Let us have a look at the different type of mutual funds available in India for you to invest. At a broad level there are three types of mutual funds available in India: Equity funds, Debt funds and Gold Funds. I would not be covering gold funds here as there are enough alternatives provided by equity and debt funds.
Equity mutual funds
As the name suggests, equity mutual funds heavily invest in equities. As per SEBI, if a fund invests at least 65% of its portfolio in equity, it is classified as an equity fund. There are following seven different type of equity mutual funds:
- Index funds
- Large cap funds
- Multi cap funds
- Mid cap funds
- Small cap funds
- Sectoral funds
- Equity Linked Savings Scheme (ELSS) funds
1. Index funds
These funds map the index that they follow. For example, a Nifty 50 fund would mirror the portfolio of Nifty 50 index. That is, it will invest in all the 50 companies that form Nifty 50, in the same weightage that is allocated to these companies in Nifty 50. Ideally, index fund’s return should be same as the return of that particular index.
Following are some of the good index funds: ICICI Prudential Nifty Next 50 Index Fund – Direct (Growth), UTI Nifty Index Fund – Direct (Growth), IDFC Nifty Fund – Direct (Growth).
Index funds are not actively managed since they just mirror the companies that are part of the index and hence have lower expense ratios.
2. Large cap funds
These type of funds invest mainly in blue chip stocks which are typically of very large companies. Think of TCS, Infosys, Reliance Industries, HDFC Ltd etc.
Considering these companies are typically stable and have low volatility in their business, the funds are also less volatile. Of course, the returns can be lower than mid and small cap but returns are stable.
Following are some of the good large cap funds: Axis Bluechip fund – Direct (Growth), ICICI Prudential Bluechip fund – Direct (Growth), Aditya Birla Sunlife Frontline Equity Fund – Direct (Growth).
3. Multi cap funds
These funds invest across large cap, mid cap and small cap stocks. They are relatively less risky than pure mid cap or pure small cap funds, but of course, slightly more risky than pure large cap funds. The returns are usually higher than large cap funds and can at times be higher than mid and small cap as well.
Following are some of the good multi cap funds: Mirae Asset Emerging Bluechip Fund – Direct (Growth), L&T India Value Fund – Direct (Growth), Aditya Birla Sunlife Advantage Fund – Direct (Growth).
4. Mid cap funds
As you may have guessed by now, these funds invest in medium sized companies. The idea is that these companies are somewhat stable and would be on a higher growth path than large cap. However, in India mid cap and small cap companies can be a lot more risky. This is because in mid and small cap space, there is a higher probability of shady activities and irregularities.
Following are some of the good mid cap funds: Franklin India Prima Fund – Direct (Growth), Axis Midcap Fund – Direct (Growth), HDFC Midcap Fund – Direct (Growth).
5. Small cap funds
These funds invest in very small public companies. Some of these companies grow really fast as they have a smaller base. But at the same time, some of these companies do go bankrupt. Hence, the volatility is maximum in this category.
Following are some of the good small cap funds: HDFC Smallcap Fund – Direct (Growth), SBI Smallcap Fund – Direct (Growth), Reliance Smallcap Fund – Direct (Growth)
6. Sectoral funds
These funds are focussed on a particular sector, for example, Technology, Healthcare, FMCG etc. Hence, if you think a particular sector would be booming your should invest in sectoral fund for that sector. I believe that FMCG is the sector that is expected to do well in India in the next 10 years.
Following are some of the good sectoral funds: ICICI Prudential FMCG Fund – Direct (Growth), Mirae Asset Great Consumer Fund – Direct (Growth), SBI Consumption Opportunities Fund – Direct (Growth).
7. Equity Linked Savings Scheme (ELSS) Funds
They are funds that help you in tax saving, as investments made under ELSS funds are covered under section 80C. However, there is a lock in period of 3 years before which you cannot withdraw the funds if you want to claim tax benefit.
Following are some of the good ELSS funds: Axis Long Term Equity Fund – Direct (Growth), Aditya Birla Sun Life Tax Relief ‘96 – Direct (Growth), Invesco India Tax Plan – Direct (Growth).
Those were all the different type of equity mutual funds, let us look at debt mutual funds now.
Debt mutual funds
These funds invest in fixed interest generating securities like government securities, treasury bills, corporate bonds etc. Debt funds are much safer than equity funds and offer stable returns. However, over long term the returns are much lower than equity mutual funds.
Following are different type of debt mutual funds:
- Dynamic bond funds
- Income funds
- Short-Term and Ultra Short-Term Debt Funds
- Liquid funds
- Government bond funds (GILT)
- Floating rate funds
- Fixed Maturity Plan Funds (FMP)
1. Dynamic bond funds
These funds are actively managed by the fund managers. They actively trade instruments having different maturity periods as per the anticipated change in rates. For example, if interest rates are falling, fund manager would increase the holdings in long-term instruments like gilts.
It is good for investors with moderate risk appetite and a horizon of 3-5 years. Following are some of the good dynamic bond funds: Franklin India Dynamic Accrual Fund, Kotak Dynamic Bond Fund, ICICI Prudential All Seasons Bond Fund.
However, recently Dynamic funds have been offering very low returns, because RBI raised interests while funds expected it would lower the rates. So invest with caution.
2. Income funds
Income funds try to generate regular income by investing in high dividend generating stocks, government securities, certificate of deposits etc. It is a good option if you want a steady income at present.
Following are some of the good income funds: SBI Regular Savings Fund, Aditya Birla Sun Life Treasury Optimizer Fund, ICICI Prudential Advisor Series – Dynamic Accrual Plan.
3. Short term and ultra-short term debt funds
These funds invest in instruments that have shorter maturity, which ranges from 1 to 3 years. They avoid interest rate risks, however, they are riskier and offer better returns than most money market instruments.
Following are some good short term and ultra-short term funds: Franklin India Ultra Short Bond Fund, BOI AXA Ultra Short Duration Fund, L&T Floating Rate Fund.
4. Liquid funds
As the name suggests, these funds are highly liquid. They invest in schemes that have maturities up to 90 days like Bank fixed deposits, Treasury Bills, Commercial Paper etc. They typically do not have any exit load. And they are a great replacement for Fixed deposits. If you would need a money in 90-120 days its better that you park it in liquid funds.
Following are some good liquid funds: Aditya Birla Sun Life Liquid Regular Plan, Axis Liquid Institutional, ICICI Prudential Liquid Fund.
5.Government bond funds (GILT)
Gilt funds invest in fixed-interest generating securities of the central and state governments. Government needs money for infrastructure and other expenses, these securities are issues against this loan and you get the interest. There funds are low risk and low returns and typically best for the longer term.
Following are some good GILT funds: ICICI Prudential Gilt Fund, Reliance Gilt Securities Fund, SBI Magnum Gilt Fund.
6.Floating rate Funds
These funds invest in financial instruments paying a variable or floating interest rate. The interest paid changes with the changing interest rate in the debt market.
Following are some good floating rate funds: HDFC Floating Rate Debt Fund, ICICI Pru Floating Interest Fund, Aditya Birla SL Floating Rate Fund.
7. Fixed Maturity Plan (FMPs)
These are close-ended funds. Basically, it means you can invest only during the time of a new fund offer, not continuously. They have a fixed tenure. And investors get to know in advance approximately how much returns they would get by investing at the NFO stage.
Update: FMPs have recently come under trouble. Six fund houses having exposure to the troubled debt papers issued by the Essel Group and IL&FS are now thinking how to handle the crisis. These fund houses may either withhold returns or offer investors an option to roll over their investments.
Hence, be careful while investing in Debt funds as Indian businesses have shown they cannot be trusted with Debt.