Investing in mutual funds is one of the best ways to create wealth over a period of time. However, mutual funds come in various types and categories that suit different investment needs.
Mutual funds have something for everyone including aggressive investor who may want to earn high returns by taking high risk, moderate risk-taking investors and those who are conservative with minimum risk-taking ability.
While investing one should choose a fund that suits one’s risk-profile and preferably consult a financial adviser to make the right choice. Here are ten different MF categories where investors can invest their money:
Large Cap Funds
These funds comprise of blue-chips companies with large market capitalization. If you do not want to take high risk in mutual funds and also want to invest in equity MF’s, then large cap funds can be the option for you to invest your money. As the schemes are not exposed to high risk and returns under these funds generally range between 12%-15% or at times more if the market conditions are favourable.
Mid- and Small-Cap Funds
The higher the risk you will take, the higher return you will get while investing money in such kind of funds. The schemes under these funds are very risky in nature as these funds invest in small and emerging companies which may provide exceptionally high returns. The companies lie in the range of low market capitalisation. Aggressive investors who are ready to take risk may invest in such kind of funds
These funds are designed in such way that they are not dependent on the market capitalisation of any company because of which the fund manager make the best use of opportunities which they get from the market volatility from time to time. While investing in this fund, the scope of diversification gets widen.
New investors who are afraid of risking their money into equity markets can consider these fund. Fund managers of these funds try to spread investments them into various sectors which help them in reducing the market risk. Actively managing these funds also reduces heavy losses if market conditions weaken. These are categorised under equity-oriented funds. Moderate or conservative investors can invest their money in such type of fund.
The fund is made with a mix of equity and debt including bonds and money market instruments. These are also termed as hybrid funds having a relatively fixed mix of stocks and bonds mainly in 50:50 ratio. The equity-ratio may also change to 65:35 or 80:20. This reflects that fund is made up of either a moderate, aggressive, conservative or higher fixed-income of component orientation. These funds are made for those investors who are not confident about investing in risky funds. Moderate investors can go for this fund while making any investments.
Debt funds have exposure to money market instruments and pure debt instruments. Among debt funds, liquid funds have the minimum risks associated. The funds usually give returns ranging from 7-9%, depending on the asset mix, duration and the risk involved in them. With respect to low-risk to high-risk debt funds are categorised from the liquid fund, ultra short-term debt funds, short-term debt funds, corporate bond funds, guilt funds to MIP’s respectively.
These funds invest in securities which have a maturity of up to 91 days. These funds are least risky. Investors who want to invest lump sum amount should invest in these schemes and then go for an STP (Systematic Transfer Plan) in equity schemes to earn more interest. As assets invested under such category are not held for a longer duration. The fund also not have a lock-in period. Therefore, they can be easily redeemed any time. However, one should also know that returns are not guaranteed as the performance of these funds depend on how the market will perform in near future.
Asset Allocation Funds
Unlike balanced funds, these funds have the composition of three asset classes mainly equity, debt and cash equivalents which deal in a wide variety of securities. Investors who do not have time to do proper asset allocation of their funds from time to time may choose these asset allocation schemes for making investments as these funds in itself gives a diversification to your invested amount into its various asset classes.
These funds invest in stocks of a specific sector. For example, funds may comprise of either banking sector or telecom sector, technology sector and so on. An investor who is bullish on a sector and wants to take advantage from it can invest in these funds. However, these funds are risky in nature.
These funds provide a wider scope of diversification while making investments. These funds are risky in nature where the selection of companies is done from different sectors on the basis of a common theme. The most common example is infra fund which may comprise of sectors like oil and gas, steel, metal, and mining etc.