Mutual Fund Types - Nature

Based on NATURE mutual fund are of 3 types

1. Equity fund
2. Debt funds
3. Balanced funds



1. Equity fund:
These funds invest a maximum part of their total corpus into equities. The nature of the fund and the fund manager’s outlook on different stocks can vary different for different funds . The Equity Funds are sub-classified depending upon their investment objective, as follows:

1.1 Diversified Equity Funds
1.2 Mid-Cap Funds
1.3 Tax Savings Funds (ELSS)
1.4  Sector Specific Funds

Equity investments are meant for a longer time horizon [> 3 years], thus Equity funds rank high on the risk-return matrix. For longer time horizon the risk becomes negligible and hence equities are the best means for capital appreciation in the long term.

2. Debt funds:
The objective of these Funds is to invest in debt papers. Government authorities, private companies, banks and financial institutions are some of the major issuers of debt papers. By investing in debt instruments, these funds ensure low risk and provide stable income to the investors. Debt funds are further classified as:

2.1 Gilt Funds:
They invest in securities like Government of India debt papers. These funds can be considered as zero default risk but are associated with Interest Rate risk. When the bank interest rate increases these funds may not perform well.

2.2 Liquid Funds:
Also known as Money Market Schemes, These funds provides easy liquidity and preservation of capital. These schemes invest in short-term instruments like Treasury Bills, inter-bank call money market, CPs and CDs. These funds are meant for short-term cash management of corporate houses and are meant for an investment horizon of 1day to 3 months. These schemes rank low on risk-return matrix and are considered to be the safest amongst all categories of mutual funds.

2.3 Income Funds:
Invest a major portion into various debt instruments such as bonds, corporate debentures and Government securities.

2.4 MIPs:
 Invests maximum of their total corpus in debt instruments while they take minimum exposure in equities. It gets benefit of both equity and debt market. These scheme ranks slightly high on the risk-return matrix when compared with other debt schemes.

2.5 Short Term Plans (STPs):
Meant for investment horizon for three to six months. These funds primarily invest in short term papers like Certificate of Deposits (CDs) and Commercial Papers (CPs). Some portion of the corpus is also invested in corporate debentures.

3. Balanced funds:
As the name indicates, its a mix of equity and debt funds. They invest in both fixed income securities and equities, which matches with the pre-defined investment objective of the scheme. There aim is to provide investors with the best of both the worlds. Here debt part provides stability and equity part provides growth in the returns.