Mutual Funds Types Based on Asset Class

Mutual Funds Types Based on Asset Class: Asset class relates to grouping investments based on common or similar characteristics. They may also be subject to similar laws and regulations. Hence, the classification of Mutual Funds based on its asset class is as follows:

Multi-Cap Fund

Multi-Cap Fund is an open-ended equity scheme that invests in large-cap, mid-cap, and small-cap company shares. A multi-cap fund allocates a minimum of 65% of the total assets for equity & equity-related instruments. Multi-cap funds are the most diversified equity funds. Hence, you have a lower risk than individual large, mid, or small-cap-focused funds. You benefit from stability from large-cap and returns from mid and small-cap stocks. Multi-cap funds are suitable for creating long-term wealth. These are of great value to create a multipurpose corpus. Popular Fund

Large Cap Fund

Large-cap mutual funds are an open-ended equity scheme with a majority investment in the stocks of large-cap companies. Large-cap mutual funds allocate a minimum of 80% of the pool for investment in equity & equity-related instruments of large-cap companies. These mutual funds invest in stable companies with a long track record of robust financial performance with established operations. They can have the lowest volatility among equity mutual funds because large-cap companies’ stock prices fluctuate less and these companies have years of business experience.

Large & Mid Cap Fund

Large & mid-cap fund is a mutual fund scheme that brings the benefits of investing in both large-cap and mid-cap companies. Minimum 35% of the total assets of the large and mid-cap fund consists of equity & equity related instruments of large-cap companies. Another 35% of the assets are made up of equity & equity-related instruments of mid-cap companies. Large and mid-cap funds capture the stability offered by the large-cap stocks and the growth opportunities of a mid-cap fund. Popular Fund

Mid Cap Fund

Mid-cap mutual fund schemes are an open-ended equity mutual fund that predominantly invests in shares of mid-cap companies. Mid-cap mutual funds have a minimum investment of 65% of the total assets in equities & equity-related instruments of the mid-cap companies. The mid-cap companies are in a growing phase and have expansion plans. Hence, the mid-cap mutual funds are more aggressive than large-cap mutual funds. The mid-cap mutual funds offer higher returns but also carry a higher amount of risk due to investment in mid-cap companies.

You may also read: Types of Mutual Funds Based on Structure

Small Cap Fund

A small-cap fund is an open-ended equity scheme that invests a major portion in small-cap stocks. The fund invests a minimum of 65% of the total assets of the small-cap mutual fund in equity & equity-related instruments of small-cap companies. Small-cap companies are future companies with very high growth potential. They have the highest risk but also have the potential to generate the highest returns.

Value Fund

Value funds are an open-ended equity scheme that follows a value investment strategy. The portfolio of value funds is constructed on the principles of value investment strategy. The minimum investment in equity & equity-related instruments is 65% of the total assets. You benefit from value funds by the long-term wealth creation opportunities.

Contra Fund

Contra funds are an open-ended equity scheme that follows a contrarian investment strategy. The strategy involves buying and selling in contra (opposite) to the present market sentiments. Contra fund schemes follow a contrarian investment strategy. The fund has a minimum of 65% of total assets invested in equity & equity-related instruments. The contra fund helps investors benefit from the contrarian theory by capitalizing on the changing market conditions.

Sectoral Fund

A Sectoral fund is an open-ended equity scheme investing in a particular sector like the pharma, auto, or IT sector. Thematic funds are open-ended equity schemes following a particular theme across different sectors. For example export & services fund, business cycle fund, infrastructure fund. Sectoral funds invest a minimum of 80% of total assets in equities & equity-related instruments of a particular sector. A thematic fund invests a minimum of 80% of total assets in equities & equity-related instruments of a particular theme. The sector and thematic funds have high risks of cycles changing or themes dying. Hence, they are high-risk and high return investments.

Equity Linked Savings Scheme (ELSS)

Equity Linked Savings Scheme (ELSS) is an open-ended equity-linked savings scheme with a statutory lock-in of 3 years. These funds invest a minimum of 80% of total assets in equity & equity-related instruments following the Equity Linked Saving Scheme, 2005 notified by the Ministry of Finance. ELSS investments allow tax deductions of up to Rs. 1.5 Lakhs under the Income Tax Act, 1961. Compared to other tax-saving options ELSS has the lowest lock-in period of three years. ELSS funds have a lock-in period that helps in the reinvestment of returns and ultimately ends up generating higher returns. Thus, ELSS serves the dual purpose of tax saving/ planning and generating higher returns from equity investment. Apart from that, you benefit from diversification, professional fund management, and low-cost investment through SIP when you invest in an ELSS fund.

Mutual Funds Types
Mutual Funds Types

Debt Mutual Funds

Debt Mutual Funds park your money in fixed-income securities such as treasury bills, bonds, and securities. The debt instruments include Fixed Maturity Plans (FMP), Short Term Plan, Liquid Funds, Monthly Income Plans, Gilt Funds, Long Term Bonds, and more. All fixed-income securities offer a fixed rate of interest and have a maturity date.
These investments are safe as they possess low risk. However, the returns are rarely inflation-beating. Further, in the case of debt funds, TDS (tax deducted at source) is not deducted, so those earning more than Rs. 10,000 on their investment should pay the tax on their own.
Let’s discuss all the different types of funds in detail.

Overnight Fund

An overnight mutual fund is an open-ended debt scheme that invests in overnight securities. The overnight securities have a residual maturity of a single day. Examples of overnight securities are T-Bills, call money, and certificates of deposits having a single-day maturity. The overnight fund invests in overnight securities having a maturity of 1 day. They are highly liquid and offer a highly safe investment avenue. Overnight funds help investors park their funds for a few days. They have returns higher than the savings rate offered by many banks.

Liquid Fund

Liquid funds are open-ended debt mutual funds that invest in highly liquid securities. The securities are usually money market instruments like T-Bills, call money, collateral borrowings (CBLO), certificates of deposit (CD’s), and commercial papers (CPs). A liquid mutual fund invests in debt and money market securities with maturity of up to 91 days only. They are highly liquid and offer a highly safe investment avenue. A liquid mutual fund helps you park excess money for a few weeks up to 3 months. Liquid funds are ideal for creating an emergency fund for various life events like temporary financial crises from job loss and medical emergencies. You can also use liquid funds to manage your monthly expenses and for making provisions. The best part is that your money is accessible in a day or two of the redemption requests. Thus, the liquid fund helps you earn a higher return than the savings account rate.

Ultra Short Duration Fund

Ultra short-duration funds are an open-ended scheme that invests in debt instruments with Macaulay duration lying between 3 months and 6 months. In layman terms, Macaulay’s duration is the time an investor would take to get back all his invested money in the bond by way of periodic interest as well as principal repayments. The Macaulay duration for a portfolio is calculated as the weighted average time period over which the cash flows on its bond holdings are received. Ultra-short duration funds too are highly liquid and offer a relatively stable investment avenue. Investors benefit from a longer duration fund that generates a slightly higher income and reinvestment opportunity. Using ultra-short-duration mutual fund you can create a corpus for purchasing a dream bike or retire an existing short-term loan.

Money Market Fund

Money Market Fund is an open mutual fund scheme that invests majorly into money market instruments like T-bills, CPs, and CDs. These funds invest in money market instruments having a maturity of up to 1 year. They are highly liquid and offer a highly safe investment avenue. Money market funds are best for a risk-averse investor that combines a better yield and safe investments.

Medium Duration Fund

Medium duration fund is an open-ended scheme that invests in debt securities that have a Macaulay duration between 3 years and 4 years. These funds offer a relatively stable investment avenue with good returns. The fund provides capital protection and higher yields. The fund consists of debt & money market instruments like Government securities, T-bills, CDs and CPs. Medium duration funds are helpful in creating a corpus of funds for conservative investors who want to build capital without taking a risk like aggressive equity investors

Long Duration Fund

Long duration mutual fund is an open-ended scheme that invests primarily in debt instruments with Macaulay duration greater than 7 years. These long duration funds are best in a falling interest rate scenarios. Because the interest rate is inversely proportional to bond prices. Generally, the long duration funds have the highest yield among all the duration funds. They also carry the highest interest rate risk among the duration funds. The fund invests in corporate bonds, Govt. securities, T-bills, CDs and CPs such that the Macaulay duration of the portfolio is greater than 7 years

Dynamic Bond Fund

A dynamic bond fund is an open-ended dynamic debt scheme that invests in debt instruments across the duration. The fund offers flexibility to manage duration in different market scenarios. In a sense, they increase maturity in falling interest rate scenarios so that you can enjoy higher interest income. Likewise, they decrease the maturity in a rising interest rate scenario. Hence, you do not need to manage the fund actively.

Corporate Bond Fund

Corporate bond funds are an open-ended scheme that invests predominantly in the highest-rated corporate bonds. The fund investments are in AAA-rated bonds from established large companies. The fund invests a minimum 80% of the total assets in the highest-rated (AAA) corporate bonds. The instruments include bonds, debentures, commercial papers, and structured obligations.

Credit Risk Fund

Credit risk fund is an open-ended debt scheme that invests in below highest-rated corporate bonds, i.e in AA or A-rated debt papers of companies. The fund invests a minimum of 65% of the total assets in debentures, commercial papers, and bonds of companies having below the highest-rated instruments.

Banking and PSU Fund

Banking and PSU fund is an open-ended mutual fund scheme predominantly investing in the debt instruments of banks, Public Sector Undertakings (PSUs), and Public Financial Institutions. The fund invests a minimum of 80% of the total assets of the fund in debt instruments like Tier I and Tier II bonds of banks and PSUs.

Money Market Mutual Funds

The money market mutual funds invest in liquid assets. Owing to a high degree of liquidity, they are also known as the cash market or capital market. Government or financial institutions such as banks or corporations form the backbone of money market mutual funds through securities such as bonds, dated securities, and certificates of deposits, T-bills, etc. Normally, it is ideal for those who wish to park their excess money for the short term.

Balanced Advantages / Hybrid Funds

Also known as hybrid funds, balanced mutual funds in India are a mix of assets, such as bonds and stocks. The ratio of fixed income to equity could be fixed or variable. Normally, these funds invest in equities and debt in the 40:60 proportion, with either of the two outweighing the other. Accordingly, the risk and returns associated with this mutual fund balance each other out. Due to their characteristics, balanced mutual funds can be thought of as an intermediary of debt and equity funds.

Conservative Hybrid Fund

Conservative Hybrid funds must invest at least 10% to 25% in equity & equity-related instruments and 75% to 90% in Debt instruments.

Balanced Hybrid Fund

Balanced Hybrid Funds must invest at least 40% to 60% in equity & equity-related instruments and 40% to 60% in Debt instruments.

Aggressive Hybrid Fund

Aggressive hybrid funds must invest 65% to 80% in equity & equity related instruments, and 20% to 35% in Debt instruments.

Dynamic Asset Allocation or Balanced Advantage Fund

Balanced Advantage funds must invest in equity/ debt that is managed dynamically (0% to 100% in equity & equity-related instruments; and 0% to 100% in Debt instruments).

Multi-Asset Allocation Fund

Multi-asset funds must invest in at least 3 asset classes with a minimum allocation of at least 10% in each asset class.

Arbitrage Fund

Arbitrage funds are funds that follow the arbitrage strategy and invest a minimum of 65% in equity & equity-related instruments.

Equity Savings

Equity savings funds invest a minimum of 65% in equity and equity-related instruments and a minimum of 10% in debt instruments and in derivatives

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