Mutual fund investments in equity have significantly risen in India, with equity fund inflows surging by 165%. This remarkable increase is indicative of the growing interest among Indian investors in mutual fund schemes. Investors can often miss out on certain “game-changer” mutual fund options while researching mutual fund options online. An investor can choose to invest based on their investment objectives or on asset classes.
Investing based on asset classes
Investors can also choose a preferred asset class while considering any mutual fund investment. Asset classes have two major categories:
- Equity mutual funds offer high returns and higher associated risks:
Equity funds invest their capital in stocks and have three major types – large-cap, small-cap, and mid-cap mutual funds. Large-cap equity funds focus on established companies with a track record of stability. They are relatively less risky than their mid-cap and small-cap counterparts but may offer slightly lower growth potential. Mid-cap and small-cap equity funds invest in smaller companies with considerable growth potential. While they offer the possibility of higher returns, they are also associated with higher volatility.
- Debt funds invest in fixed-income instruments:
Debt funds invest in government bonds, corporate bonds, and other debt securities. Conservative investors with a lower risk-taking capacity generally prefer debt funds. Debt funds can be further divided into several categories:
- Hybrid Funds: These funds combine both equity and debt instruments in their portfolio, offering a balanced approach to investors. They are suitable for those seeking a mix of stability and growth potential.
- Equity-Oriented Hybrid Funds: These funds have a higher allocation to equities, making them suitable for investors with a moderate risk appetite.
- Arbitrage Funds: These funds take advantage of price differences in the cash and derivative markets. They aim to generate low risk returns by exploiting market inefficiencies.
- Debt-Oriented Funds: These funds predominantly invest in debt instruments, making them a safe option for risk-averse investors.
Based on investment objectives
Apart from asset classes, investors can choose mutual funds based on their specific investment objectives. Here are four major categories to consider:
- Growth Funds: Growth-oriented mutual funds focus on capital appreciation over the long term. They invest primarily in equities and are suitable for investors with a high-risk tolerance and a long investment horizon.
- Liquid Funds: Liquid funds are ideal for short-term goals or parking surplus funds temporarily. They invest in highly liquid debt instruments and provide easy access to your money with minimal risk.
- Income Funds: Income funds aim to provide regular income to investors through interest and dividend payments. Investors who wish to generate a steady income stream without investing in equity can pick Income Funds.
- Tax-Saving Funds:
Tax-saving funds are a sub-category of mutual funds that helps investors increase their tax-adjusted returns. Tax-saving funds like Equity-Linked Savings Schemes (ELSS)s help investors save tax under Section 80C of the Income Tax Act and have a mandatory lock-in period of three years.
Investors can make informed choices that align with their unique financial journey by carefully assessing their risk tolerance, investment horizon, and financial objectives. They can also make SIP investments in funds that align with their unique investor profile.