Common Types of Mutual Funds Where Most Investors invest their Money

Do you know which are the mutual fund categories that garner the highest AUM as of now?

Here are the top 3 categories from each bucket of equity, debt and hybrid mutual funds:

  • Largecap Funds – Rs 5.32 lakh crore
  • Flexicap Funds – Rs 3.02 lakh crore
  • Tax Saving ELSS funds – Rs 1.32 lakh crore
  • Liquid Funds – Rs 3.97 lakh crore
  • Overnight Funds – Rs 1.35 lakh crore
  • Corporate Debt Funds – Rs 1.15 lakh crore
  • Dynamic Asset Allocation Funds – Rs 1.96 lakh crore
  • Aggressive Hybrid Funds – Rs 1.52 lakh crore
  • Arbitrage Funds – Rs 1.10 lakh crore

So if you were to ask about which are the most common funds, then you can have a look at the AUM data above and see which categories are most popular. Whether each of these is suitable for you or not is a different matter altogether.

Anyways, let’s discuss a few of these briefly for the layman

Equity Mutual Fund Schemes – Equity mutual funds invest in the stock of a group of publicly traded companies. Equity funds come in a variety of types. Some of these are large-cap oriented while others are focused on the mid and small-cap stock. Then there are few which have the flexibility to invest across them all. These equity funds enable investors to participate in the markets via stock exchanges and benefit from potentially high, inflation-beating returns that equity as an asset class offers. Despite being classified as high risk, these schemes have a high return potential in the long run and also more potential volatility in value. They are suitable for those investors who want to build a portfolio that will provide them with superior long-term returns. An equity fund, also known as a diversified equity fund, typically invests across multiple sectors to spread risk. A few of the popular equity fund categories are large-cap funds, flexicap funds, midcap funds, large&midcap funds, etc.

Sector Specific Funds – As is evident by its name, a sector fund is an equity mutual fund scheme that invests most of its portfolio in stocks of one particular sector. There are different types of sector funds. Like FMCG funds, Pharma funds, Technology funds, Natural resource funds, energy funds, healthcare funds, precious metals funds, financial services funds, banking funds, etc. These sector and thematic funds have their own separate category in the mutual fund categories. No doubt, sectoral funds can provide attractive returns. But for that, you have to get your investment timing right. And you also need to time your exits from such sectoral bets carefully. Remember, good days for a sector will not last forever. They cannot because every sector and industry follows its own unique business cycle. So if you invest in a sector fund that invests in stocks of an industry that is just about to do very well, then you can earn superior, market-beating returns. But eventually, the law of averages will catch up and when the industry turns a corner and faces headwinds, it can lead to significant losses to sectoral funds as well.

Index Funds – Index Funds invest in all securities that form part of the market index i.e.  S&P BSE Sensex or Nifty Fifty and their aim is to replicate the returns of the underlying index as closely as possible. Therefore, these funds help provide investors with broad exposure to the markets. An index mutual fund employs the same strategy as the index upon which it is based. There is no fund manager discretion and hence, you get market returns. Neither more than that nor less than that.

Tax Saving ELSS Funds – Almost every mutual fund investor’s journey starts with these tax-saving ELSS funds. These funds provide tax-saving benefits to investors. They invest in stocks (primarily large-cap stocks and comparatively lesser allocation to mid and small-cap stocks) and are also called Equity Linked Saving Schemes (ELSS). These schemes have a 3-year lock-in period. Investments in the scheme are tax-deductible under Section 80C of the Income-Tax Act of 1961. Though people often compare PPF vs ELSS funds, it is not right to do so as both caters to different asset classes. But if you look at the long-term returns, the average returns (with volatility) of ELSS funds in the long term are much more than PPF returns.

Liquid or Money market funds – These funds invest in short-term debt instruments to provide investors with a reasonable return over a short period of time. These funds are appropriate for investors with a low-risk tolerance who want to park their excess funds in the short term. These are alternatives to saving money in a bank account.

Fixed income or debt mutual funds: Most of the money in these funds is invested in debt-fixed income, i.e., fixed coupon-bearing instruments such as government securities, bonds, debentures, and so on. They have a low-risk-low-return feature and are suitable for investors looking to generate uniform income. They are, however, exposed to credit risk. Read more about all the Indian debt funds in detail here.

Balanced Advantage Funds: These investments, also known as asset allocation funds, are a mix of equity and debt funds with a predetermined investment ratio, such as 60% stocks and 40% bonds. The allocation may change in response to market risks. The most well-known type of these funds is target-date funds, which automatically reallocate the proportion of investments from equities to bonds as you approach retirement. They are mostly suitable for investors looking for a combination of moderate returns and low risk. In recent years, this category has grown a lot compared to other fund categories.

That’s about the most common fund categories.

There are now almost 40 fund categories. And to be honest, most investors can easily ignore most of them. Just a few schemes from a few suitable fund categories are enough for most investors’ investment requirements.

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