Why Mutual Fund Category Matters More Than the Fund Itself

A mutual fund is an investment vehicle that collects money from investors to purchase a broad range of assets like stocks, bonds, and other financial instruments. The different types of mutual fund categories are based on the blend of assets and risk appetite. It is necessary to understand the different types of mutual funds to help you decide where and when to invest. For this article, we will cover the broad topic of mutual fund categories with a brief explanation of what funds within each category typically look like and their common risks and rewards.

• Mutual funds are classified according to their investment objectives, asset allocation, and risk levels.
• Equity funds are funds with high growth potential, high-risk
• Debt funds can remain flat but with less returns as compared to equity funds.
• Hybrid funds provide a balanced risk-return ratio by investing in both equity and debt.
• Index funds and international funds are geographically diversified investments suitable for International funds.

Based on their objective of investment, asset allocation, and risk levels, mutual funds are broadly classified into various categories. Let us take an in-depth view of what the various types of mutual fund categories are:

Equity funds

Equity funds invest in stocks and shares of companies. These funds work towards long-term capital appreciation and are suitable for investors with a high-risk appetite. The equity funds are divided into:

• Large-cap funds: Large-cap funds invest in those companies which have a high market capitalisation. These are the funds that offer returns that are moderately stable.
• Mid-cap funds: Mid-cap funds refer to mutual funds that primarily invest in companies with a medium market capitalisation and thus, higher growth potential, but also more volatility.
• Small-cap funds: Investing in small companies, can fetch high returns but also has a lot of risk.
• Sector/thematic funds: Invest in specific sectors such as technology or healthcare.
• ELSS (Equity Linked Savings Scheme): Apart from section 80C tax benefits, ELSS funds rank high on risk-return scales.

Debt funds

Debt funds are the funds that invest their money in fixed-income instruments like government securities, bonds, and debentures. They tend to be less volatile than equity funds unless they focus on a narrow industry, which makes them appropriate for risk-averse investors. The majority of the debt funds are in the following categories:

• Liquid funds: Appropriate for keeping surplus funds and catering to emergencies as these invest in short-term instruments like treasury bills.
• Corporate bond funds: Invest in high-rated corporate bonds that provide a stable return with small risk.
• Gilt funds: Invest in government securities so it is one of the low-risk funds but returns can be expected to be comparatively lower.
• Dynamic bond funds: Changes the maturity of investments depending upon market circumstances.

Hybrid funds

Hybrid funds, also known as balanced funds, invest in both equity and debt instruments. The mix of assets aims to balance risk and return. Types of hybrid funds include:

• Aggressive hybrid funds: Invest mainly in equities (65-80%) while the balance is invested in debt.
• Conservative hybrid funds: Predominantly invest in debt (75-90%) and smaller equities.
• Balanced hybrid funds: They invest 50% in equity and the rest 50% in Debt.
• Multi-asset funds: As the name suggests, these funds invest in three or more asset classes which could be equity, debt, and commodities

Index funds

These funds track a specific market index like Nifty 50 or Sensex. The objective is to copy the performance of the index. These funds typically lower expense ratios and are primarily for the passive investor.

International funds

International funds invest in global markets outside India. They are a great way to diversify globally and come in the following categories:

• Country-specific funds: Invest in specific countries like the US, and China.
• Regional funds: Invest in particular regions like Asia or Europe only.
• Global funds: Globally invest in multiple countries.

Solution-oriented funds

These funds are designed to achieve particular financial objectives such as saving for retirement or the education of your children. There is a lock-in and you should only invest in it with a long-term saving perspective.

An extensive list of mutual fund categories provides an array of options supporting diverse risk appetites and investment objectives. If you are searching for growth, income, or a combination, uncovering these classes will help you find the perfect investment strategy. Bajaj Finance mutual fund platform hosts a plethora of funds suitable to meet diverse financial goals for those who wish to invest in mutual funds effectively. You can choose from various mutual fund schemes and resources that make investing in mutual funds easy and hassle-free.