Intimidated by the complicated world of investing? Mutual funds provide newbies with an easy way to get started. If you want to understand mutual funds better to make informed decisions, this comprehensive guide is for you! Let's get cracking.

What are Mutual Funds?

A mutual fund is a managed investment scheme that pools money from thousands of investors to invest in a variety of market instruments like shares, bonds, etc., based on the fund's stated objective.

Each investor in the mutual funds holds units of the fund depending on how much they invested. The number of units changes with new inflows and redemptions from the fund. A professional fund manager handles all the investments in various assets on behalf of the investors.

Types of Mutual Fund Schemes

Based on portfolio structure and investment objective, mutual funds offer many types of schemes. Here are some key categories:

1. Equity Funds

These funds invest a minimum 65% of their total assets in shares of various companies. They aim for high capital growth over the long term instead of regular returns. Popular sub-types are:

  • Large Cap Funds: Invest predominantly in shares of large blue-chip companies with a steady track record. Lower risk than small caps.
  • Mid/Small Cap Funds: Invest majorly in medium/emerging companies to tap their higher growth potential. Hence, they carry higher risk.
  • Sectoral/Thematic: Invest across companies engaged in specific sectors like IT, Pharma, Commodities, etc. thus concentrating risk to the sectors.

2. Hybrid Funds

Also called balanced funds, they invest in an optimal mix of both equities and fixed-income instruments. This balances pursuing the growth potential of shares while also having the stability of debt and G-sec instruments in the same fund. Based on their equity: debt allocation, main types are:

  • Conservative Hybrid Funds: Invest 75-90% in fixed-income securities 10-25% in equities. For investors with lower risk appetite focused on stable capital protection than maximising returns.
  • Aggressive Hybrid Funds: Invest 65-80% in equities 20-35% in debt. For investors willing to accept higher volatility in pursuit of greater capital appreciation.
  • Dynamic Asset Allocation Funds: Vary the equity: debt allocation dynamically based on pre-defined triggers for market volatility or momentum to optimize returns post-tax. Useful for passive investors.

3. Debt/Income Funds

Invest a minimum 65% assets in fixed-income-producing securities like corporate bonds, government securities, money market instruments etc. Provide regular income payouts for investors with low proportion of capital growth over the medium-long term. Have various sub-categories based on the maturity duration of debt securities invested in. Lower risk than equity exposure in aggressive hybrid and equity funds.