Mutual funds have become one of the most preferred investment routes for millennials in India. It is convenient, hassle-free, and flexible. However, to reap the maximum benefits out of the Mutual Funds, it is imperative that you choose the right fund for yourself. There are many mutual funds in the market based on the underlying assets, in which the investments are made. There are various types of mutual funds available in the market. Mutual funds are broadly categorized into equity funds and debt funds. Explained below is an in-depth description of equity funds, debt funds, and the types of funds falling under these categories. You can choose the fund as per your risk appetite and investment horizon.
- Equity funds
Equity funds are the mutual funds, which invest primarily in the equities. These funds are generally meant for the long-term and are fairly exposed to a certain type of market risk. The mutual funds invest in equities across large-cap stocks, small-cap stocks, and mid-cap stocks. The small-cap and mid-cap stocks are riskier to invest into as compared to the large-cap stocks. Large-cap stocks include the shares of the companies, which have large market capitalization. If you have a higher risk appetite and are inclined towards more returns, you can opt for mid-caps and small-caps. However, if you have a limited risk appetite, seek considerable returns, and are aiming at long-term investments, large-caps are the safest bet for you.
Amongst the large-cap stocks, one type of mutual fund that has gained immense popularity is the ’blue chip mutual funds.’ There is no definition of ’blue chip funds’ as such. These mutual funds are given this name to denote that the asset bases consist of the best-performing shares of large-cap companies. These mutual funds have shown consistent performance over a period of five-ten years, have overcome the stock market volatility, and have received good ratings by the independent rating agencies. Sometimes certain blue chip mutual funds also have investments in mid-cap stocks for better returns.
- Debt funds
Debt mutual funds are mutual funds, which invest in fixed income earning securities such as bonds, government securities, and money market instruments. The return-generating potential of the fixed income securities is limited but they are relatively safer and ensure capital protection. If you are slightly risk-averse but want fixed returns on your investments over a period of time, debt funds are the best bet.
Since debt funds include bonds and money market securities, the underlying assets are exposed across maturities. The various types of debt funds include short-term funds, liquid funds, and ultra short-term funds. Here is a look at each of these.
- Short-term debt funds
Short-term debt funds are the right option when the interest rate scenario is unpredictable. These mutual funds are meant for investments ranging from one to three years. However, it is recommended that the investment is continued for more than three years. These have a reasonable risk quotient and deliver relatively stable returns. Short-term debt funds play an important role in your portfolio. Equity funds start delivering returns after a period of three years. Hence, keeping a short-term debt fund in your kitty helps you to balance the risk and maintain stability. Therefore, short-term debt funds with higher returns are a must in your portfolio.
- Liquid funds
Liquid funds are debt mutual funds that invest the money in short-term money market instruments. These instruments include treasury bills, government securities, and call money, which have the least amount of risk. The maturity of the investments is for a period of 91 days. With a maturity period so low, the investments can be redeemed at any point of requirement. These funds are also less volatile in nature. While selecting liquid funds, you should consider factors such as the size of the fund, credit quality of the securities, and the track record of the fund’s performance. Additionally, liquid funds offer better returns than the savings account.
- Ultra short-term fund
Another mutual fund, meant for short-term investing is the ultra short-term fund. This fund invests in securities that have maturities ranging from one week to 18 months. They are slightly higher on the risk quotient and even more volatile. Ultra short-term funds do not levy exit loads and are less exposed to interest rate movements because they have lower ‘average maturity period.’ Therefore, if you have a sudden inflow of cash and want to earn handsome returns in a very short period, these funds are your best bet.