DIFFERENT TYPES OF MUTUAL FUNDS

Equity Funds - Equity funds are mutual funds that invest in the stocks of different
companies. Equity mutual funds can further be subcategorized into large cap funds, small
cap funds, midcap funds, and multi-cap funds, based on market capitalization of the
companies in the funds.
Benefits of Equity Funds
1. Diversification - Equity funds allow investors to invest in a diversified portfolio
which is exposed to different sectors of the economy. It also allows investment
across market capitalization. This reduces the risk as compared to investing directly
in stocks as the underperformance of some stocks can be offset by the
outperformance of other stocks.
2. Better inflation adjusted returns - Compared to traditional investment avenues,
equity funds have the potential to generate better inflation adjusted returns as the
returns are market linked. Equity funds provide opportunities to reasonably grow
investors’ capital over the long term.
3. Expert Management - Equity funds are professionally managed by fund managers
who constantly track investment opportunities in the market while striving to
mitigate risk. This makes investments in equity funds a good option for investors
who want to gain exposure to the equity market.
4. Convenience - Investors have the convenience of starting a SIP (Systematic
Investment Plan), SWP (Systematic Withdrawal Plan) and STP (Systematic
Transfer Plan) making it easier for investors to invest, redeem or transfer their units
to another scheme easily.
Hence, it is advised as an asset which has a potential to create long term wealth. It also
gives an exposure to the stock market. It is hence, ideal for long term goals.
Debt Funds - Debt funds are mutual funds that invest in a wide range of debt securities and
money market instruments such as commercial papers, debentures, certificates of deposits,
treasury bills, and government securities, among others. Again, as with equity funds, there
are multiple different subcategories of debt funds such as overnight funds, ultra-short term
funds, short-term funds, and long-term funds.
Benefits of Debt Funds
1. Liquidity - Unlike traditional avenues, debt funds don’t have a lock-in period and
can be redeemed at any time subject to applicable exit loads. Debt funds are
considered to be liquid as they can be withdrawn on any business day. Few Liquid
funds also offer instant redemption facilities which allows investor to redeem upto
₹50,000 instantly per day per scheme per investor.
2. Tax efficiency - Debt funds can be more tax efficient than traditional investment
avenues. Debt funds are taxed only when they are redeemed and the tax is only paid
on the redemption proceeds unlike some of the traditional avenues which deducts
TDS on the interest earned every year. The dividend received from debt funds is
 taxable in the hands of the investor according to the investors tax slab. Debt funds
can be more tax efficient with LTCG (Long Term Capital Gain) of 20% along with
the benefit of indexation when the investments are held for more than 3 years which
can help provide better post-tax returns.
3. Stability - Debt funds are relatively less volatile than equity funds and can provide
stability to an investor’s portfolio. This can help diversify an investor’s portfolio
and bring down the overall risk. They are also considered to be a good source of
relatively stable income over a period of time.
4. Potential for better returns than traditional investment avenues - Investments in debt
fund have the potential to generate better returns than traditional investment
avenues. An investor can also take advantage of changing interest rates and could
generate income by choosing the right fund matching his risk appetite and
investment horizon.
Investments in debt fund have the potential to generate better returns than traditional
investment avenues. They are less volatile than equity funds and they are ideal for short
term to medium term investing.
Hybrid Funds - Hybrid funds are mutual funds that invest in both equity and the debt
market. By investing in both these markets, these funds aim to reduce risk and increase the
return that investors get to enjoy. With hybrid funds, there’s no fixed percentage of
allocation between the equity and debt market and is dependent on the fund, the manager of
the fund, and the goal of the fund.
Benefits of Hybrid Funds
1. Diversification - Hybrid funds offer the investor the benefit of diversification as it
invests in a portfolio consisting of multiple asset classes. This can help lower risk as
the performance of one asset class is balanced by the performance of another asset
class thus stabilising returns.
2. Convenience - Hybrid funds invest in multiple asset classes giving investors
exposure to equity, debt, gold related instruments (including ETF) and other asset
classes (as permissible) depending on the type of fund and its investment objective.
This saves the investors the hassle of investing in each asset class separately while
also reducing the cost involved for investing in each asset class-based fund.
3. Benefits of different asset classes - As hybrid funds invest multiple asset classes, it
benefits from the advantages each asset class offers. These funds have the potential
to generate long term capital appreciation by investing in equity, the stability and
lower volatility of debt funds, the perceived safe haven nature of gold and the high
liquidity offered by cash depending on the type of fund.
They are investments offering the potential to generate better returns than debt funds. It is
Diversified exposure to both equity and debt markets. They are idea for medium term
goals. Difference between equity, debt and hybrid funds
Equity Funds Debt Funds Hybrid Funds
Invests in the stocks of Invests in debt securities and Invests in both equity and debt
companies. money market instruments. instruments.

Returns are fully dependent Returns are more stable and are Returns are partly stable and
on the performance of the not dependent on the partly dependent on the
market. performance of the market. performance of the market.

These funds are very risky. These funds carry low levels of These funds carry moderate
risk. levels of risk.

Direct Mutual Funds - Direct Mutual Funds is the type of mutual fund that is directly
offered by the AMC or fund house. In other words, there is no involvement of third party
agents – brokers or distributors. Since there are no third party agents involved, there are no
commissions and brokerage. Hence the expense ratio of a direct mutual fund is lower.
Thus, the return is higher due to a lower expense ratio. The direct plan of a mutual fund can
be easily identified; the word ‘Direct’ is prefixed in the name of the fund. These mutual
funds can be bought through either online or offline mode.
Regular Mutual Funds - Regular plans are those mutual fund plans that are bought through
an intermediary. These intermediaries can be brokers, advisors, or distributors. The
intermediaries charge the fund house a certain fee for selling their mutual funds. The
AMCs usually recover this fee through expense ratio. The expense ratio for regular mutual
funds is slightly higher than direct mutual funds. Hence the returns tend to be a little higher
for direct plans.
A regular plan best suits investors who do not have the knowledge about the market nor the
time to monitor their portfolio. Therefore, a regular plan is far more convenient for
investors who aren’t well informed about the market. They receive expert advice at a
nominal fee. Difference between direct and regular mutual funds
Parameter Direct Plan Regular Plan
Third – party Not present Present
Returns High (no additional fees to Low
broker/agent)
NAV High Low
Expense Ratio Low expense ratio (no additional fees High expense ratio
to broker/agent)
Market Research Done by self Done by advisor
Investment Advice Not available Provided by advisor
Net Asset Value (NAV)
The performance of a particular scheme of a Mutual Fund is denoted by Net Asset Value
(NAV). In simple words, NAV is the market value of the securities held by the scheme.
Mutual Funds invest the money collected from investors in securities markets. Since market
value of securities changes every day, NAV of a scheme also varies on day to day basis.
The NAV per unit is the market value of securities of a scheme divided by the total number
of units of the scheme on any particular date.
Exit Load
Mutual Fund exit load is a fee charged by the mutual fund houses if investors exit a scheme
partially or fully within a certain period from the date of investment, as specified in the
Scheme Information Document. Some schemes do not charge any exit fee.
Mutual fund charges exit load to discourage investors from redeeming before a certain time
period. This is done to protect the financial interest of all investors in the scheme,
especially the ones who remain invested.
Different mutual funds houses charge different fees for different schemes as an exit load. If
you want to invest for short tenures then you should understand the exit load structure of
the scheme so that you can make informed investment decisions.
Lockup Period
Mutual fund lock in period means that the investor cannot withdraw or redeem the invested
amount or the allocated units, fully or partially, during the lock in period. Mutual funds
with a lock in period are known as closed funds.
SIP
A Systematic Investment Plan (SIP) is an investment tool which allows the investor to
invest a
fixed amount at regular intervals in a Mutual Fund scheme. SIP works by investing a fixed
amount at a defined frequency. With this an investor does not need to time the market and
can invest in a hassle-free manner.
Example of different mutual fund schemes
Name Type 3Y annualized return Risk
Tata Digital Fund Equity 28.77 % Very high risk
Direct Growth
Nippon India Small Equity 17.00% Very high risk
Cap Direct Fund
Mirae Asset Large Equity 14.17% Very high risk
Cap Fund - Direct
Plan – Growth
DSP Equity & Bond Hybrid 13.41% Moderately high
Fund - Direct Plan - risk
Growth
HDFC Corporate Corporate Bond 7.07% Moderate risk
Bond Fund - Direct Fund
Plan - Growth
Kotak Banking and Banking and PSU 6.77% Moderate risk
PSU Debt Fund - Fund
Direct Plan
Sundaram Corporate Corporate Bond 7.09% Moderately high
Bond Fund Fund