Many of us know about mutual funds as investors, through TV commercials, or from someone who has invested in them. However, some find it difficult to navigate due to the different types of funds available in the market.
Simply put, a mutual fund is filled with money from a large number of investors. This fund is managed by a professional fund manager. The money is invested in stocks, bonds, money market instruments and/or other securities.
India has seen a rise in retail investors in mutual funds in recent years. Many novice investors have jumped into the sea of funds to find the right one for them. However, due to the availability of multiple options, they often get confused to understand the difference between mutual funds.
According to market regulator SEBI, mutual funds are classified into five broad categories, namely;
1. Share Plans
2. Debt Settlements
3. Hybrid Schemes
4. Solution-oriented arrangements – for pension and children
5. Other Schemes – Index Funds & ETFs and Funds of Funds
1. Share Plans
SEBI has defined large, mid and small cap stocks in the Equity Schemes category.
The Association of Mutual Funds in India has also produced clear definitions of each SEBI classified mutual fund scheme.
Read also: SIP or lump sum? Factors to consider before investing
An equity fund primarily invests in equities and equity-related instruments. It aims for long-term growth, but can be volatile in the short term.
This is suitable for investors with a higher risk appetite and a longer investment horizon.
2. Debt Settlements
A debt fund (also known as an income fund) is a fund that invests primarily in bonds or other debt securities. Debt funds invest in short-term and long-term securities issued by governments, public financial institutions, and corporations. For example, treasury bills, government bonds, debentures, commercial paper, certificates of deposit and others.
Debt plans invest in various fixed income instruments such as short term plans, long term bonds, monthly income plans, fixed term plans (FMPs), Gilt Funds and Liquid Funds, among others.
3. Hybrid Schemes
Hybrid Scheme funds (Balanced Funds) are a mix of bonds and equities, bridging the gap between equity funds and debt funds. SEBI has classified hybrid funds into 7 sub-categories as follows: Conservative Hybrid Fund, Balanced Hybrid Fund, Aggressive Hybrid Fund, Dynamic Asset Allocation or Balanced Advantage Fund, Multi Asset Allocation Fund, Arbitrage Fund and Equity Savings.
These funds invest in a mix of equity and debt securities. They seek a ‘balance’ between growth and income by investing in both equities and debt.
4. Solution-oriented arrangements – for pension and children
5. Other Schemes – Index Funds, ETFs and Funds of Funds
a) Index Funds- This creates a portfolio that mirrors a market index.
– The securities in the portfolio and their weight are the same as those in the index
– The fund manager does not rebalance the portfolio based on its view of the market or sector
– Index funds are passively managed, which means that the fund manager makes only minor, periodic adjustments to keep the fund in line with its index. Therefore, an index fund offers the same return and risk as the index it tracks.
– The costs that an index fund may charge are capped at 1.5%
b) Exchange Traded Funds (ETFs) – It is a tradable security that tracks an index, a commodity, bonds or a basket of assets such as an index fund.
- ETFs are listed on the stock exchange.
- Unlike regular mutual funds, an ETF trades like a common stock on an exchange. The traded price of an ETF changes throughout the day just like any other stock, as it is bought and sold on the exchange.
- ETF units are required to be kept in Demat mode
- ETFs are passively managed, meaning the fund manager makes only small, periodic adjustments to keep the fund in line with its index
- Because an ETF tracks an index without trying to outperform, it incurs lower administrative costs than actively managed portfolios.
- Instead of investing in an “active” fund managed by a fund manager, buying units of an ETF is leveraging the power of the market itself.
c) Fund of Funds (FoF) – Investment funds that invest in the units of other schemes of the same mutual fund or other mutual funds.
- The schemes selected for investment will be based on the investment objective of the FoF
- The FoF has two cost levels: that of the scheme whose units the FoF invests and the cost of the FoF itself.
Investors should note that there are subcategories of the above funds based on utility and investment demand. Importantly, mutual fund arrangements are not guaranteed or insured return products and past performance is no guarantee of future performance of a mutual fund arrangement.
As AMFI has stated that is a mutual fund arrangement Not a Deposit product and is not an obligation of, or guaranteed or insured by, the mutual fund or its asset management company. Therefore, investors are advised to read all related documents carefully before investing.
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