Mutual Funds Types and Risks

 

Mutual funds are very important in this world, as the generation of Genz is more into investment and Entrepreneurship. Investing in mutual funds is a very good option because there is less risk as your fund is managed by a fund manager and yield high returns than fixed deposits. There are two types of mutual funds one is Equity and another is Debt funds and there is yet another fund called Hybrid fund which is the mixture of both Equity and Debt instruments in a certain quantity. The main difference between Equity and Debt funds are equity is a more risky investment and yields good interest in long run which is market linked where as debt funds yield less risky returns and can give a fixed return which is backed by a certain group or an organization or government and has a maturity period. The sub divisions of Equity mutual funds are Large cap funds, Midcap funds and Small cap funds which are categorized according to their market capitalization. The companies who have 20,000 crore and above market cap are Large cap companies, the companies who have 5000-20,000 crore market cap are mid cap companies and the companies who have less than 5000 crore market cap are small cap companies. Before investing in mutual funds make sure to track AUM, Expense ratio, Exit Load, NAV, Benchmark returns, Category returns in 1,3,5 and 10 years, Sortino ratio, Alpha, Beta, Standard deviation, Portfolio overlapping, Rolling returns, CAGR and Portfolio Turnover ratio of the fund. The investment in mutual funds is done in two ways first is Lumpsum and another is through SIP. The investment through SIP is preferred because it manages the market corrections properly due to rupee cost averaging. Another thing is the holdings percentage should also be checked and the diversification of holdings industries in mutual fund is important, a single holding having more than 5% weightage in the mutual fund can be risky during market corrections. The risk level of these 3 funds are as follows Small cap> Mid cap> Large cap. Another sub division of mutual funds are on the basis of its characteristics of investment these are as follows:-

1. Dividend yield funds- These funds invest in stocks that yield a dividend and they predominantly invest 65% in equity. These funds are active funds and have high expense ratio. They are low risk funds. the capital gains tax is levied according to the income tax slab rate of a person.
2. Value funds- These funds invest in value strategy where they pick undervalued stocks that have the potential to rise in coming future and those funds having good ethics. These funds invest in equity for 65% allocation. These funds are active funds and have high portfolio turnover ratio. These funds have high expense ratio.
3. Contra funds- These funds invest in stocks that are not performing well in the market but have potential to perform. These funds invest 65% in equity. These are high risky funds. These are active funds. These funds have high portfolio turnover ratio. These funds have high expense ratio.
4. Opportunities funds- These funds are the funds that are performing best in the market due to good stocks. These funds are active funds and have high expense ratio. These funds may have high portfolio turnover ratio.
5. Growth funds- These funds are the funds that pick stocks that are growing in the highest growth rate in the market. These funds are active funds. These funds have high portfolio turnover ratio. These funds have high expense ratio.
6. Focused funds- These are the funds that focuses on a few stocks like 30 stocks performing good in the market. These are highly risky because they lack diversification. They spends 65% of their amounts in equity allocation. These funds are active funds. These funds have high portfolio turnover ratio and high expense ratio.
7. Index funds- These are the funds that track a certain Index like Nifty Fifty Index. These are passive funds and have low expense ratio. These are ETF funds.
8. Sectoral funds- These are the funds that invests in a certain sector of the industry like EV Industries. These funds invest 80% in equity. These are risky funds due to less diversification.
9. Thematic funds- These funds invests in certain part of the sector like the production of Lithium Ion batteries. These funds invest in 80% in equity. These are risky funds due to less diversification.
10. ELSS funds- These funds are called Equity Linked Savings Schemes. These funds invests in Equity and equity linked instruments. These funds have tax benefits under section 80c of income tax and a lock in period of 3 years. These are highly risky funds due to 90% equity allocation. 
11. Multicap funds- These funds invest 65% in equity. These funds invests in Large, Mid and Small cap companies. These funds are active funds having high expense ratio.
12. Blue chip funds - These funds invests in big multinational large cap companies. They are highly risky because of low diversification across markets. These funds are active funds. They offer capital gains tax exemptions on dividends from foreign companies.
13. Balanced Hybrid funds- These are the funds that invests 40%-60% of their assets in both equity and debt instruments, they adjusts the risk level properly.
14. Hedge funds- These are the funds that diversifies its investments across Equity, Debt and Gold products.
15. Aggressive Hybrid funds- These are the funds that invests 80% in equity and 20% in debt instruments. These are risky funds due to heavy allocation in equity.
16. Multi Asset Allocation funds- These funds invests in different asset categories. They also invests in foreign assets. 
17. Arbitrage funds- These funds invest in 65% in equity. These are the funds that can manage fund efficiently, they buy stock in cash market in lower price and sell in futures market in profit. These are active funds and have high Expense ratio.
18. Funds of Funds- These funds invest their assets in different funds units usually in those funds who are performing good.
19. Flexi cap funds- These funds invest in Large, Mid and Small caps according to the market risks and projected high returns. For example it may invest in equity when market is down and sell the equity stocks when market is in the peak for profits. It may buy debt instruments when market is highly volatile. These funds have higher allocation towards Large cap stocks in their portfolio. It has 80% portfolio overlap with Large cap funds.
20. Momentum fund- These are highly choosy funds that invests in stocks who shows active earrings and price movements. These funds invests in stocks that are high in market valuation. These funds follow a top up approach where they buy stocks in higher price and sell them in even higher price than the cost price of stocks. These are basically passive funds and copy a index and have a less expense ratio. These can be risky stock because of a lot of price volatility.

The tax benefits is as follows the long term capital gains tax is 12.5% and short term capital gains tax is 20% on returns more than 1.5 Lakhs.