Types of Mutual Funds

Different categories and sub-categories of mutual funds explained

Income Objective

You have to opt for dividend option if you want to get the dividend declared to come to your account. Alternatively, you can opt for growth option and ask for a specific amount of money as per needs to get the actual income. This can be automated with SWP or it can be done as per your request.

Liquid Funds

These are a type of Money-market funds. These types of mutual funds invest in highly liquid and high credit rated securities with very short maturity time frames (usually less than 91 days) like CD (certificate of deposit which is a big FD), government securities, commercial papers, and corporate bonds (AA+ and above, mostly).

They usually pay higher interest rates than corresponding FD or savings account rates and are extremely safe. The last 1 year average return is around 8.9% and the forward yield is around 8.7%. The 5- year return has been 8.1%. (Time-End Nov 2014). Source – Morningstar.in. Reliance MF has an ATM card which you can associate with their funds. Link. I don’t have personal experience with it.

Bond Funds (Debt Funds)

Bond funds have the aim to earn more than the liquid funds by investing in a portfolio of bonds and other instruments. Depending upon the underlying specific objective, bond funds can be of the following types:

Ultra-short Term Bond funds

These use bonds for up to 3-6 months in most cases. They can invest in government as well as corporate bonds.

Gilt Short Term Bond funds Funds which exclusively invest in government (gilt is for gilded = backed by govt) short-term securities. They are safer than funds which invest in corporate bonds.

Short Term Bond funds These use bonds up to 1-3 years.

Income Funds These are usually flexible funds which can change their portfolio according to the interest rate outlook and tend to provide with a less fluctuating income.

Gilt Medium to Long Term funds

These use government (gilt) bonds, which have longer maturities. Currently, some of the funds have average maturities of 20-25 years.

Growth Objective

These funds have the objective of increasing the value of the fund. The equity funds will come under this group.

Large cap funds These funds invest in equities / stocks of the top 30/50/100 companies. Cap is for capitalization, which refers to the total stock market value of the company.

Mid cap funds These funds invest in stocks of companies which are not Large-cap. They do so by having a mandate of not investing in companies which are in the top 50 or top 100 by market capitalization size.

Small cap funds These funds invest in companies which are not in the top 200 or top 300 companies.

Flexi cap or Multi-cap funds

These have flexible mandate to invest in any group of stocks and not limited like the above 3 groups. They may have additional restrictions like not investing in very small stocks. The idea is to invest in a particular group according to market conditions – so they can become large cap during one phase and small cap in another phase. Or they can have some money in large cap and some money in mid-small cap phase so as to have benefits of all worlds in a single fund.

Sectoral Funds

These funds in a particular sector only, like infrastructure, banking, capital goods, pharma, etc. which are defined in their scheme document. Many infrastructure funds have pretty wide coverage and do not invest only in specific infrastructure companies.

Regional and Country Specific Funds

These funds invest in a particular region / country of the globe.

International Funds These funds invest internationally without restriction to a specific country.

Gold / Thematic funds These funds invest in gold ETFs or gold mining companies, commodities, agribusiness, real-estate, real asset companies. Thematic funds appear like sectoral funds on the surface, but a theme is much larger than a single sector. Infra funds are usually considered thematic instead of sectoral, since the companies cut across various sectors related to infrastructure - banking and finance, engineering (who finances the projects), construction (who builds them), energy, metals and automobiles (where do the raw materials come from and who transports them) etc.

Ethical / Socially Responsible Funds These funds do not invest in companies associated with “sin products” like gambling, cigarette, porn, alcohol, etc. The Shariah related funds come under this.

GROWTH AND INCOME OBJECTIVE

Balanced Funds These have variable allocation to equity and debt. There are equity-oriented hybrid funds which have >65% equity allocation, while others are debt-oriented hybrid funds which have lesser amounts of equity (can go to 5-10%). They have an in-built asset re-allocation based on changes in the values of the securities.

Asset Allocation funds These funds use other funds to manage the assets. Many life cycle funds and dynamic ratio funds come under this head.

ETF

Exchange traded funds are a separate type of mutual fund. These funds can be bought / sold during the trading hours on the Exchange and these track the price of the underlying portfolio. So, a nifty index ETF can have a variable NAV throughout the trading period, while a nifty index mutual fund will only have a single NAV for the day declared at the end of the trading hours.