All types of 'funds' decoded

  • Posted By :
  • Wednesday May 09, 2018

When we decide to invest, we try to analyse and understand the various investment options keeping the following expectations in mind.

  • Low costs (Initiation fee, Entry/Exit load, Fund expenses)
  • Investment Flexibility
  • Liquidity
  • Ease of portfolio management
  • Diversification
  • Tax convivial
  • Transparency and no hidden costs
  • Strict directive

As an investor, your objectives revolve around the following three parameters:

  • Capital conservation
  • Capital growth
  • Regular income out of savings

There are various types of mutual funds that you can choose from, based on your objectives. Let’s look at a few types of funds based on the risk levels involved.

What are Liquid Funds?

These are associated with low risk levels and provide returns higher than from a traditional banks savings account. The average maturity period is of 91 days and the minimum holding period is of two weeks. They come with no exit load (expense given at the time of withdrawing invested capital along with returns). Capital gains are taxable under normal income tax slab if withdrawn before three years. For over three years gains are taxable at 20% with indexation benefit.

What are Ultra-Short-Term Funds?

These funds invest in accountable and reputed bonds/stocks reducing the risk levels when compared to other . They cater to short term investment goals with returns that are typically higher than liquid funds yet not as high as debt or equity. They have a minimum holding period of three months with a longer maturity period.

What is Money Market?

These are financial instruments which provide extreme stability and liquidity of investments. They are famously termed as cash reserves and cater to short term investment objectives with low risks. They invest in treasury bills, short-term bank CDs, corporate commercial papers, etc. The maturity period for these funds should ideally be less than 90 days.

What are Income/Debt Funds?

These cater to midterm investment goal nevertheless can also be kept for a longer duration and are associated with low to medium level risks. These funds invest in corporate and government securities and bonds in a particular ratio. Corporate bonds accompany certain levels of risks making them moderate-risk-moderate-return instruments. These are highly liquid and should be held for over three years for tax benefits.

What are Gilt Funds?

These funds invest solely in government securities and bonds which makes them least risky in terms of Income and Debt Funds. Nonetheless they are impacted by market volatility and can witness considerable risk levels in a short term. These are ideal for midterm investment objectives.

What are Balanced Funds?

Balanced Funds are vehicles that bestow an investor with benefits of equity and debt. An investment can be made in a predefined ratio (60% Equity and 40% Debt) to avail substantial returns than debt alone. The asset which increases in value is sold. For instance, if stock value increases, the fund manager will sell it to buy more bonds, thereby maintain the 60-40 ratio. These are associated with moderate risk levels. 

What is Equity MF?

These are Long Term investment instruments which have the highest risk tolerance. They can be further classified into:

  • Sectoral/Thematic Funds 

    Investments are made across sectors like IT, pharma, manufacturing, etc.

  • Large Cap 

    Least risky owing to investments in stocks with highest level turnover

  • Mid Cap 

    Higher risk levels than large-cap and lower than small-cap, these are growing businesses with moderate level turnover

  • Small Cap 

    Highly risky since these stocks are with the least level of turnover and cannot be predicted

  • Multi Cap 

    Invest chunks in each cap thereby diversifying the portfolio

What are ETF/Index Funds?

These funds track a particular asset class or index (gold, equity, international indices, and debt) and trade like a normal stock on an exchange. These funds are best suited for investors who cannot master trading abilities and need a safe approach. These replicate performances of their associated indices and provide inflation-adjusted returns.

In Conclusion:

With you can choose any of the available Mutual Fund options depending on your risk-bearing levels to make a smart investment portfolio of your choice to have a sound financial vision.

All types of 'funds' decoded

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