (CPs), Certificates of Deposit (CDs), and Treasury Bills are examples of money market instruments

    Characteristics of money market mutual funds
    • Highly Liquid
      The flexibility with which an asset can be converted into cash equivalents reflects its liquidity. Money market funds are highly liquid investments that invest in short-term securities. As a result, they are ideal for short-term objectives.
    • Short maturity
      If you wish to make extra money while keeping your assets liquid, you can invest in money market funds. To diversify your investment portfolio, allocate a small portion of it to money market instruments.
    • Low risk
      Because these funds invest in short-term instruments, the interest rate risk is low. Furthermore, money market instruments are typically backed by high credit ratings, lowering credit risk.

Corporate bond fund

Corporate bond funds are funds that lend at least 80% of their money to AA+ and above credit rated corporate bonds or non- convertible debentures. AA+ and higher ratings are only given to companies that are financially strong and have a high likelihood of repaying lenders on time. Corporate bonds are an excellent choice for investors seeking a fixed but higher income from a safe option. They carry a low risk but are not completely safe. When interest rates rise above expectations, long-term debt funds often become riskier

Advantages of corporate Bond funds
  • Ideal for investors who don’t need funds for 2-3 years
  • Funds in this category typically outperform bank fixed deposits of comparable duration
  • If an investor continues the investment for three or more years, it will result in tax-efficient returns due to indexation benefits
  • Corporate bond funds, sometimes, do take small exposures to government securities when no other suitable opportunities in the credit space are available

Fixed maturity funds (FMPs)

Fixed maturity funds are closed-ended funds that eliminate interest rate risk by locking in yield by investing in securities matching the maturity profile of the FMP tenor. Since the fund is close-ended, the investor commits money for a fixed time and cannot redeem their investments.

Other schemes

  • Index funds
    Index funds are funds that are designed to replicate the performance of a specific market index. The securities in the fund, as well as their weight age, are identical to those in the underlying index. Index funds are funds that mimic the performance of a market index. The securities and weight age of the securities in the fund are identical to those in the underlying index. Because the fund is passively managed, the fund manager must make changes on a regular basis to keep the fund in line with the targeted index. The portfolio manager is not required to rebalance the portfolio in response to market conditions

    There are two approaches to investing in index funds
    • Active investing
      Active investing is when a fund manager selects which stock to buy and which stock to sell the fund manager aims to beat the benchmark.
    • Passive investing
      In passive management, the goal of the fund manager is to simply match the returns generated by the benchmark and is not interested in beating the benchmark
  • Fund of Funds (FOF)
    These are funds that invest in units of the same mutual fund or different mutual funds. The risk in this fund is well-diversified as they invest across many mutual funds containing thousands of securities of different sectors. The objective of investing in schemes is defined in the offer document of the mutual fund. FOF has a higher expense ratio and results in the possibility of portfolio duplication.
  • Gold exchange-traded funds
    The Government of India introduced sovereign gold bonds as a Debt Fund in 2015 under Gold Monetization Scheme, as an alternative to purchasing physical gold. The scheme works by having investors pay the issue price in cash and then redeeming the bonds in cash at maturity. Upon maturity, investors are guaranteed the market value of gold as well as periodic interest. The SGB eliminates the risk of storing gold in physical form. The minimum initial investment is one gram of gold, and the maximum per investor is four kilograms of gold.
  • International funds
    An investor can invest in international securities/portfolios through international funds. These funds offer the investor benefits such as diversification, investments in products that may not be available in the domestic market, and selection of companies that are best in their class. There are numerous challenges to investing in international funds like tax policies, limited investment areas due to restriction in target country, forex movement that could result in losses, and so on.
  • Emerging market index
    Emerging market funds invest primarily in assets from developing markets. These funds invest in debt or equity to provide investors with a well-diversified fund portfolio. The top four emerging markets are Brazil, Russia, India, and China. These funds take advantage of high-return opportunities while also being riskier. Emerging market funds offer a range of risk-adjusted options and are generally appealing investments for growth investors.
  • Global fund
    A Global Mutual Fund is a mutual fund that invests primarily in companies located throughout the world as well as in its home country. Because two countries’ economic cycles and fundamentals cannot be the same, these funds can help you make huge profits.
    We often use international and global interchangeably but are global funds, the same as international funds?
    NO!An international fund is one that invests solely in international markets rather than in the fund’s home market. In contrast, a global fund invests in both domestic and international markets.

    Features of global funds
    • Diversification
      Global funds offer diversification to investor’s portfolio. These funds invest in securities listed around the world
    • Currency factor
      Currency plays an important role in performance and returns of portfolio if an investor in investing in international markets. The fluctuations in either currency can         increase or decrease fund’s total returns
    • Inflation hedge
      Global funds are good way to provide inflation hedge

No comment yet, add your voice below!


Add a Comment

Your email address will not be published.

Related Posts

Indexation-Inflation-Capital-gain
Indexation Because all income in India is taxed, you risk losing a significant portion of...
Mutual-funds-Glossary
SIP A systematic Investment Plan, also known as a SIP, allows you to invest a...
ETF-fund
An ETF is a stock basket created by pooling small-denomination investments from various investors that...