Mutual fund investments are of different types so that they can suit the investment needs and preference of different types of investors. Broadly, mutual funds are divided into three main categories which are as follows:
Equity Mutual Funds
Equity mutual funds are those which invest at least 65% of their portfolio in equity oriented stocks and securities. They have the following features –
- High risk of market volatility
- High return generating potential
- Long term capital gains if the fund is redeemed after 12 months of investment
- Long term capital gains are tax-free up to Rs.1 lakh. Returns exceeding Rs.1 lakh are taxed @10%
Short term capital gains, incurred if the fund is redeemed within 12 months, are taxed @15%
Debt Mutual Funds
Debt mutual funds are said to be those funds which invest primarily in debt oriented securities, i.e. securities which earn a fixed rate of interest. Debt funds have the following features:
- Debt funds are independent of market volatility. They therefore have a low market risk
- Low but stable returns
- Long term capital gains if the fund is redeemed after 36 months of investment
- Long term gains are taxed @20% with the benefit of indexation
Short term capital gains are taxed at the investor’s income tax slab rate
Balanced Mutual Funds
Mutual funds which combine the benefits of both equity and debt funds are called balanced funds. Balanced mutual funds, also called hybrid funds, invest in both equity and debt instruments. Their features are as follows:
- Balanced funds have moderate risks since the volatility risk of equity exposure is stabilized by the debt component of the portfolio
- Returns are moderate
- Balanced funds are offered as two variants – aggressive hybrid funds which invest heavily in equities and balanced hybrid funds which invest moderately in both equity and debt
Taxation of balanced funds depends on their portfolio. If the portfolio has a minimum equity exposure of 65%, equity taxation would be applicable else these funds would be taxed as debt funds
Sub categories of Mutual Funds
Equity and debt funds are further divided into different types of funds depending on their asset allocation. Here’s a look at these sub-variants:
| Large cap funds | Invest in stocks of large cap companies |
| Mid cap funds | Invest in stocks of mid cap companies |
| Small cap funds | Invest in stocks of small cap companies |
| ELSS | Equity mutual funds with a tax benefit and lock-in period of 3 years |
| Multi cap funds | Invest in mixed stocks of large cap, mid cap and small cap companies |
Similarly, debt mutual funds also have variants which include the following:
| Gilt funds | Invest in Government securities |
| Long term debt funds | Invest in debt instruments which have a maturity of 5 years and above |
| Short term debt funds | Invest in debt instruments which have a maturity of up to 3 years |
| Liquid funds | Invest in debt instruments which have a maturity of up to 91 days |
| Dynamic bond funds | Funds with a dynamic portfolio which keeps changing to earn maximum returns |
Before choosing a mutual fund scheme, assess your risk appetite and investment objective and then choose a fund which best suits your needs.