Mutual Funds: Meaning, Types, Categories and Alternatives

Mutual funds are investment options, through which an investor can put their money in equity, debt or hybrid instruments. There are different funds which are created by Asset management companies for various risks. Each fund is managed by a fund manager.

Hence, these investment options are more secure than direct stocks.

This article will discuss every essential detail about a mutual fund that you should know, including its definition, types, risk exposure, and return potential.

Understanding Mutual Funds

In simple terms, a mutual fund is an investment option offered by fund houses where they pick top-performing stocks, bonds, etc of various sectors and bring them under one portfolio.

It is a combination of securities where the fund manager decides the amount of exposure to equity or debt, depending on the category of fund. 

Fund managers build a diversified portfolio to offer reasonable returns at lower risk than the stock market. Since fund managers create and manage the portfolio, they charge a fee in the name of an expense ratio where buying, selling, or holding various securities is within their power.  

Also Read: A Complete Guide on Mutual Fund Investment

Types and Categories of Mutual Funds

Mutual funds are allocated to asset classes differently, and their exposure to equity also varies with each mutual fund.

For example, a small-cap mutual fund is heavily exposed to equity and will not have traces of debt. However, a hybrid mutual fund will have traces or debt and equity.

SEBI has broadly classified mutual funds into:

• Equity schemes;
• Debt schemes;
• Hybrid schemes.

However, under these broad categories of mutual funds, there are sub-types of, which are explained below:

Also Read: Equity Mutual Funds: Definition, Types, Benefits, Returns & Taxation Policy

Equity Schemes

As explained earlier, mutual funds invest in a variety of securities. However, the proportion of investment into such securities differs.

Hence, those mutual funds that invest at least 65% of their total assets into equity shares of companies are called equity mutual funds.

Under equity schemes, there are further sub-categories of mutual funds, as explained below:

• Large-Cap Funds: Mutual funds that invest in shares of companies with the largest market capitalization, typically ranked 1st to 100th by SEBI, are called large-cap funds.
• Mid-Cap Funds: Mutual funds that invest in companies with medium market capitalization, typically ranked 101st to 250th by SEBI, are called the Mid-cap funds.
• Small-Cap Funds: Mutual funds that invest in companies with the smallest market capitalisation, typically ranked after 250th by SEBI, are called small-cap funds.
• Multi-Cap Funds: These mutual funds invest in all market capitalisation companies (basically, large, mid and small cap), to attain maximum returns with reduced risks.
• Sector Funds: These mutual funds invest in a particular sector such as financial or healthcare and are called thematic funds.
• Index Funds: Index funds are created considering the companies in a particular market index where the index and the index fund return will be similar. These funds basically mimic the market.Such funds invest in the same companies as that of the market index.
• ELSS Funds: These funds invest majorly in equity shares and are eligible to avail INR 150,000 tax deduction from total income, under section 80C of the Income Tax Act, 1964.

Also Read: Best ELSS Funds to Invest in 2022 in India

Debt Schemes

In contrast to equity schemes, debt schemes invest majorly in debt instruments and other safe securities such as corporate bonds, government bonds, etc.

At least 65% of the total investment is allocated to debt and fixed-income instruments.

• Liquid Funds: These mutual funds invest in liquid instruments that mature within 91 days. Liquid funds offer higher returns than a savings bank account and fixed deposit.
• Dynamic Bond Funds: These mutual funds invest in short-term and long-term bonds and their fund managers generate higher returns by modifying the portfolio based on interest rate fluctuations.
• Short-term Debt Funds: These mutual funds invest in debt funds that mature in a short duration, typically one to three years.
• Fixed Maturity Plan Funds: Such mutual funds invest in fixed-income debt funds, such as government bonds.
• Gilt Funds: Such mutual funds invest in high-rated government securities that offer stable returns with low risk.
• Credit Opportunity Funds: Such mutual funds invest in low-rated securities, potentially good return providers.

Read More: Dynamic Bond Funds: Definition, Benefits, Risk and Things to Consider

Hybrid Schemes

Hybrid schemes invest in equity and debt funds to balance the risk. The motto of hybrid schemes is to invest in equity to attain returns, however, balance it out with debt. There

• Monthly Income Funds: Such mutual funds invest in debt funds majorly and less than 20% in equity funds to offer regular returns monthly, quarterly, or yearly.
• Conservative Hybrid Funds: Such mutual funds invest at least 65% in fixed-income instruments, and the balance amount is invested in equity funds.
• Aggressive Hybrid Funds: Such mutual funds invest at least 65% in shares of various companies and the balance in fixed-income instruments.
• Arbitrage FundsSuch mutual funds offer better returns by buying the securities from one market and selling them at a higher price in another market.

Read More: Conservative Hybrid Funds: How They Work & How to Invest?

Returns Generated by the Top Mutual Funds

Equity Schemes

Read More: Thematic Funds: Meaning, How They Work & How to Invest

Debt Scheme

Also Read: Debt Funds: Best Debt Mutual Funds to Invest in 2023

Hybrid Scheme

How Can You Balance Your Portfolio?

As you have already gauged, although mutual funds can be lucrative options, they are still risky. Where equity funds are volatile, debt funds do not give you as much returns.

But where do you balance your portfolio?

Wint Wealth’s assets give you a chance to invest in bonds and earn returns of 9-11% per annum.

These assets are instruments that can provide significant balance to your portfolio.

Also Read: History of the Mutual Funds Industry in India

The Bottom Line

Although mutual funds are safer than stock market investments, their equity involvement makes it risky in the end.

While mutual funds are considered a lucrative investment choice, you must always look to balance your portfolio. Market Linked Debentures offered by Wint Wealth could be a prudent choice for those seeking decent returns as well as investing in an asset which is not as risky as equity mutual funds. 

Happy Winting!