A mutual fund is a type of financial vehicle made up of a pool of money collected from many investors to invest in securities like stocks, bonds, money market instruments, and other assets. Mutual Fund invest in a diversified, professionally managed basket of securities at a relatively low cost.

Mutual Fund Mechanism:

The flow chart below describes broadly the working of a mutual fund:

A mutual fund is set up in the form of a trust, which has Sponsor, Trustees, Asset Management Company (AMC) and Custodian.  A mutual fund is required to be registered with SEBI which regulates securities markets before it can collect funds from the public.

 Advantages of Mutual Funds:

• Professional Management
• Diversification
• Low Cost
• Liquidity
• Transparency
• Choice of schemes
• Tax benefits
• Well regulated

Open-ended funds are available for subscription and repurchase on a continuous basis; NAV declared on daily basis.

Open-ended funds do not have a fixed maturity period.

Equity Funds: An equity fund is a mutual fund scheme that invests predominantly in equity stocks. In the Indian context, as per current SEBI Mutual Fund Regulations, an equity mutual fund scheme must invest at least 65% of the scheme’s assets in equities and equity related instruments.

Debt funds are classified as:

• Large cap Fund: Large cap invests in Top 100 stocks. Large Cap are a set of companies with market capitalization of more than Rs 20,000 Cr. These companies are usually among the largest in sector, well-established and tend to do very well across market cycles.
• Mid Cap Fund: Mid cap invests in next 150 stocks. The funds invest in stocks of mid-size companies, which are still considered developing companies, tend to offer more growth potential.
• Small Cap Fund: Small Cap Fund invests in stocks of smaller-sized companies. Small Cap stocks are generally regarded as a company with a market capitalization of less than 100 crores.
• Multi Cap Fund: The fund invests in stocks across market capitalization. Their portfolio comprises of large cap, mid cap, small cap stocks. They are relatively less risky compared to a pure mid cap or a small cap fund.
• Focused Fund: The fund invests in 20-30 stocks. Focused mutual fund focuses on a limited number stocks in a limited number of sectors, rather than holding a broad or diversified mix of positions.
• Sectorial Fund:The funds invests in securities of specific sectors such as Information Technology, Banking, Service and pharma sector etc. The performance of the fund depends on the performance of the respective sector. The funds may give higher returns, but they also come with increased risks.
• Value Fund: A value fund is a fund that follows a value investing strategy and seeks to invest in stock that are deemed to be undervalued in price based on fundamental characteristics. Value investing is often compared with growth investing, which focuses on emerging companies with high growth prospects.
• Fund of Funds (FoF): Fund of Funds is a mutual fund which invests in a group of funds that are internationally or domestically available instead of picking specific stocks.
• ELSS Fund: ELSS is an equity mutual fund investment that invests at least 80% of its assets in equity and equity-related instruments. Investments in an ELSS qualify for tax deductions under Section 80C of the Income Tax Act within the overall limit of ₹1.5 lakh. ELSS fund has 3-year lock-in period.
• Index Fund: Index Mutual Fund invests in stocks that imitate a stock market index like the NSE Nifty, BSE Sensex, etc. These are passively managed funds which means that the fund manager invests in the same securities as present in the underlying index in the same proportion and doesn’t change the portfolio composition. These funds endeavour to offer returns comparable to the index that they track.

Debt Funds: Debt Funds are invested in debt papers. Government authorities, private companies, banks and financial institutions are some of the major issuers of debt papers. By investing in debt instruments, these funds ensure low risk and provide stable income to the investors. Debt funds are further classified as:

• Overnight Funds: Overnight funds are the best Fund with overnight maturity it invest in debt securities with overnight Overnight funds invest in Reverse Repo, CBLO, and other debt assets with a maturity of one day. Overnight funds earn through interest payments on their debt holdings. They carry zero interest rate risk and minimal credit risk.
• Liquid Fund: Liquid Funds invest predominantly in highly liquid money market instruments and debt securities of very short tenure and hence provide high liquidity. They invest in Treasury Bills (T-bills), Commercial Paper (CP), Certificates Of Deposit (CD) and Collateralized Lending & Borrowing Obligations (CBLO) that have residual maturities of up to 91 days. Liquid funds have exit load within 7 days.
• Ultra Short Term Fund: Ultra Short Term Fund generates slightly higher returns than liquid funds. The fund invests in instruments with maturity period higher than 91 days. Duration horizon is basically 3-6 months.
• Money Market Fund: Money Market Mutual Fund invests in debt securities characterized by their short maturities and minimal credit risk. Money market mutual funds are among the lowest-volatility types of investments.
• Low Duration Fund: Low Duration Funds have a higher maturity than liquid funds and overnight funds but lower maturity than short, medium duration funds. These funds allow investors to park their money for 6-12 months.
• Gilt Fund: Gilt Funds are debt fundswhich only invest in bonds and fixed interest-bearing securities issued by the state and central governments. These investments are made in instruments having varying maturities. The funds have long duration period.

• Credit Risk Fund:Credit Risk Funds invest approx. 65% of the investment corpus in less than AA-rated paper. These funds have higher risk.

• Corporate Bond Fund: The fund invests at least 80% of its total assets in highest-rated corporate bonds. These mutual fundsare capable of providing high returns and also carry a relatively low amount of risk by investing in high-rated instruments.

Hybrid Funds:

These funds invest in a mix of equities and debt component. Balanced funds are suitable for a medium-term horizon and are ideal for investors who are looking for a mixture of safety, income and modest capital appreciation.

Close-ended fund has a stipulated maturity period e.g.  1 to 5 years. The fund is open for subscription only during a specified period at the time of launch of the scheme. Investors can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units of the scheme on the stock exchanges where the units are listed (If permissible).

• Thematic Funds:These are closed ended funds which invests in securities of specific themes such as Information Technology, Service and Pharma & Healthcare, Infrastructure   The performance of these funds depends on the performance of the respective sector’s. The funds may give higher returns, but they also come with increased risks. Investor cannot exit in between the tenure of the fund, investor’s will received proceeds on maturity only.

Fixed Monthly Plan (FMP): FMP is closed-end debt funds having a fixed maturity period. FMPs are not available for subscription continuously. FMPs offer an indicative yield. A long Period of FMP involves indexation benefit.

As per SEBI Guidelines, all the mutual fund displays their respective RISK-O-METER depicting the level of risk associated with that respective funds.

As shown in the figure, the riskometer has five levels of risks. It is made to look similar to a car’s speedometer and indicates the scheme’s risk level. The five risk levels are ‘low’, ‘moderately low’, ‘moderate’, ‘moderately high’ and ‘high’.

Low-risk level
Securities and instruments such as fixed maturity plans, gilt funds and income funds usually come under this classification. These are considered to be the safest mutual funds and are suited for an investor looking for a safe income source.

Moderately low-risk level
Short to medium-term bonds usually come under this category. They are considered safe investments and are suited for investors who can stay invested for a period of 1-3 years.

Moderate risk level
It signifies that the funds in this category have their principal at moderate risk. Instruments such as arbitrage funds, MIP funds, and hybrid debt-oriented funds are suited for a semi-conservative investor who intends to book decent profits at the same time wants to keep his risk limited. Funds under this label are suited medium to the long-term investment horizon.

Moderately high-risk level
It signifies that the funds in this category have their principal at moderately high risk. Usually, balanced equity-oriented funds, diversified equity funds, index funds and Gold ETFs are classified under this label. Products under this label are suited for investors seeking to create wealth over a long period. Investment in equity under such funds is related to the large-cap segment.

High-risk level
This label means that the funds in this category have their principal at high risk. Sectoral funds, thematic funds, international funds and micro-cap funds are a few examples of funds under this label. Products under this label are suited for investors seeking to create wealth over a long period of time and are fine with the high risk associated with their bet.

*All investors are requested to check Risk-o-Meter of funds before investing, as all funds will have different Risk Profiling compared to each other.