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What are the different investment options for mutual funds?

Mutual funds offer a wide range of options to invest across various asset classes, market capitalization, sectors, themes and investment styles to suit the diverse needs of investors. Based on underlying assets, main investment options in mutual funds are:

Equity funds

Equity or stock funds invest primarily in shares of companies across market capitalization – large, mid and small-cap. They aim to generate high returns by capital appreciation in stock prices but involve higher volatility.

  • Large-cap funds invest at least 80% of their assets in large-cap stocks with a market capitalization of over Rs 20,000 crore. They offer stability but lower growth potential and are suitable for conservative investors.
  • Mid-cap funds invest predominantly in mid-cap shares with a market capitalization of Rs 5,000-20,000 crore. They carry moderate risk and offer higher growth potential than large-caps.
  • Small-cap funds invest over 65% in small-cap stocks with a market capitalization of under Rs 5,000 crore. They are the riskiest type of equity fund but can offer high returns in a bull market. They are suitable for aggressive investors.
  • Multi-cap funds invest across large, mid, and small-cap stocks, offering the best of both stability and growth.
  • Focused funds concentrate their portfolio in up to 30 stocks. They offer higher risk but the potential of high returns.
  • Value funds invest in undervalued stocks that are trading below their intrinsic value.
  • Dividend yield funds invest in companies that offer high dividend yields. They have lower volatility than other equity funds.
  • Sector funds invest only in specific sectors, such as banking, pharma, infrastructure, etc. They are suitable for experienced investors.
  • Thematic funds invest in companies that are aligned with specific investment themes, such as the rural economy, consumption, environment, etc.

Debt funds

Debt mutual funds invest in fixed income instruments like corporate bonds, government securities, money market instruments etc. They offer steady returns with low to moderate volatility.

  • Liquid funds invest in cash, T-bills, and term deposits. They are ideal for parking emergency funds as they offer high liquidity.
  • Ultra-short-term funds invest in instruments with maturities of less than one year. They offer higher returns than liquid funds, but also slightly higher risk.
  • Low duration funds invest in debt assets with maturities of one to three years. They offer moderately high returns with low to moderate volatility.
  • Money market funds invest in T-bills, certificates of deposit, and commercial paper with maturities of up to one year.
  • Short duration funds invest in debt assets with maturities of one to three years. They offer higher return potential than liquid and ultrashort funds.
  • Medium duration funds invest in debt assets with average maturities of three to four years. They offer higher returns than short duration funds, but also higher volatility.
  • Medium to long duration funds invest across the entire yield curve with average maturities of over four years. They are exposed to higher interest rate risks.
  • Dynamic bond funds vary their portfolio maturity according to interest rate outlook. They involve active fund management.
  • Corporate bond funds invest predominantly in the highest rated corporate bonds. They offer moderate to high returns with low credit risk.
  • Credit risk funds invest at least 65% in AA and below rated corporate bonds. They offer higher returns for higher credit risk taken.

Hybrid funds

They invest in a mix of equity and debt to balance risk and return. Popular types are below.

  • Equity savings funds invest 65-80% of their assets in equities, 10-25% in debt, and the remainder in gold or cash equivalents.
  • Aggressive hybrid funds invest 65-80% of their assets in equities and 20-35% in debt. They have the potential for higher returns than conservative hybrid funds, but also higher risk.
  • Conservative hybrid funds invest 10-25% of their assets in equities and 65-90% in debt. They have lower volatility and returns than aggressive hybrid funds.
  • Dynamic asset allocation funds vary their equity-debt allocation based on market conditions. They involve active fund management, which means that the fund manager makes decisions about which assets to buy and sell.
  • Arbitrage funds use price differences between cash and derivatives markets to generate steady, low-risk returns.

Mutual funds offer multiple options across equity, debt and hybrid categories to meet the diverse investment needs of retail investors with varying risk appetites and return expectations. Do your research to find the best mutual funds for you.

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