One of the primary functions of money is to offer financial security. However, are sources of money limited to one’s monthly income? No! The key to multiplying your blessings is to choose the route of investments rather than just savings. As such, mutual funds or MFs are rising in popularity among the Indian population.
If you are also planning to invest and need help with understanding the different types of mutual funds, this guide will help you.
Categorization based on investment strategy
Based on the approach used for investment, MFs can be categorized as follows –
- Sectoral funds
Sectoral funds refer to those funds that typically invest in companies belonging to the same industrial sector.
- Focused funds
As the name itself may give away, focused equity mutual funds are those funds wherein the fund concentration is limited to no more than 30 stocks. The investment strategy for such funds is to choose the best-performing stocks.
- Contra funds
Their against-the-grain style of investing defines these funds. The aim here is to go against the prevailing market trends and buy assets that are under-performing at that point in time.
Categorization based on market capitalization
When equity funds are invested based on a company’s market capitalization or share, the following types are available –
- Large-cap funds
Considered to be the most stable, large-cap funds invest at least 80% of their total assets in the stocks of companies that belong to the top 100.
- Mid-cap funds
These equity mutual funds invest nearly 65% of their total assets in the shares of companies that rank lower than large cap but offer steady returns.
- Small-cap funds
These funds typically invest nearly 65% of their total assets in companies that are in a growth stage. These funds promise great returns but are also highly volatile.
- Multi-cap funds
These equity funds invest around 65% of their total assets in large, mid, and small-cap companies in differing proportions.
Categorization based on the tax treatment
Based on the tax treatment, the following MFs are available –
- Equity Linked Savings Scheme (ELSS)
Investments made in ELSS mutual funds up to a maximum of Rs. 1.5 lakhs can be claimed for a tax deduction as per Section 80C of the Income Tax Act.
- Non-tax-savings funds
As opposed to ELSS funds that offer benefits in the form of indexation and tax exemptions, non-tax-saving funds do not offer any such benefits.
Categorization based on investment style
Based on the investment style, or the method and philosophy followed by the investor for fund selection, the following types are available –
- Active funds
In the case of active equity funds, the fund manager plays an active role in fund selection and management. They hand-pick the stocks that they want to invest in.
- Passive funds
In the case of passive equity funds, the fund manager does not play an active role, either in the selection of stocks or their management. Based upon tracking of a market index or segment, the list of stocks is determined wherein the scheme will invest in.
Whether you want to take the systematic route of SIP or otherwise, investing in MFs can be done from the comfort of your home using investment apps like Tata Capital Moneyfy App – compare different categories of funds and choose the one that best suits your investment strategy, risk tolerance, and other requirements.