A mutual fund is an investment scheme managed by professionals, pooling money from numerous investors to invest in various securities such as stocks, bonds, money market instruments, and other assets. The collection of all these holdings forms the mutual fund’s portfolio.
Mutual funds are managed by financial professionals known as fund managers, who have expertise in analysing and managing investments. Determining where and when to invest the funds is among the responsibilities handled by the fund managers, along with other duties. All mutual funds are registered with Sebi and operate within strict regulatory provisions created to protect the interests of investors.
The two most prevalent types of mutual funds are Equity mutual funds and Debt mutual funds. Let us understand the difference between equity and debt funds:
Equity mutual funds
Equity mutual funds invest in stocks, bonds, and securities, providing opportunities in listed and unlisted companies. Depending on stock market indices and external factors, they offer higher returns than debt funds. Suited for long-term investors, these funds typically focus on large, mid and smallcap companies, carrying associated market risks. A fund qualifies as an Equity mutual fund if over 60 per cent of its assets are in equity shares, offering flexibility for the manager to optimise returns through growth or value-oriented strategies.
Equity funds come in various categories with differing risk and return profiles.
Largecap equity funds invest primarily in the top 100 companies of India that are stable and offer sustained returns with lower risk
Midcap equity funds invest in the mid-sized companies of India, generally with market capitalisation between Rs 5,000 crore and Rs 20,000 crore, thereby balancing risk and growth potential
Smallcap equity funds must invest at least 65 per cent of their assets in stocks of smallcap companies, offering high growth but increased volatility
Multicap funds can diversify their investments across market caps and sectors, reducing the overall risk
Thematic funds are designed to concentrate on specific sectors, providing the potential for higher returns but with elevated sector-specific risks
Debt mutual funds
Debt mutual funds primarily invest in government and corporate debt instruments, giving investors stable and fixed returns. Despite often incurring higher expenses due to diversification and risk management, they appeal to investors who have lower risk tolerance. Suitable for short-term and medium-term investment goals, these funds offer alternatives to traditional savings accounts and fixed deposits, catering to diverse financial objectives and liquidity requirements.
Debt funds also offer various categories based on the instruments and tenures they invest in.
Liquid & Money Market funds focus on highly liquid, short-term instruments for optimal returns and liquidity
Income funds invest in debt instruments with varying maturities
Short-term funds focus on shorter-duration debts
Floating Rate funds aim to minimise volatility by investing in instruments with floating interest rates
Gilt funds invest in government securities, carrying low risks of default
Interval funds combine features of open-ended and closed-ended schemes, allowing redemptions only at specified intervals
Multiple Yield funds are hybrid debt-oriented funds investing in debt and dividend-yielding equities
Dynamic Bond funds actively manage portfolios based on interest rate views, providing flexibility in duration management
Investing in mutual funds presents numerous advantages for investors. Foremost among them is giving small investors access to professionally managed, diversified portfolios that include equities, bonds, and other securities. Such diversification would typically be challenging to achieve with a small amount of capital.
First Published: Mar 12 2024 | 7:45 PM IST
