Mutual Funds

Mutual Funds are an investment tool for investors to invest in equity and bond markets without participating directly. Mutual Funds are professionally managed investment schemes authorized by SEBI (The Securities and Exchange Board of India). In a mutual fund, investors pool their resources to earn returns on the capital over a period of time while the fund is managed by a fund manager.

There are different types of mutual funds in India depending on their structure, nature of investment, category of the scheme and tax benefits, etc.

Types of Mutual Funds

• Open ended Funds: These funds can be bought and sold any time after the launch of the new fund offer. Some open ended funds like ELSS or Equity Linked Savings Schemes come with a lock-in period of 3 years, after which only the units of these schemes can be redeemed.


• Close ended Fund: Close ended funds can be bought only during the new fund offer and not after that. Once the NFI is over, investors cannot invest in these funds. Close ended Funds have fixed investment period that means each closed ended fund will have a maturity date after which the fund is redeemed automatically and redemption proceeds are paid to the investors.

Mutual Fund classification

Based on the underlying investments in open and closed ended funds, mutual funds are broadly classified in 5 different groups -

• a) Equity Schemes
• b) Debt Schemes
• c) Hybrid Schemes
• d) Solution Oriented Schemes
• e) Other Schemes

Equity mutual Funds

Equity mutual funds align underlying investments in equity and equity related securities. Equity funds can further be categorized into large cap funds, mid cap fund, small cap funds, multi-cap funds, focused funds etc.

In order to ensure uniformity in respect of the investment universe for equity schemes, the following are defined as large, mid and small cap stocks in which the equity mutual fund schemes can invest depending upon the scheme mandate or category/ type -

Large cap - 1st - 100th company in terms of full market capitalization, Mid cap - 101st - 250th company in terms of full market capitalization and Small Cap 251st company onward in terms of full market capitalization.

Some equity mutual funds align their investments in particular sectors e.g. banking, FMCG, pharma, technology, infrastructure, automobile or entertainment and so on. Such mutual funds are known as sector or thematic funds.

Debt Funds

Debt funds have money market and / or debt market securities as their underlying investments. Money market securities include commercial papers, certificates of deposits (CDs), treasury bills etc. Debt market securities include government bonds, PSU bonds, non-convertible debentures etc.

Debt funds can be further categorized into sub-categories depending on the nature of the investment and their respective maturity period. For example - Liquid funds invest in money market securities which have a maturity period of upto 91 days. Ultra-short duration funds invest in money market securities which has a maturity range of 90 days to 180 days. Short term debt funds invest in debt and money market securities which has a maximum duration of 1 to 3 years.

Hybrid Funds

These schemes invest in both, equities as well as debt instruments. The percentage allocation to equity and debt varies depending on whether they are equity oriented hybrid funds also known as Aggressive Hybrid Funds or debt oriented hybrid funds also known as Conservative Hybrid Funds. Equity oriented funds have at least 65% exposure to equities and balance to debt securities; whereas debt oriented hybrid funds have at least 75% exposure to debt instruments.

Solution Oriented Funds

These funds have two categories of schemes - Retirement fund and Children's Fund. These are open ended schemes with minimum lock-in period of 5 years or till retirement age whichever is earlier (in case of Retirement Funds) and / or till the child attains age of majority whichever is earlier (in case of Children's Fund)

Other Funds

These funds have two categories of schemes - Index funds/ETFs which invest 95% in securities of a particular index and Fund-of-Funds (FoFs) which invest minimum 95% of total assets in underlying funds. There are two types of FoFs - domestic and Overseas.

Benefits of investing in mutual funds

• 1. Diversification of risk: One of the biggest benefit is risk diversification. Mutual funds help investors diversify unsystematic risks by investing in a diversified portfolio of stocks across different sectors and market capitalization. Therefore, risk is much lower in mutual funds compared to investing directly in stocks.


• 2. Smaller capital requirement: Since mutual funds work on the basis of pooling of money, mutual fund investors can have the beneficial ownership of a diversified portfolio of stocks with a much smaller investment. Investors can buy units of a diversified equity mutual fund scheme with an investment as low as Rs 5,000/- and in case of ELSS funds it is as low as Rs 500.


• 3. Investment expertise: Mutual funds are managed by professional fund managers who have the desired qualification, expertise and experience in picking the right stocks or other instruments to get the best risk adjusted returns for the investors.


• 4. Economies of scale in costs: Since mutual funds buy and sell securities in large volumes transaction costs on a per unit basis is much lower than what investors may incur if they buy or sell shares through stock brokers.


• 5. Wide array of products: Mutual funds offer investors a variety of products to suit their risk profiles and investment objectives. Apart from equity funds, there are hybrid funds, debt funds, liquid funds, sector/ thematic funds and tax savings schemes etc. to suit different investment requirements from 1 day to many years.


• 6. Multiple investment options: Mutual funds also offer investors flexibility in terms of modes of investment and withdrawal. Investors can opt for investment modes like lump sum or one time investment, systematic investment plans or SIPs, systematic transfer plans or STPs and systematic withdrawal plans or SWP.


• 7. Disciplined investing: Mutual funds also offer investors flexibility in terms of modes of investment and withdrawal. Investors can opt for investment modes like lump sum or one time investment, systematic investment plans or SIPs, systematic transfer plans or STPs and systematic withdrawal plans or SWP.