In personal finance investing in mutual funds is an important step towards reaching your financial goals. The process of how to find which mutual fund is best will take you closer to reaching your goals. Moreover, you will not make any mistakes.

The below highlighted 5 points might appear simple. But if you are someone new to mutual funds you will realize the importance when you come to know the total available different types of mutual funds that is available to a investor.

Steps for finding which mutual fund is best to invest:

1) Find how much time you have for your financial goals

2) choose equity mutual fund if you have 5+ years

3) Hybrid mutual funds are best if you have 2-5 years as investment duration

4) choose debt mutual fund if you have less than 2 years

5) Find funds from Moneycontrol website and compare if it follows baseline

The above 5 points are explained in the podcast audio, Attain financial freedom with power of compounding in mutual funds. Also, read further below in this article to understand the structure and different types of mutual funds.

In India as of July 2021 there are 44 different Mutual fund houses. 

UTI Asset Management company ltd is the oldest mutual fund house in India. 

In India, SEBI had adopted 3 tier structure. SEBI is the regulatory authority with AMFI overseeing Mutual fund regulations among fund houses and distributors. Investors are utmost protected with these regulations. 

1)     Sponsor 

2)     Trustee 

3)     Asset Management company (AMC) 

Sponsors are the company like Aditya Birla capital limited and Sun life (India) AMC Investment Inc based in Canada.

Trustee in this case in Aditya Birla Sunlife trustee private limited 

AMC is Aditya Birla Sunlife AMC limited

Now after the formation of AMC, they appoint custodian, Registrar, Transfer Agent and Auditor.

In general, there are only 2 custodians & RTA in India. Custodians are the one who maintains about the Investors and they act as interface between AMC and Clients or Investors. 

Karvy and CAMS are the 2 RTA in India. CAMS got listed in stock market last year and as of now it is the top company in this unique segment. Hence share prices have went up in this post covid rally.

In this chapter you will see the different types of equity, Debt and Hybrid funds which is available in the market. Most of the mutual fund houses or AMC’s offer mutual fund schemes in all these categories. 

Types of Mutual fund based on fund duration -Open Ended Vs Closed Ended Funds:

Mutual funds can be open ended or closed ended fund. Open ended means, once the NFO or New fund offer is launched, and units got allocated means it will be open for investments. Investors are allowed to invest at any point of time by Lump sum or SIP. Invested amount can be redeemed at any point of time. 

Closed ended funds are the ones where the fund gets closed immediately after the NFO period gets over. Generally minimum amount to be invested in this is 5000. SIP is not allowed in this closed ended fund. No liquidity during this lock in period and it is the disadvantage of this fund. At the end of the tenure, maturity proceeds may be transferred to existing open ended fund after getting the consent from the investors. Another disadvantage is if the invested amount didn’t perform well, then the maturity amount may not be great. 

Types of Mutual funds based on category

Based on funds handling mutual funds can also be categorized into following types.

1) Equity

2) Debt 

3) Hybrid 

Equity Fund:

Equity mutual fund is favored for higher investment returns. They accumulates money and invests in equity or stock market. Even in this Equity mutual funds we have many varieties,

Large Cap mutual fund: They invest only in Large cap Stocks. Top 50 or 100 stocks are classified as Large cap stocks and this category of fund invests in them.

Large & Mid cap mutual fund: Large & Mid cap invests in Large and mid cap stocks alone. The number of stocks available is up to 250 and the fund manager chooses to invest in any of the 30 or 40 or more companies depending on the market condition. 

Mid cap mutual fund: This fund invests only in the mid cap stocks from stock 101 to 250. It tracks Mid cap index and returns are compared with this to see the alpha. 

Small cap mutual fund: Any stocks from 251 is classified as small cap stocks and few among them will be chosen to invest in small cap mutual fund.

Focused mutual fund: Focused fund chooses some focused stocks to invest for long term returns, as the stock size is focused this fund type is called as focused fund.

ELSS mutual fund: Equity Linked Savings Scheme or Tax saver mutual fund is the only fund with lock in period of 3 years and there is no restriction for investing in the stock type. Generally, this fund type tends to do well in most of the fund houses. For the people investing by SIP, every month SIP needs 3 years of lock in period. Ideally you can use this for long term wealth accumulation. 

Multicap mutual fund: Multi cap fund has the mandatory allocation of 25% to large cap, mid cap and small cap fund. Basically, this is diversified across all market capitalizations. 

Flexi cap mutual fund: Flexi cap invests across large cap, mid cap and small cap fund and this too is diversified across all market capitalization. Only difference with Multi cap fund is that this doesn’t have mandatory investments in one particular market capitalization.

Dividend yielding mutual fund: This fund type invests in stocks which has provided consistent dividends over a period of time. 

Contra mutual fund: Going Contrarian can bring in returns and this fund type does that contrarian approach in investing. Depending on the economic cycle they will be able to do investments. 

Value mutual fund: Value stocks tend to do well over a period of time, it is all about buying the stock before it starts to grow which means entering at right price.

Sectoral/Thematic mutual fund: Thematic fund depends on particular theme like manufacturing or service based etc. Sectoral fund invests in particular sectors like Pharma or FMCG or Banking or IT etc. You can see huge returns some year and some years the returns will be pathetic. If you are ready to stay invested for close to 7 years, then this fund may be for you. 

Here is the current riskometer for Equity mutual funds, choose the funds accordingly.

Debt Mutual fund:

There are different types of debt mutual fund which is available in the market. Returns depend on the change in interest rate by RBI and there is no guarantee that you will always get positive returns in Debt mutual funds.

Low Duration Debt Mutual Fund: These funds invest in low duration securities which has time period between 6 to 12 months.

Short Duration Debt Mutual Fund: These funds invest in short duration securities which has time period between 1 to 2 years.

Medium duration Debt Mutual fund: These funds invest in Medium duration securities which has time period between 1 to 3 years. Fund manager can invest in securities with different credit risks. 

Medium to Long Debt Mutual duration fund: These funds invest in Medium to long duration securities which has Macaulay duration between 4 to 7 years.

Long duration Debt Mutual fund : These funds invest in long duration securities which has Macaulay duration of more than 7 years.

Dynamic bond mutual fund: This fund types choose between short term and long term funds depending on the prevailing interest. 

GILT Mutual fund: GILT funds invests only in fixed interest earning securities issued by Central and state governments. 

GILT fund with 10 year constant duration: Generally GILT funds are issued for 10 year or more period. This fund invests in Government securities without actively managing them. They don’t change the funds as the interest rate is moving up or down. 

Corporate bond fund: Corporate bond funds invest more than 80% in bonds of companies with highest credit ratings. 

Credit risk fund: Credit risk fund also invests in corporate bonds but the only difference with corporate bond fund is that this category invests in low rated corporate bond funds so that they generate extra returns. 

Floater fund: This fund invests in debt funds that invest at least 65% of their money in floating rate bonds.

Banking & PSU fund: Generally the risk is low when compared to all other debt funds. As the names suggest they invests in banks & securities of PSU companies.

Fixed Maturity Plans: FMP is special closed ended fund and you can invest only during NFO period and after that it will be closed for predetermined period. 

Interval plans: In this fund type, they allow to purchase or sell a particular security during the pre-decided time period. 

Ultra short duration fund: They invests in very short term securities and generates better than liquid funds and lesser than short duration funds. Hence the volatility of this fund is less.

Liquid fund: These are funds which invests in fixed income securities such as certificates of deposits, treasury bills, commercial papers and other debt securities that mature within 91 days

Money Market fund:  This is a short term debt fund. They offer better returns compared to bank savings account and invest predominantly in cash and cash equivalents. 

Overnight fund: They are formed only in 2018 after the reclassification by SEBI. They invest in overnight asset or securities with a residual maturity of one day. 

It is a huge list of varieties of debt funds that are available.

If you are very conservative investor choose Gilt funds for minimum period of 3-5 years’ timeline. 

Generally, RBI changes interest rates based on Inflation data and prevailing economic conditions. If the interest rate is reduced, then existing funds which are already issued will be in demand as interest rate is higher. It will tend to go higher.

If the interest rate is increased, then existing funds will be favored lesser and hence existing funds will go down. Interest rate and returns are inversely proportional. 

You need to be cautious enough to watch this change in interest rates and shift your allocation to make money in debt funds. Hence if you want to park your funds for up to one year or hold your money as an emergency fund choose Ultra short duration fund. Even can consider parking it in Banking & PSU debt funds for better returns. 

Here is the current riskometer for Debt mutual funds, choose the funds accordingly. 

Hybrid Funds:

In hybrid funds below are the different types available in the market for an investor, 

Aggressive hybrid fund:  They invest a maximum of 65-80% in equity and rest in debt funds. Aim is to maximize the returns and at times equity portion contains Arbitrage as well.

Conservative hybrid fund: They invest a maximum of 75-90% in Debt funds and rest in equity. Aim is to provide better returns than debt funds.

Arbitrage fund: They try to take advantage of price difference between Cash and derivative position of same stock. They provide around 6-7% as maximum returns and as it is considered as equity in nature there is advantage of taxation benefit if withdrawn after a year

Capital Protection fund: It is closed ended hybrid mutual funds with much focus on preserving capital and invest maximum in debt funds. 20% of the fund is invested in equity.

Equity savings fund: They invest in Equity market and does arbitrage also. 65% is invested in equity and remaining is invested in debt fund. 

Dynamic Asset allocation or Balanced Advantage fund: This fund invests between equity and debt based on market condition and hence suitable to invest at any market condition. 

Multi Asset allocation: New category of fund which invests between equity, debt and gold. Those who are looking for asset allocation can look to invest in this type of fund. 

Solution Oriented Funds 

Solution oriented funds helps you to stick to the goal as the name of this fund suggests. The name of this mutual fund will have “children” or “Retirement” sticking to it and hence it is easy for you to continue till that goal is reached. 

Children’s fund : Children’s fund will have a minimum lock in period of 5 years or when the child attains the age of 18. Similar to Child Insurance plan you can invest in this fund for your child education plan and the amount to invest can be decided based on the need when the child turns 18

Retirement Fund: This is need of the hour, considering only 82% of the Indians invest for their retirement as per cafe mutual report. It has minimum lock in period of 5 years or till the retirement age whichever is earlier. 

I believe knowing the different types of mutual fund and timeline available to you as an investor will help you in finding which mutual fund is best to invest.