Mutual funds offer the benefits of diversified risks while requiring a minimum base capital to start investing.
A mutual fund is an investment vehicle that pools funds from investors and invests in equities, bonds, government securities, gold, and other assets. Mutual funds are managed by sound financial professionals known as fund managers, who have the expertise in analysing and managing investments. The funds collected from investors in mutual funds are invested by the fund managers in different financial assets such as stocks, bonds, and other assets, as defined by the fund’s investment objective. Where and when to invest are some of the things taken care of by the fund managers, amongst many other responsibilities. n India, the capital markets regulator SEBI (Securities and Exchange Board of India) has encouraged the mutual fund industry by creating a system that works for the benefit of all stakeholders, including investors and mutual fund sponsors. Regulations are passed from time to time which improves functioning and help attract investments and generate growth.
There are different types of mutual funds in India depending on their structure, nature of investment, tax benefits, category of the scheme and investor goals etc.
Equity Funds
Equity funds primarily invest in the shares of different companies. The gains and losses associated with these funds depend solely on how the invested shares perform (price-hikes or price-drops) in the stock market. Equity funds have the potential to generate significant returns over a period. Hence, the risk associated with these funds also tends to be comparatively higher.
Large cap funds
They must invest at least 80% of the assets in large cap stocks or top 100 companies by market capitalisation.
Mid cap funds
Mid cap funds are mandated to invest at least 65% of their assets in mid cap stocks. These stocks are ranked between 101 and 250 in terms of their market capitalisations.
Large & mid cap funds
These types of funds must have at least 35% of their assets in large cap stocks and 35% in mid cap stocks.
Small cap funds
Small cap funds have a mandate to invest at least 65% of their assets in small cap stocks. Small cap stocks are ranked below 251 in terms of their market capitalisation.
Flexi cap funds
Flexi cap funds invest across large cap, mid cap and small cap stocks. These types of funds must have a minimum of 65% of total assets in equity and equity-related instruments.
Multi cap funds
These funds are mandated to invest 25% each in large cap, mid cap, and small cap stocks. They should invest 75% of their corpus in stocks.
Dividend yield funds
These funds must invest at least 65% of their assets in dividend-yielding stocks.
Value funds
These schemes have a mandate to invest at least 65% of their assets in stocks, following a value investment strategy.
Contra funds
Contra funds must invest at least 65% of their assets in stocks based on a contrarian investment strategy.
Focused funds
Focused funds must invest in a portfolio of a maximum of 30 stocks.
Sectoral/thematic funds
These types of funds have to invest at least 80% of their assets in a dedicated sector or theme.
ELSS or tax saving funds
Equity Linked Saving Schemes or tax saving mutual funds qualify for tax deductions of up to Rs 1.5 lakh under Section 80C. ELSS funds must invest at least 80% of total assets in stocks. These funds have a mandatory lock-in period of three years.