{"id":12540,"date":"2021-10-26T07:01:18","date_gmt":"2021-10-26T07:01:18","guid":{"rendered":"https:\/\/www.5paisa.com\/finschool\/?post_type=markets&#038;p=12540"},"modified":"2024-06-12T17:38:56","modified_gmt":"2024-06-12T12:08:56","slug":"mutual-funds-classification","status":"publish","type":"markets","link":"https:\/\/www.5paisa.com\/finschool\/course\/mutual-fund-course\/mutual-funds-classification\/","title":{"rendered":"Learn About Classification of Mutual Funds From Mutual Fund Course"},"content":{"rendered":"\t\t<div data-elementor-type=\"wp-post\" data-elementor-id=\"12540\" class=\"elementor elementor-12540\">\n\t\t\t\t\t\t<section class=\"elementor-section elementor-top-section elementor-element elementor-element-23ba90b elementor-section-full_width tab_container elementor-section-height-default elementor-section-height-default\" data-id=\"23ba90b\" data-element_type=\"section\">\n\t\t\t\t\t\t<div class=\"elementor-container elementor-column-gap-default\">\n\t\t\t\t\t<div class=\"elementor-column elementor-col-100 elementor-top-column elementor-element elementor-element-b6a6f9f\" data-id=\"b6a6f9f\" data-element_type=\"column\">\n\t\t\t<div class=\"elementor-widget-wrap elementor-element-populated\">\n\t\t\t\t\t\t<section class=\"elementor-section elementor-inner-section elementor-element elementor-element-e0f864e elementor-section-full_width elementor-section-height-default elementor-section-height-default\" data-id=\"e0f864e\" data-element_type=\"section\">\n\t\t\t\t\t\t<div class=\"elementor-container elementor-column-gap-wide\">\n\t\t\t\t\t<div class=\"elementor-column elementor-col-50 elementor-inner-column elementor-element elementor-element-7efb245 chapters_list\" data-id=\"7efb245\" data-element_type=\"column\">\n\t\t\t<div class=\"elementor-widget-wrap elementor-element-populated\">\n\t\t\t\t\t\t<div class=\"elementor-element elementor-element-33d4575 elementor-widget elementor-widget-shortcode\" data-id=\"33d4575\" data-element_type=\"widget\" data-widget_type=\"shortcode.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t\t\t<div class=\"elementor-shortcode\">\t<script>\n\t\tjQuery(document).ready(function(){\n\t\t\tjQuery(\"#post_chapters a[href*='\" + location.pathname + \"']\").addClass(\"current\");\n\t\t})\n\t<\/script>\n\t<div class=\"desktop_chapters\"><div id=\"post_chapters\"><div class=\"post_chapters-heading\">Chapters<\/div><ul><li><i class=\"fa fa-chevron-right\"><\/i>&nbsp;&nbsp;&nbsp;<a href=\"https:\/\/www.5paisa.com\/finschool\/course\/mutual-fund-course\/introduction-to-mutual-funds\/\">Introduction<\/a><\/li><li><i class=\"fa fa-chevron-right\"><\/i>&nbsp;&nbsp;&nbsp;<a href=\"https:\/\/www.5paisa.com\/finschool\/course\/mutual-fund-course\/nfo-offer-documents\/\">NFO & Offer Documents<\/a><\/li><li><i class=\"fa fa-chevron-right\"><\/i>&nbsp;&nbsp;&nbsp;<a href=\"https:\/\/www.5paisa.com\/finschool\/course\/mutual-fund-course\/mutual-funds-classification\/\">Learn About Classification of Mutual Funds From Mutual Fund Course<\/a><\/li><li><i class=\"fa fa-chevron-right\"><\/i>&nbsp;&nbsp;&nbsp;<a href=\"https:\/\/www.5paisa.com\/finschool\/course\/mutual-fund-course\/things-to-know-before-buying-mutual-funds\/\">Things To Know Before Buying MFs<\/a><\/li><li><i class=\"fa fa-chevron-right\"><\/i>&nbsp;&nbsp;&nbsp;<a href=\"https:\/\/www.5paisa.com\/finschool\/course\/mutual-fund-course\/measuring-risk-return-of-mutual-fund\/\">Understand Measures of Risk &#038; Return in Mutual Fund<\/a><\/li><li><i class=\"fa fa-chevron-right\"><\/i>&nbsp;&nbsp;&nbsp;<a href=\"https:\/\/www.5paisa.com\/finschool\/course\/mutual-fund-course\/what-are-exchange-traded-funds\/\">What Are ETFs<\/a><\/li><li><i class=\"fa fa-chevron-right\"><\/i>&nbsp;&nbsp;&nbsp;<a href=\"https:\/\/www.5paisa.com\/finschool\/course\/mutual-fund-course\/what-are-liquid-funds\/\">What Are Liquid Funds<\/a><\/li><li><i class=\"fa fa-chevron-right\"><\/i>&nbsp;&nbsp;&nbsp;<a href=\"https:\/\/www.5paisa.com\/finschool\/course\/mutual-fund-course\/taxation-of-mutual-funds\/\">Taxation of Mutual Funds<\/a><\/li><li><i class=\"fa fa-chevron-right\"><\/i>&nbsp;&nbsp;&nbsp;<a href=\"https:\/\/www.5paisa.com\/finschool\/course\/mutual-fund-course\/mutual-fund-investment-redemption-plan\/\">Mutual Fund Investment & Redemption Plan<\/a><\/li><li><i class=\"fa fa-chevron-right\"><\/i>&nbsp;&nbsp;&nbsp;<a href=\"https:\/\/www.5paisa.com\/finschool\/course\/mutual-fund-course\/regulation-of-mutual-funds\/\">Regulation of Mutual Funds<\/a><\/li><\/ul><\/div><\/div><div class=\"chapters_toggle\" title=\"chapters\"><a title=\"chapters\" href=\"#\" id=\"open_chapters\"><span>View Chapters<\/span>&nbsp;&nbsp;&nbsp;<i class=\"fa fa-chevron-right\"><\/i><\/a><a title=\"chapters\" href=\"#\" id=\"close_chapters\" style=\"display:none;\"><span>Hide Chapters<\/span>&nbsp;&nbsp;&nbsp;<i class=\"fa 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elementor-element elementor-element-93f371b tabs_contents\" data-id=\"93f371b\" data-element_type=\"column\">\n\t\t\t<div class=\"elementor-widget-wrap elementor-element-populated\">\n\t\t\t\t\t\t<div class=\"elementor-element elementor-element-90f6d06 market_content_tabs elementor-widget elementor-widget-eael-adv-tabs\" data-id=\"90f6d06\" data-element_type=\"widget\" data-widget_type=\"eael-adv-tabs.default\">\n\t\t\t\t<div class=\"elementor-widget-container\">\n\t\t\t\t\t        <div data-scroll-on-click=\"no\" data-scroll-speed=\"300\" id=\"eael-advance-tabs-90f6d06\" class=\"eael-advance-tabs eael-tabs-horizontal eael-tab-auto-active \" data-tabid=\"90f6d06\">\n            <div class=\"eael-tabs-nav \">\n                <ul class=\"eael-tab-inline-icon\" role=\"tablist\">\n                                            <li id=\"study\" class=\"active-default eael-tab-item-trigger eael-tab-nav-item\" aria-selected=\"true\" data-tab=\"1\" role=\"tab\" tabindex=\"0\" 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>Slides<\/span>                            \n                                                    <\/li>\n                                            <li id=\"videos\" class=\" eael-tab-item-trigger eael-tab-nav-item\" aria-selected=\"false\" data-tab=\"3\" role=\"tab\" tabindex=\"-1\" aria-controls=\"videos-tab\" aria-expanded=\"false\">\n                            \n                                                                <i class=\"far fa-eye\"><\/i>                                                            \n                                                            <span class=\"eael-tab-title title-after-icon\" >Videos<\/span>                            \n                                                    <\/li>\n                    \n                                  <\/ul>\n            <\/div>\n            \n            <div class=\"eael-tabs-content\">\n\t\t        \n                    <div id=\"study-tab\" class=\"clearfix eael-tab-content-item active-default\" data-title-link=\"study-tab\">\n\t\t\t\t        <p><div class='white' style='background:rgb(255, 255, 255); border:solid 0px rgb(255, 255, 255); border-radius:0px; padding:0px 0px 0px 1px;'>\n<div id='text_slider' class='owl-carousel sa_owl_theme owl-pagination-true' data-slider-id='text_slider' style='visibility: visible;visibility:visible;'>\n<div id='text_slider_slide01' class='sa_hover_container' data-hash='Based-On-Structure' style='padding:4.9% 5%; margin:0px 0%; background-color:rgb(255, 255, 255); min-height:398px; '><h2 style=\"text-align: left\"><strong>3.1 Based On Structure<\/strong><\/h2>\r\n<p><img fetchpriority=\"high\" decoding=\"async\" class=\"aligncenter wp-image-48832 size-full\" src=\"https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/Based-on-Structure.png\" alt=\"Based on Structure\" width=\"1126\" height=\"1039\" srcset=\"https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/Based-on-Structure.png 1126w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/Based-on-Structure-300x277.png 300w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/Based-on-Structure-1024x945.png 1024w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/Based-on-Structure-768x709.png 768w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/Based-on-Structure-50x46.png 50w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/Based-on-Structure-100x92.png 100w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/Based-on-Structure-150x138.png 150w\" sizes=\"(max-width: 1126px) 100vw, 1126px\" \/><\/p>\r\n<p>&nbsp;<\/p>\r\n<p><strong>Anand:<\/strong> So how do mutual funds work in terms of structure?<br \/><strong>Ridhima:<\/strong> There are three types of funds, Closed-ended, open-ended and interval funds.<br \/><strong>Anand:<\/strong> What does closed ended mean?<br \/><strong>Ridhima<\/strong>: In\u00a0 close ended fund you can invest only at the time of launch and then you have to wait till it matures. You can trade these funds because they are listed on stock exchanges.<br \/><strong>Anand:<\/strong> What about the open ended funds?<br \/><strong>Ridhima:<\/strong> Open-ended funds are always open for subscription. You can put money in. Just take it out whenever, like a savings account.\u201d<br \/><strong>Anand:<\/strong> What are these interval funds?<br \/><strong>Ridhima:<\/strong> Interval funds open at specific time like every quarter. They often invest in things like property.<br \/><strong>Anand<\/strong>: What is Equity Mutual Fund?<br \/><strong>Ridhima:<\/strong> Equity mutual funds invest mainly in the shares of companies. The value of these funds is dependent on stock prices.<\/p>\r\n<p>One of the biggest ways to classify mutual funds in India is by structure \u2013 basically how easy it is for investors to put their money in or take it out. On this basis, funds are classified into three categories: open-ended, closed-ended and interval funds. Each has its own rules, and the differences are most evident when you see how investors actually deal with them.<\/p>\r\n<p><strong>Closed-end funds<\/strong><\/p>\r\n<p>Closed-ended funds are similar to a fixed deposit, but with one major difference \u2013 investors can only invest during the New Fund Offer window when the scheme is first launched. When that window closes, you\u2019re stuck waiting for the fund to mature before you can get your money out \u2014 if the fund has a term of five years, for example, your money is locked in for the full five years. For liquidity, these schemes are listed on stock exchanges and investors can buy and sell units in these schemes as they do in shares of the companies.<br \/>The market price of these units may differ from the fund\u2019s Net Asset Value and may increase or decrease depending on demand and general market sentiment. Crucially, buying and selling units on the exchange doesn&#8217;t alter the total number of units in existence. Some closed-ended funds also have periodic buy-back windows to allow early exit for investors. After maturity, a fund may convert to an open-ended one, but only with investor approval.<\/p>\r\n<p><strong>Open-Ended Funds<\/strong><\/p>\r\n<p>Conversely, open-ended funds are like a savings account that you can draw from at any time. Investors are free to invest or withdraw money at any time of their choice, without any fear of lock-in period or specific date of redemption. This flexibility is one of the reasons why open-ended funds are so popular in India as it also allows for regular investing through a Systematic Investment Plan. They recalculate their NAV on a daily basis, based on the current value of the fund\u2019s holdings. Let\u2019s say you invest \u20b95,000 today and want to redeem it after six months. You can easily do that. This flexibility is a big draw for investors who want to stay nimble as their financial objectives change.<\/p>\r\n<p><strong>Interval funds<\/strong><\/p>\r\n<p>Interval funds are a hybrid of closed-end and open-end funds. Investors can buy or sell units only at particular times, possibly quarterly or annually. Unlike closed-ended funds, they do not have to be listed on a stock exchange as they have their own scheduled windows for transactions. During these times investors have the opportunity to buy new units or redeem existing ones at the current NAV. Interval funds are distinct in that they can invest in assets that are not easily marketable, such as real estate or private loans \u2013 for example, an interval fund could own a portfolio of warehouses leased to logistics companies, giving investors access to asset classes that open-ended funds generally cannot access.<\/p><\/div>\n<div id='text_slider_slide02' class='sa_hover_container' data-hash='Based-On-Investment-Objective' style='padding:4.9% 5%; margin:0px 0%; background-color:rgb(255, 255, 255); min-height:398px; '><h2 style=\"text-align: left\"><strong>3.2 Based On Investment Objective<\/strong><\/h2>\r\n<p>&nbsp;<\/p>\r\n<h3 style=\"text-align: left\"><img decoding=\"async\" class=\"aligncenter wp-image-48833 size-full\" src=\"https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/Based-on-Investment-Objective.png\" alt=\"\" width=\"1105\" height=\"782\" srcset=\"https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/Based-on-Investment-Objective.png 1105w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/Based-on-Investment-Objective-300x212.png 300w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/Based-on-Investment-Objective-1024x725.png 1024w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/Based-on-Investment-Objective-768x544.png 768w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/Based-on-Investment-Objective-50x35.png 50w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/Based-on-Investment-Objective-100x71.png 100w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/Based-on-Investment-Objective-150x106.png 150w\" sizes=\"(max-width: 1105px) 100vw, 1105px\" \/><\/h3>\r\n<p><strong>Anand:<\/strong> Why should I invest in equity funds?<\/p>\r\n<p><strong>Ridhima:<\/strong> Equity funds are good for your money to grow over a period of time. They can also help combat inflation. They spread your investment out in a lot of companies and are easy to get your money out of.<\/p>\r\n<p><strong>Equity Mutual fund\u00a0<\/strong><\/p>\r\n<p>An equity mutual fund is a mutual fund that invests the majority of its money in stocks of companies. Think of it like a basket: your money, along with the money of thousands of other investors, is used to buy stocks and the value of that basket changes every day based on how those stocks do. That changing value is referred to as the Net Asset Value, or NAV.<\/p>\r\n<p><strong>Advantages of Equity Mutual Funds<\/strong><\/p>\r\n<p><strong>Capital Growth<\/strong><\/p>\r\n<p>Equity funds are much riskier than safer instruments such as fixed deposits, as share prices can move quickly, but that same volatility is also what gives them the potential to deliver much higher returns over longer periods. Equity funds are of two types \u2013 one where a professional is actively managing the fund by taking conscious decisions on which stocks to buy or sell and the other where the fund is passively managed tracking an index like Nifty 50 or S&amp;P 500 through a computer driven process.<\/p>\r\n<p><strong>Returns that beat inflation<\/strong><\/p>\r\n<p>Here\u2019s a simple way to think about it: Picture two friends who invest differently. One invests money in a fixed deposit which earns 6% interest, the other in an equity fund tracking something like Nifty 50. If inflation has been around 5% a year over the last decade, the fixed deposit is just about keeping up with rising prices. So the real value of that money is growing very little. Even with its volatility, an equity fund could return 10-12% per year during the same time frame \u2013 giving the investor a lot more purchasing power.<\/p>\r\n<p><strong>Diverse<\/strong><\/p>\r\n<p>Another big plus is diversification. If you own stock in only one company, your fortunes are tied to that company&#8217;s performance. An equity fund however invests your money in dozens or hundreds of companies across different sectors \u2013 so if the IT sector drops, gains in pharma or banking can help offset the loss.<\/p>\r\n<p><strong>Liquidity.<\/strong><\/p>\r\n<p>Equity funds are also fairly liquid. It\u2019s not quite as instant as a savings account, but you can usually redeem your units within about two working days \u2013 far faster than, say, real estate, which can take months to sell.<\/p><\/div>\n<div id='text_slider_slide03' class='sa_hover_container' data-hash='Types-Of-Equity-Fund' style='padding:4.9% 5%; margin:0px 0%; background-color:rgb(255, 255, 255); min-height:398px; '><h2 style=\"text-align: left\"><strong>3.3 Types Of Equity Fund<\/strong><\/h2>\r\n<p><img decoding=\"async\" class=\"alignnone wp-image-48834 size-full\" src=\"https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/Types-of-Equity-Fund.png\" alt=\"Types of Equity Fund\" width=\"1116\" height=\"1080\" srcset=\"https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/Types-of-Equity-Fund.png 1116w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/Types-of-Equity-Fund-300x290.png 300w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/Types-of-Equity-Fund-1024x991.png 1024w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/Types-of-Equity-Fund-768x743.png 768w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/Types-of-Equity-Fund-50x48.png 50w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/Types-of-Equity-Fund-100x97.png 100w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/Types-of-Equity-Fund-150x145.png 150w\" sizes=\"(max-width: 1116px) 100vw, 1116px\" \/><\/p>\r\n<p>&nbsp;<\/p>\r\n<p><strong>Anand:<\/strong> What are the different types of equity funds?<br \/><strong>Ridhima :<\/strong> There are types of :<\/p>\r\n<ul>\r\n<li>Index funds follow the list of top companies such as Nifty 50.<\/li>\r\n<li>Funds with large caps invest in stable companies.<\/li>\r\n<li>Mid cap funds invest in fast growing companies.<\/li>\r\n<li>Small-cap funds invest in companies that have the ability to grow rapidly.<\/li>\r\n<li>Multi-cap Funds invest in a mix of large, medium and small size companies.<\/li>\r\n<li>ELSS funds save your taxes.<\/li>\r\n<li>Sector funds invest in just one sector, such as technology or banking.<\/li>\r\n<\/ul>\r\n<p><strong>Indexing of Funds<\/strong><\/p>\r\n<ul>\r\n<li>Index funds are not about stock picks. They are about tracking the overall market. These are tied to a particular index such as Nifty 50 or Sensex and you do not need a fund manager to pick stocks or to time the market.<\/li>\r\n<li>For example a Sensex index fund will have the same 30 stocks in the same proportion as the Sensex itself. The theory is that markets are generally efficient and beating the market consistently is really hard to do.<\/li>\r\n<li>This allows investors to capitalise on the market\u2019s overall performance, rather than the luck of any one stock. Index tracking gives investors automatic diversification, lower fees and less chance of human error in stock picking. Index funds have become hugely popular in India, particularly after the global boom in low-cost passive investing.<\/li>\r\n<li>Take the Nifty 50 index fund, which has become the darling of retail investors looking for exposure to India\u2019s best companies across sectors. ETFs have become increasingly popular in recent years due to their liquidity and transparency. This has led to the growth of index investing. Indian index funds\u2019 assets under management crossed the \u20b93 lakh crore mark in 2025. Index funds work best for long-term investors who want to capture the market&#8217;s returns but don&#8217;t want to have to follow individual stocks.<\/li>\r\n<li>They are also the standard for actively managed funds. The only real downside is they can never beat the market, only match it less the expense ratio.<\/li>\r\n<li>They are a good option for investors who prefer cost efficiency and stable long-term wealth creation over short-term gains. Index funds are for all. Simply put, they are a cheap way to get a piece of the action in the wider economy.<\/li>\r\n<\/ul>\r\n<p><strong>Large Cap Funds<\/strong><\/p>\r\n<ul>\r\n<li>Large-cap funds invest in companies with the largest market capitalisation, which are usually the top 100 in India. They are market leaders with proven track records.\u00a0<\/li>\r\n<li>These are bigger and more stable but also riskier than mid- and small-cap funds. They also provide consistent returns over the long term. They are a good option for the risk averse investor. It normally has companies such as Reliance Industries, Infosys and HDFC Bank.<\/li>\r\n<li>Large caps tend to be more resilient during downturns, acting as a stabilising force in a portfolio when the broader economy looks iffy.<\/li>\r\n<li>That\u2019s exactly what large-cap Indian funds demonstrated in 2024, delivering steady returns even as global markets were rattled by rising interest rates. Hence the appeal of these funds to pension funds and conservative investors.<\/li>\r\n<li>In large-cap funds, you will not get the explosive growth that you can get in mid-cap and small-cap funds. Their performance is more steady than spectacular and that reflects the maturity of the companies they own. These seem most appropriate for investors more concerned with capital preservation and a reasonably sustainable if modest rate of return.<\/li>\r\n<li>Liquidity is also another plus. Large-cap stocks are traded in volume, so they are easy to buy and sell. SEBI requires large-cap funds to invest at least 80 per cent of their assets in large-cap companies. So their strategy is aligned. Big-cap funds remain a foundation for equity investing, valued for their stability, credibility and ability to create wealth over the long term.<\/li>\r\n<\/ul>\r\n<p><strong>Mid Cap Funds<\/strong><\/p>\r\n<ul>\r\n<li>Mid-cap funds are funds which invest in companies with market capitalisation of 101st to 250th. They are in between large cap and small cap companies i.e. companies which are not start ups but are not big corporate companies.<\/li>\r\n<li>They are attractive because they can offer the possibility of higher returns for a reasonable amount of risk. Mid-cap funds have often outperformed large-cap funds in bull markets as mid-sized firms have more room to grow than market leaders.<\/li>\r\n<li>For instance, the Indian mid-cap indices have significantly beaten the large-cap indices with returns of over 25% in 2023-24. That&#8217;s true, but mid-cap funds are usually more volatile because these companies are more susceptible to market shocks and recessions, and often lack the brand strength or financial muscle of larger firms.<\/li>\r\n<li>They are generally more stable than small-cap funds, and have a moderate risk\/reward profile. Hence they are a favourite choice for investors who are willing to tolerate some short-term volatility for long-term gain. Yes, mid-cap stocks can be volatile.<\/li>\r\n<li>But the risk is mitigated through diversification across sectors and through professional management of the fund. There are some mid-cap names like Persistent Systems which have seen a good growth on the back of niche expertise and growing global demand.<\/li>\r\n<li>Mid-cap funds need to invest minimum of 65% of assets in mid-cap companies to keep the fund\u2019s focus, as per SEBI norms. These funds are suitable for investors seeking above-average returns but wanting a little more stability than can be offered by small-cap investing.<\/li>\r\n<\/ul>\r\n<p><strong>Small Cap Mutual Funds<\/strong><\/p>\r\n<ul>\r\n<li>Small cap funds generally invest in companies with a market cap of less than Rs 100 crore.They are often young and innovative companies with a lot of growth potential. These are high-risk, high-reward investments. They can provide good returns in a growing economy but can be very volatile when conditions change . India\u2019s small-cap indices are a case in point.<\/li>\r\n<li>They had zoomed up almost 40% in 2021 as the economy recovered from the pandemic, but they also plunged during the 2020 market crash. Aggressive growth investors often find small-cap companies attractive because they tend to be in niche or emerging sectors.<\/li>\r\n<li>The risk of business failure is higher here as these companies may not have the financial stability, the customer base or the governance. Another real concern is liquidity because the small caps are less liquid. It can also be more difficult to get in and out of positions smoothly.<\/li>\r\n<li>Micro-cap companies take the risk-reward equation to another level. Small cap funds are meant for long term holding and investors should have a higher risk appetite. These funds aren\u2019t for everyone, but they can be powerful wealth-builders for those with a stomach for volatility.<\/li>\r\n<li>SEBI has mandated that small-cap funds in India must invest at least 65% of their assets in small-cap stocks. It&#8217;s also recently added small-cap stocks in energy and fintech with good growth potential. Small cap funds are generally speculative in nature but can be a powerful wealth creator if chosen wisely and held for a longer duration.<\/li>\r\n<\/ul>\r\n<p><strong>Multi Cap Fund<\/strong><\/p>\r\n<ul>\r\n<li>Multi cap funds also called equity funds invest in large cap, mid cap and small cap companies. The blended approach offers diversification and reduces the risk of being over exposed to any one area of the market.<\/li>\r\n<li>Multi-cap funds look to provide a mix of growth and stability by spreading across market capitalisations and sectors. For instance, a multi-cap fund could have Reliance Industries, Persistent Systems and a promising fintech startup in its portfolio giving investors exposure to multiple growth drivers.<\/li>\r\n<li>This diversification will soften any downturn in one industry, with losses in one part of the business being offset by gains in another. SEBI norms mandate multi-cap funds to invest at least 25% in each of large-cap, mid-cap and small-cap companies thus maintaining a truly balanced portfolio.<\/li>\r\n<li>These funds are a good choice for investors who want broad market exposure but don\u2019t want to pick and choose categories themselves. Multi-cap funds have been a favourite with investors in the past few years for their stability and growth. For example, they have beaten large-cap funds in 2024 on the back of mid and small-cap stock rallies.<\/li>\r\n<li>They are good for long term investors who want a one stop shop for diversification across equities but success depends on how well the fund manager allocates across segments at the end of the day. To put it simply, multi-cap funds offer a balanced approach to equity investing, leveraging the strengths of different market-cap segments.<\/li>\r\n<\/ul>\r\n<p><strong>Equity Linked Saving Scheme (ELSS)<\/strong><\/p>\r\n<ul>\r\n<li>ELSS funds are equity based tax saving instruments and they are eligible for deduction under Section 80C of Income Tax Act. An investor can save tax up to Rs 46,800 a year on investments up to Rs 1.5 lakh.<\/li>\r\n<li>The lock in period for ELSS is 3 years which is the minimum period for all the tax saving instruments available under 80C.The lock-in also works in the favour of the investors.<\/li>\r\n<li>This enables fund managers to invest with a genuine long-term perspective and without the continual pressure of redemptions. Most of the ELSS funds are following a multi-cap approach giving diversification to the investors across sectors and market-caps.<\/li>\r\n<li>Historically, ELSS funds have outperformed traditional 80C instruments like PPF or NSC but they are riskier as they are linked to the market. ELSS funds, for example, have delivered annualised returns of 12-15% over the last 10 years, much higher than fixed income alternatives.<\/li>\r\n<li>Also, the lock-in period helps inculcate a healthy discipline that makes investors concentrate on their investment rather than getting swayed by short-term market noise. ELSS is a natural choice for young professionals who want to create equity exposure while saving tax.<\/li>\r\n<li>ELSS investment through SIP is very popular because every installment has a lock-in period of three years and it also helps to develop a regular saving habit. Most of the financial advisors would generally suggest to go ahead with the investment after the mandatory lock-in period to enjoy the benefits of long term compounding.<\/li>\r\n<li>ELSS funds walk a fine line between tax efficiency and real wealth generation potential. Thus, it is a good option for investors who want to get both financial growth and tax saving in one product.<\/li>\r\n<\/ul>\r\n<p><strong>Sectoral Funds<\/strong><\/p>\r\n<ul>\r\n<li>Sector funds focus on a particular segment of the economy, whereas diversified funds are spread out over many industries. Sector funds focus on one area \u2013 whether it\u2019s technology or banking \u2013 and can produce super-sized returns when the sector is on fire.<\/li>\r\n<li>For instance, if a fund has tech stocks such as Infosys, TCS and Wipro in its kitty, it will perform well whenever there is a boom in the tech sector as a whole. Similarly, a fund that has exposure to banks like HDFC Bank, ICICI Bank and SBI will do well when the banking sector does well.<\/li>\r\n<li>This is why sectoral funds can outperform the market if an investor invests in the right sector at the right time. A good example is India\u2019s IT industry between 2020-2022. Funds with an IT orientation did better, aided by a growing global demand for services. Healthcare funds did well in the COVID-19 pandemic, with the companies growing at a rapid pace.<\/li>\r\n<li>Of course, the downside is concentration risk. Sector funds all go into one pot. If that sector encounters a bump in the road \u2013 for example, due to regulatory changes, an economic slowdown or disruptive new technology \u2013 the fund will take a big hit. A run of defaults on loans, for instance, afflicted banking-focused funds in 2018-19. Sectoral funds are required to invest 80% of their assets in the sector of choice as per SEBI guidelines. This means that the money remains strictly within the stated strategy.<\/li>\r\n<li>Sector funds cover many themes, including real estate, utilities, natural resources, technology, finance and healthcare, each with their own strengths and weaknesses.<\/li>\r\n<li>For example, resource funds tend to do well when commodity prices are rising and utility funds tend to be more stable with their steady dividend payments. When you invest in a sectoral fund you need to be very sure about the sector you are investing in and be comfortable with the possibility of sharp volatility.<\/li>\r\n<li>These funds are for the smart investor making a calculated bet on a sector, not the novice investor looking for broad diversification.<\/li>\r\n<li>Sectoral funds have gained popularity in recent years with rising interest in themes such as renewable energy, electric vehicles and digital infrastructure. Investors aware of the concentrated risk may find this a useful way to invest in such trends.<\/li>\r\n<\/ul><\/div>\n<div id='text_slider_slide04' class='sa_hover_container' data-hash='Debt-Fund' style='padding:4.9% 5%; margin:0px 0%; background-color:rgb(255, 255, 255); min-height:398px; '><h2 style=\"text-align: left\"><strong>3.4 Debt Fund<\/strong><\/h2>\r\n<p>&nbsp;<\/p>\r\n<h3 style=\"text-align: left\"><img loading=\"lazy\" decoding=\"async\" class=\"aligncenter wp-image-48835 size-full\" src=\"https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/Debt-Funds.png\" alt=\"Debt Funds\" width=\"1080\" height=\"789\" srcset=\"https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/Debt-Funds.png 1080w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/Debt-Funds-300x219.png 300w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/Debt-Funds-1024x748.png 1024w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/Debt-Funds-768x561.png 768w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/Debt-Funds-50x37.png 50w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/Debt-Funds-100x73.png 100w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/Debt-Funds-150x110.png 150w\" sizes=\"(max-width: 1080px) 100vw, 1080px\" \/><\/h3>\r\n<p data-id=\"SufbWm\" data-pm-slice=\"1 1 []\"><strong>Anand:<\/strong> What about debt funds?<br \/><strong>Ridhima:<\/strong> Debt funds are those that invest in bonds and government securities. They are safe and have a good tax saving potential.<br \/><strong>Anand:<\/strong> Are there risks involved with debt funds?<br \/><strong>Ridhima:\u00a0<\/strong>Yes there are few risks like interest rate risk and credit risk.<\/p>\r\n<p data-id=\"SufbWm\" data-pm-slice=\"1 1 []\">Debt funds invest in fixed income bearing securities like bonds, government securities and treasury bills. While equity funds make money from the variance in the stock market price, debt funds make money through the interest on the bonds and the lesser variance in their price with a comparitively lower expense ratio.<br \/><br \/><strong>Debt Funds \u2013 Why do investors prefer them?<\/strong><\/p>\r\n<p>Debt funds have been the preferred choice of investors due to the following reasons:<br \/><br \/><strong>Less Volatility:\u00a0<\/strong>Debt funds offer an income stream similar to fixed deposits but with a much better returns potential.<br \/><br \/><strong>Ability to generate stable returns:\u00a0<\/strong>The interest income from debt funds are stable and predictable.<br \/><br \/><strong>Tax saving potential:<\/strong>\u00a0Tax is applicable only on redemption and losses can be claimed to adjust profit from other sources thereby reducing the tax outflow.<br \/><br \/><strong>Liquidity:\u00a0<\/strong>Most debt funds offer liquidity and the money can be withdrawn within a day.<br \/><br \/><\/p>\r\n<p>Short term returns:\u00a0Debt funds are suitable for short term financial goals like making a down payment for a house or an educational institution or for a holiday.<br \/><br \/><strong>Risks of Mutual Funds (Debt)<\/strong><br \/><br \/>Debt funds carry certain risks which are discussed below:<br \/><br \/><strong>Interest Rate Risk<\/strong><br \/><br \/>As a rule of thumb, when the interest rates rise bond prices fall and vice versa. Therefore, when interest rates are on the rise the prices of the bond funds fall as well. Bonds with longer maturity have a bigger impact on the price of the bond fund so a 10 year gilt fund will be more volatile that a shorter dated gilt fund. When rates are rising it makes sense to invest in shorter dated funds.<br \/><br \/><strong>Credit Risk<\/strong><br \/><br \/>This refers to the risk of default by the issuer of the bond in meeting either the coupon payment or the repayments at par on maturity. Credit rating agencies assign ratings to bonds based on the credibility of the issuer in meeting his obligations. Any downgradation in the rating will lead to fall in the price of the bond. Government securities are considered to be free from credit risk as the government can always print more money or raise taxes to meet its obligations. This makes government backed bonds and hence gilt funds a safer investment option.<br \/><br \/><strong>Anand:<\/strong> What types of debt funds are there?<br \/><br \/><strong>Ridhima:<\/strong> There are Fixed Maturity Plans, Gilt Funds and Corporate Bond Funds.<br \/><br \/><strong>Types of Debt Mutual Fund Plans<\/strong><br \/><br \/><strong>Fixed Maturity Plans<\/strong><br \/><br \/>Closed ended schemes that invest in predominantly debt instruments that have maturity matching with the maturity of the scheme. The maturity period varies from less than a year to a period of 5-7 years. Units of these schemes can only be bought during the initial new fund offer period. They are listed on the stock exchange but can only be redeemed on maturity. They are ideal for investors looking at locking in money for a short period of time and wish to benefit from the lower interest rate risk and better tax benefits.<br \/><br \/><strong>Gilt Funds<\/strong><\/p>\r\n<p>These are funds that invest in Government securities. It is mandatory that at least 80% of the assets of the fund are government securities.<br \/>There are two types of gilt funds:<\/p>\r\n<ul>\r\n<li>Gilt funds with diversified portfolio of government securities.<\/li>\r\n<li>Constant maturity gilt funds (10 year)<\/li>\r\n<\/ul>\r\n<p>These schemes offer investors the twin advantage of safety of capital and accessibility to government securities that were till recently available only to institutional investors. They have lesser interest rate risk than diversified gilt funds but are subject to interest rate risk nonetheless.<br \/><br \/><strong>Corporate Bond Funds:<\/strong><br \/><br \/>Atleast 80% of the assets of the fund are invested in corporate bonds. These funds give returns of around 7-8% over and above savings account interest or fixed deposits. The returns depend upon the credit rating of the bond. It is important to look at the credit profile of the bond before investing in it. If the fund has a concentrated portfolio, it may be risky if default occurs.<br \/><br \/><strong>Anand:<\/strong> What are hybrid funds?<br \/><strong>Ridhima:<\/strong> Hybrid funds are those that combine both equity and debt instruments to balance the risk and rewards.<br \/><strong>Anand<\/strong>: Are there different types of hybrid funds?<br \/><strong>Ridhima:\u00a0<\/strong>Yes there are equity oriented debt oriented dynamic bond funds, monthly income plans, child benefit plans and capital protection funds.<\/p>\r\n<p>&nbsp;<\/p><\/div>\n<div id='text_slider_slide05' class='sa_hover_container' data-hash='Hybrid-Fund' style='padding:4.9% 5%; margin:0px 0%; background-color:rgb(255, 255, 255); min-height:398px; '><h2 style=\"text-align: left\"><strong>3.5 Hybrid Fund<\/strong><\/h2>\r\n<p><img loading=\"lazy\" decoding=\"async\" class=\"aligncenter wp-image-48837 size-full\" src=\"https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/Hybrid-Funds.png\" alt=\"Hybrid Funds\" width=\"851\" height=\"1025\" srcset=\"https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/Hybrid-Funds.png 851w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/Hybrid-Funds-249x300.png 249w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/Hybrid-Funds-768x925.png 768w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/Hybrid-Funds-42x50.png 42w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/Hybrid-Funds-83x100.png 83w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/Hybrid-Funds-150x181.png 150w\" sizes=\"(max-width: 851px) 100vw, 851px\" \/><\/p>\r\n<p>&nbsp;<\/p>\r\n<p>Hybrid funds are funds that invest in a single portfolio of equity and debt instruments to balance the risk and return. Equity provides long term capital appreciation and debt provides stability and regular income. This mixture creates a hybrid fund which is better than a pure debt fund but less volatile than a pure equity fund. Fund managers actively manage the mix of equities and debt to respond to market conditions and the fund\u2019s stated objective allowing investors to benefit from market opportunities and at the same time reduce concentration risk.<\/p>\r\n<h3><strong><b>H<\/b><\/strong><strong><b>ybrid funds Advantages<\/b><\/strong><\/h3>\r\n<p><strong><b>Diversification:<\/b><\/strong>\u00a0By investing in both equities and debt, you hedge against the possibility of failure of a particular class of assets.<\/p>\r\n<p><strong><b>Active portfolio management<\/b><\/strong>\u00a0\u2013 Fund managers buy and sell investments according to market trends.<\/p>\r\n<p><strong><b>Lower equity risk: <\/b><\/strong>The debt component cushions the portfolio from equity market volatility.<\/p>\r\n<p><strong><b>Automatic Rebalancing: <\/b><\/strong>Portfolios are automatically rebalanced to maintain performance through large market swings. Depending on the level of risk he is comfortable with, he can go for conservative, balanced or aggressive schemes.<\/p>\r\n<h3><strong><b>Types of Hybrid Mutual Funds?<\/b><\/strong><\/h3>\r\n<ol>\r\n<li><b><\/b><strong><b>Hybrid funds with an <\/b><\/strong><strong><b>E<\/b><\/strong><strong><b>quity <\/b><\/strong><\/li>\r\n<\/ol>\r\n<p>At least 65% of the assets are invested in equities across different sectors and market caps.The balance is debt securities.\u00a0For investors looking for growth in a relatively stable environment.<\/p>\r\n<ol start=\"2\">\r\n<li><b><\/b><strong><b>Hybrid Debt Funds <\/b><\/strong><\/li>\r\n<\/ol>\r\n<p>60% or more in debt instruments, e.g. government securities, bonds.\u00a0The rest is divided into shares to give some chance for growth.Suitable for conservative investors seeking low to moderate exposure to equities<\/p>\r\n<ol start=\"3\">\r\n<li><b><\/b><strong><b>Balanced funds <\/b><\/strong><\/li>\r\n<\/ol>\r\n<p>Minimum 65 percent in equities and balance in a mix of debt and cash.\u00a0\u00a0Long term capital gains up to Rs.1 lakh is tax free (Taxed as per equity funds).The debt allocation also helps to dampen volatility, which they are attractive to equity investors who want some stability.<\/p>\r\n<ol start=\"4\">\r\n<li><b><\/b><strong><b>Dynamic Bond Funds<\/b><\/strong><\/li>\r\n<\/ol>\r\n<p>Actively managed debt funds with maturity profile based on interest rate outlook.Fund managers are switching between short and long term instruments given the present macro-economic conditions.\u00a0Flexibility and ability to benefit from changing interest rate cycles.<\/p>\r\n<p><strong><b>\u00a0 \u00a0 \u00a05. Monthly<\/b><\/strong><strong><b>\u00a0<\/b><\/strong><strong><b>Income Plans<\/b><\/strong><\/p>\r\n<p>Debt oriented hybrid funds with small equity component (15-25%).It aims to provide a regular income through dividends but there is no guaranty that dividends will be paid.\u00a0Available in growth and income options with different levels of equity exposure.\u00a0Usually offer better returns over fixed deposits for 1-3 yrs but are slightly riskier due to equity component.<\/p>\r\n<p><strong><b>\u00a0 \u00a0 \u00a06.\u00a0 Child Benefit<\/b><\/strong><strong><b>\u00a0<\/b><\/strong><strong><b>schemes<\/b><\/strong><\/p>\r\n<p>Mostly debt-oriented, little equity exposure.It is intended as a long term investment of 5-15 years to help cover the costs of a child\u2019s education or other future expenses.<\/p>\r\n<p><strong><b>\u00a0 \u00a0 \u00a07. Capital Preservation Funds<\/b><\/strong><\/p>\r\n<p>Close ended schemes are primarily meant for preservation of capital of the investor.Focus on capital preservation and slow appreciation.They invest 80-90% in high rated debt instruments and balance in equity.The debt component is a means to the recovery of principal upon maturity, while the equity component is designed to produce incremental returns.Principal protection (during lock-in period) and a balanced mix of bonds and stocks are its\u00a0main features.<\/p>\r\n<p><strong><b>Hybrid Funds Characteristics<\/b><\/strong><\/p>\r\n<ul>\r\n<li><strong><b>Principal protection:<\/b><\/strong>\u00a0Used in capital protection schemes, to protect the original investment specifically.<\/li>\r\n<li><strong><b>Lock-in period: <\/b><\/strong>Some hybrid funds have a lock-in period, and investors have to remain invested in the fund to get any guaranties.\u00a0Debt &amp; equity structure for stability &amp; growth potential.<\/li>\r\n<li><strong><b>Flexibility:<\/b><\/strong>\u00a0Investors can choose a scheme from conservative to aggressive as per their risk appetite.<\/li>\r\n<\/ul>\r\n<p>&nbsp;<\/p>\r\n<p>&nbsp;<\/p>\r\n<p>&nbsp;<\/p>\r\n<p>&nbsp;<\/p>\r\n<p>&nbsp;<\/p>\r\n<p>&nbsp;<\/p>\r\n<p>&nbsp;<\/p><\/div>\n<div id='text_slider_slide06' class='sa_hover_container' data-hash='Factors-To-Be-Considered-While-Choosing-A-Mutual-Fund-Scheme' style='padding:4.9% 5%; margin:0px 0%; background-color:rgb(255, 255, 255); min-height:398px; '><h2 style=\"text-align: left\"><strong>3.6 Factors To Be Considered While Choosing A Mutual Fund Scheme<\/strong><\/h2>\r\n<p>&nbsp;<\/p>\r\n<p><img loading=\"lazy\" decoding=\"async\" class=\"aligncenter wp-image-48839 size-full\" src=\"https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/Factors-To-Be-Considered-While-Choosing-A-Mutual-Fund-Scheme.png\" alt=\"Factors To Be Considered While Choosing A Mutual Fund Scheme\" width=\"1072\" height=\"972\" srcset=\"https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/Factors-To-Be-Considered-While-Choosing-A-Mutual-Fund-Scheme.png 1072w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/Factors-To-Be-Considered-While-Choosing-A-Mutual-Fund-Scheme-300x272.png 300w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/Factors-To-Be-Considered-While-Choosing-A-Mutual-Fund-Scheme-1024x928.png 1024w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/Factors-To-Be-Considered-While-Choosing-A-Mutual-Fund-Scheme-768x696.png 768w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/Factors-To-Be-Considered-While-Choosing-A-Mutual-Fund-Scheme-50x45.png 50w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/Factors-To-Be-Considered-While-Choosing-A-Mutual-Fund-Scheme-100x91.png 100w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/Factors-To-Be-Considered-While-Choosing-A-Mutual-Fund-Scheme-150x136.png 150w\" sizes=\"(max-width: 1072px) 100vw, 1072px\" \/><\/p>\r\n<p>&nbsp;<\/p>\r\n<p><strong><b>Anand: <\/b><\/strong>How do I choose a mutual fund?<\/p>\r\n<p><strong><b>Ridhima: <\/b><\/strong>You have to see how much you can invest, how much risk you can take, compare the performance of different funds, see if a fund has performed well over time, see the experience of the person managing the fund and check the fees.<\/p>\r\n<p>There are many things to consider when choosing a mutual fund and not just the past performance. These parameters help you ensure that the fund you choose is truly aligned with your personal goals, risk appetite and investment horizon.<\/p>\r\n<p><strong><b>Time Frame<\/b><\/strong><\/p>\r\n<p>Time horizon refers to how long you plan to stay invested \u2014 ranging from a day to several years. For short term goals (less than 3 years) debt oriented instruments are usually a better option as they provide stability and more predictable returns. For long term goals ( 5 years or more ) , people usually prefer equity funds as they have the capability to provide huge capital appreciation ( despite short term volatility ) .<\/p>\r\n<p><strong>Risk Acceptance<\/strong><\/p>\r\n<p>Risk tolerance is the amount of uncertainty an investor can really handle.A risk-loving investor may prefer high volatility schemes like small-cap funds, which can give high returns but also involve a lot of risk.\u00a0A risk-averse investor might prefer large-cap funds that invest in well-established companies and are more stable.\u00a0Risk-o-meter, a visual tool offered by fund houses, helps investors to assess the level of risk of a scheme at a glance. It divides funds into five categories:<\/p>\r\n<ul>\r\n<li>Low<\/li>\r\n<li>Moderately Low<\/li>\r\n<li>Medium<\/li>\r\n<li>Moderately High<\/li>\r\n<li>High<\/li>\r\n<\/ul>\r\n<p>This allows investors to easily match their own comfort level with the inherent risk of a fund.<\/p>\r\n<p><strong><b>Performance by Category<\/b><\/strong><\/p>\r\n<p>Always compare a fund\u2019s performance with its peers in the same category \u2014 a large-cap fund should be benchmarked against other large-cap funds, not against mid-cap or small-cap funds. This creates a fair comparison and helps to identify funds that consistently outperform their true peer group.<\/p>\r\n<p><strong><b>Performance consistency<\/b><\/strong><\/p>\r\n<p>A really good mutual fund is not one that has an outstanding return in one year \u2013 it\u2019s one that performs consistently across different market cycles. Investors should look for funds that do reasonably well in both bull markets and downturns \u2014 that is a better signal of resilient and effective management.<\/p>\r\n<p><strong><b>Experience of the Fund Manager<\/b><\/strong><\/p>\r\n<p>The fund manager\u2019s expertise is a major factor.<\/p>\r\n<ul>\r\n<li>Their educational background and professional credentials.<\/li>\r\n<li>How long they\u2019ve been running the particular fund in question.<\/li>\r\n<li>Their proven track record of handling volatility and achieving consistent results.<\/li>\r\n<\/ul>\r\n<p><strong><b>Total Expenses Ratio<\/b><\/strong><\/p>\r\n<p><strong><b>Expense Ratio:<\/b><\/strong>\u00a0The annual fee that the AMC charges for managing the fund.<\/p>\r\n<p>The lower the expense ratio the better, as long as the fund\u2019s returns are competitive. Even a small difference in expense ratio, over time, can have a meaningful impact on your net returns.<\/p>\r\n<p><strong><b>Example \u2013 Fund A vs. Fund B<\/b><\/strong><\/p>\r\n<p>For example, you want to invest \u20b9 50,000. The first step is to decide your investment horizon. If it\u2019s a long-term goal, equity funds are the natural fit. Then, consider your risk appetite: if high volatility is making you nervous, you&#8217;ll want a large-cap fund.<\/p>\r\n<p>Now let\u2019s compare the real options. Therefore, if Canara Robeco Large Cap Fund is giving better returns for both 1-year and longer time frames and has a lower expense ratio than Edelweiss Large Cap Fund, then Canara Robeco Large Cap Fund is a better option. This systematic evaluation makes sure that your decision is based on quantitative and qualitative aspects.<\/p>\r\n<p>&nbsp;<\/p><\/div>\n<div id='text_slider_slide07' class='sa_hover_container' data-hash='Risk-Factors-In-Mutual-Fund-Schemes' style='padding:4.9% 5%; margin:0px 0%; background-color:rgb(255, 255, 255); min-height:398px; '><h2 style=\"text-align: left\"><strong>3.7 Risk Factors In Mutual Fund Schemes<\/strong><\/h2>\r\n<p><img loading=\"lazy\" decoding=\"async\" class=\"aligncenter wp-image-48840 size-full\" src=\"https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/Risk-Factors-in-Mutual-Fund-Scheme.png\" alt=\"Risk Factors in Mutual Fund Scheme\" width=\"1080\" height=\"912\" srcset=\"https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/Risk-Factors-in-Mutual-Fund-Scheme.png 1080w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/Risk-Factors-in-Mutual-Fund-Scheme-300x253.png 300w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/Risk-Factors-in-Mutual-Fund-Scheme-1024x865.png 1024w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/Risk-Factors-in-Mutual-Fund-Scheme-768x649.png 768w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/Risk-Factors-in-Mutual-Fund-Scheme-50x42.png 50w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/Risk-Factors-in-Mutual-Fund-Scheme-100x84.png 100w, https:\/\/www.5paisa.com\/finschool\/wp-content\/uploads\/2021\/10\/Risk-Factors-in-Mutual-Fund-Scheme-150x127.png 150w\" sizes=\"(max-width: 1080px) 100vw, 1080px\" \/><\/p>\r\n<p><strong>Anand:<\/strong> What risks should I know about?<\/p>\r\n<p><strong>Ridhima:<\/strong> There are two sets of risks:<\/p>\r\n<ul>\r\n<li>Common risks like market risk, liquidity risk and performance risk.<\/li>\r\n<li>Risks that are specific, to each fund linked to what it invests in and how it works.<\/li>\r\n<\/ul>\r\n<p>Every mutual fund scheme carries some element of risk, and it helps to think of these risks in two broad categories: standard risks that apply to all funds, and scheme-specific risks unique to individual products. Understanding both helps investors make informed decisions that genuinely match their goals and risk appetite.<\/p>\r\n<p><strong><b>Standard Risk Factors<\/b><\/strong><\/p>\r\n<p>These are the common risks that AMCs are required to disclose in their advertisements and offer documents, and they apply universally across all mutual fund schemes.<\/p>\r\n<ul>\r\n<li><b><\/b><strong><b>Market risk: <\/b><\/strong>Mutual funds move with the broader market \u2014 security prices can rise or fall based on economic conditions, interest rates, and overall investor sentiment.<\/li>\r\n<li><b><\/b><strong><b>Liquidity risk: <\/b><\/strong>At times, selling securities quickly without affecting their price can be difficult, which may in turn affect redemption timelines.<\/li>\r\n<li><b><\/b><strong><b>Default risk: <\/b><\/strong>There\u2019s always a possibility that an issuer of debt instruments fails to meet its obligations, potentially leading to a loss of principal.<\/li>\r\n<li><b><\/b><strong><b>Settlement risk: <\/b><\/strong>Delays or failures in trade settlement can affect a fund\u2019s performance.<\/li>\r\n<li><b><\/b><strong><b>Performance uncertainty: <\/b><\/strong>Past returns are never a guarantee of future performance \u2014 even a strong fund can underperform in a different market cycle.<\/li>\r\n<li><b><\/b><strong><b>Scheme name ambiguity: <\/b><\/strong>A scheme\u2019s name is not a reliable indicator of its quality, prospects, or likely returns.<\/li>\r\n<\/ul>\r\n<p><strong><b>Scheme-Specific Risk Factors<\/b><\/strong><\/p>\r\n<p>These risks are tied to the particular characteristics of an individual scheme and don\u2019t apply universally.<\/p>\r\n<ul>\r\n<li><b><\/b><strong><b>Objective-related risk: <\/b><\/strong>A scheme\u2019s stated objective can expose investors to specific risks \u2014 a fund chasing aggressive growth, for example, will typically carry higher volatility.<\/li>\r\n<li><b><\/b><strong><b>Strategy-related risk: <\/b><\/strong>The fund manager\u2019s approach \u2014 sector concentration or thematic investing, for instance \u2014 can heighten exposure to particular market segments.<\/li>\r\n<li><b><\/b><strong><b>Asset allocation risk: <\/b><\/strong>The mix of equity, debt, and other instruments in the portfolio determines its overall risk level \u2014 more equity means more volatility, while a debt-heavy allocation limits growth potential.<\/li>\r\n<li><b><\/b><strong><b>Non-diversification risk: <\/b><\/strong>Funds concentrated in a limited number of securities or sectors are more vulnerable to downturns in those specific areas.<\/li>\r\n<\/ul>\r\n<p><strong><b>Why Understanding Risk Matters<\/b><\/strong><\/p>\r\n<p>Recognising these risk factors helps investors match their choices to their own time horizon and risk tolerance. For example:<\/p>\r\n<ul>\r\n<li>A short-term investor may prefer debt-oriented schemes to keep volatility low.<\/li>\r\n<li>A long-term investor with a higher risk appetite may choose equity or hybrid funds to pursue genuine wealth creation.<\/li>\r\n<\/ul>\r\n<p>Fund managers and AMCs also provide tools like the risk-o-meter to visually represent each scheme\u2019s risk level, making it easier for investors to align their comfort level with a fund\u2019s actual profile.<\/p>\r\n<p><strong><b>Case Study: Building a Balanced Mutual Fund Portfolio \u2014 The Story of Meera Shah<\/b><\/strong><\/p>\r\n<p><strong><b>Background<\/b><\/strong><\/p>\r\n<p>Meera Shah, a 35-year-old marketing professional from Pune, wanted to start investing systematically in mutual funds to meet three goals:<\/p>\r\n<ol>\r\n<li>Buy a home in 8 years<\/li>\r\n<li>Build a retirement corpus<\/li>\r\n<li>Maintain liquidity for emergencies<\/li>\r\n<\/ol>\r\n<p>She had \u20b910 lakh to invest initially and planned monthly SIPs of \u20b915,000. Her financial advisor helped her classify funds based on structure, investment objective, and risk profile.<\/p>\r\n<p><strong><b>Step 1: Choosing Fund Structure<\/b><\/strong><\/p>\r\n<p>Meera divided her investments among different fund structures to balance liquidity and discipline.<\/p>\r\n<table>\r\n<tbody>\r\n<tr>\r\n<td>\r\n<p><strong>Fund Type<\/strong><\/p>\r\n<\/td>\r\n<td>\r\n<p><strong>Example<\/strong><\/p>\r\n<\/td>\r\n<td>\r\n<p><strong>Reason for Choice<\/strong><\/p>\r\n<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\r\n<p>Open-ended Fund<\/p>\r\n<\/td>\r\n<td>\r\n<p>HDFC Balanced Advantage Fund<\/p>\r\n<\/td>\r\n<td>\r\n<p>Easy entry and exit; daily NAV updates<\/p>\r\n<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\r\n<p>Closed-ended Fund<\/p>\r\n<\/td>\r\n<td>\r\n<p>ICICI Prudential FMP (3 years)<\/p>\r\n<\/td>\r\n<td>\r\n<p>Fixed tenure; predictable returns<\/p>\r\n<\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\r\n<p>Interval Fund<\/p>\r\n<\/td>\r\n<td>\r\n<p>Kotak Interval Income Fund<\/p>\r\n<\/td>\r\n<td>\r\n<p>Periodic redemption windows; exposure to real assets<\/p>\r\n<\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<p>This mix gave her flexibility while ensuring some funds remained locked for disciplined saving.<\/p>\r\n<p><strong><b>Step 2: Selecting Funds Based on Investment Objective<\/b><\/strong><\/p>\r\n<p>Meera\u2019s advisor classified her investments into equity, debt, and hybrid categories.<\/p>\r\n<p><strong><b>Equity Allocation (60%)<\/b><\/strong><\/p>\r\n<ul>\r\n<li><b><\/b><strong><b>Large-Cap Fund<\/b><\/strong>\u2014 SBI Bluechip Fund: Stability and steady growth through top 100 companies.<\/li>\r\n<li><b><\/b><strong><b>Mid-Cap Fund<\/b><\/strong>\u2014 Axis Midcap Fund: Moderate risk, higher growth potential.<\/li>\r\n<li><b><\/b><strong><b>ELSS Fund<\/b><\/strong>\u2014 Mirae Asset Tax Saver Fund: Tax benefits under Section 80C with a 3-year lock-in.<\/li>\r\n<\/ul>\r\n<p><strong><b>Debt Allocation (25%)<\/b><\/strong><\/p>\r\n<ul>\r\n<li><b><\/b><strong><b>Corporate Bond Fund<\/b><\/strong>\u2014 HDFC Corporate Bond Fund: Regular income and low volatility.<\/li>\r\n<li><b><\/b><strong><b>Gilt Fund<\/b><\/strong>\u2014 SBI Magnum Gilt Fund: Government-backed securities for safety.<\/li>\r\n<\/ul>\r\n<p><strong><b>Hybrid Allocation (15%)<\/b><\/strong><\/p>\r\n<ul>\r\n<li><b><\/b><strong><b>Balanced Fund<\/b><\/strong>\u2014 ICICI Prudential Equity &amp; Debt Fund: Combines equity growth with debt stability.<\/li>\r\n<\/ul>\r\n<p><strong><b>Step 3: Evaluating Key Parameters<\/b><\/strong><\/p>\r\n<p>Meera used the evaluation framework from Chapter 3.6:<\/p>\r\n<ul>\r\n<li><b><\/b><strong><b>Time Horizon:<\/b><\/strong>8 years for home purchase \u2192 long-term equity focus.<\/li>\r\n<li><b><\/b><strong><b>Risk Tolerance:<\/b><\/strong>Moderate \u2192 avoided small-cap funds.<\/li>\r\n<li><b><\/b><strong><b>Performance Consistency:<\/b><\/strong>Chose funds with steady 5-year returns.<\/li>\r\n<li><b><\/b><strong><b>Expense Ratio:<\/b><\/strong>Preferred funds below 1.5%.<\/li>\r\n<li><b><\/b><strong><b>Fund Manager Experience:<\/b><\/strong>Selected funds managed by seasoned professionals like Sankaran Naren (ICICI Prudential).<\/li>\r\n<\/ul>\r\n<p><strong><b>Step 4: Understanding Risk Factors<\/b><\/strong><\/p>\r\n<p>Meera learned that even diversified portfolios carry risks:<\/p>\r\n<ul>\r\n<li><b><\/b><strong><b>Market Risk: <\/b><\/strong>Equity funds fluctuate with market cycles.<\/li>\r\n<li><b><\/b><strong><b>Interest Rate Risk: <\/b><\/strong>Debt fund values fall when rates rise.<\/li>\r\n<li><b><\/b><strong><b>Liquidity Risk: <\/b><\/strong>Closed-ended funds cannot be redeemed early.<\/li>\r\n<li><b><\/b><strong><b>Credit Risk: <\/b><\/strong>Corporate bonds depend on issuer reliability.<\/li>\r\n<\/ul>\r\n<p>Her advisor explained that diversification across fund types helps mitigate these risks.<\/p>\r\n<p><strong><b>Outcome After 3 Years<\/b><\/strong><\/p>\r\n<p>By mid-2026, Meera\u2019s portfolio had grown from \u20b910 lakh to \u20b913.2 lakh, averaging 10.5% annualised returns.<\/p>\r\n<ul>\r\n<li>Equity funds contributed most of the growth.<\/li>\r\n<li>Debt funds provided stability during volatile periods.<\/li>\r\n<li>The ELSS fund saved her \u20b946,800 in taxes annually.<\/li>\r\n<\/ul>\r\n<p>She continued her SIPs and planned to increase them as her income rose.<\/p>\r\n<p><strong><b>Key Takeaways<\/b><\/strong><\/p>\r\n<ol>\r\n<li><b><\/b><strong><b>Diversification across fund types <\/b><\/strong>reduces overall risk.<\/li>\r\n<li><b><\/b><strong><b>Understanding structure and objectives <\/b><\/strong>helps match funds with financial goals.<\/li>\r\n<li><b><\/b><strong><b>Evaluating parameters like expense ratio and fund manager experience <\/b><\/strong>ensures long-term consistency.<\/li>\r\n<li><b><\/b><strong><b>Risk awareness <\/b><\/strong>prevents panic during market downturns.\u00a0<\/li>\r\n<\/ol><\/div>\n<\/div>\n<\/div>\n<script type='text\/javascript'>\n\tjQuery(document).ready(function() {\n\t\tjQuery('#text_slider').owlCarousel({\n\t\t\titems : 1,\n\t\t\tsmartSpeed : 400,\n\t\t\tautoplay : false,\n\t\t\tautoplayHoverPause : false,\n\t\t\tsmartSpeed : 400,\n\t\t\tfluidSpeed : 400,\n\t\t\tautoplaySpeed : 400,\n\t\t\tnavSpeed : 400,\n\t\t\tdotsSpeed : 400,\n\t\t\tdotsEach : 1,\n\t\t\tloop : false,\n\t\t\tnav : true,\n\t\t\tnavText : ['Previous','Next'],\n\t\t\tdots : true,\n\t\t\tresponsiveRefreshRate : 200,\n\t\t\tslideBy : 1,\n\t\t\tmergeFit : true,\n\t\t\tautoHeight : true,\n\t\t\tmouseDrag : false,\n\t\t\ttouchDrag : true\n\t\t});\n\t\tjQuery('#text_slider').css('visibility', 'visible');\n\t\tvar owl_goto = jQuery('#text_slider');\n\t\tjQuery('.text_slider_goto1').click(function(event){\n\t\t\towl_goto.trigger('to.owl.carousel', 0);\n\t\t});\n\t\tjQuery('.text_slider_goto2').click(function(event){\n\t\t\towl_goto.trigger('to.owl.carousel', 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or closed-ended or interval funds. The distinction between open ended and closed ended funds is based on investing flexibility and how easily they may be purchased. While open ended funds can be &#8230; <a title=\"Learn About Classification of Mutual Funds From Mutual Fund Course\" class=\"read-more\" href=\"https:\/\/www.5paisa.com\/finschool\/course\/mutual-fund-course\/mutual-funds-classification\/\" aria-label=\"Read more about Learn About Classification of Mutual Funds From Mutual Fund Course\">Read more<\/a><\/p>\n","protected":false},"author":1,"featured_media":21880,"parent":12525,"menu_order":0,"comment_status":"closed","ping_status":"closed","template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[],"class_list":["post-12540","markets","type-markets","status-publish","format-standard","has-post-thumbnail","hentry"],"acf":[],"_links":{"self":[{"href":"https:\/\/www.5paisa.com\/finschool\/wp-json\/wp\/v2\/markets\/12540","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.5paisa.com\/finschool\/wp-json\/wp\/v2\/markets"}],"about":[{"href":"https:\/\/www.5paisa.com\/finschool\/wp-json\/wp\/v2\/types\/markets"}],"author":[{"embeddable":true,"href":"https:\/\/www.5paisa.com\/finschool\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.5paisa.com\/finschool\/wp-json\/wp\/v2\/comments?post=12540"}],"version-history":[{"count":18,"href":"https:\/\/www.5paisa.com\/finschool\/wp-json\/wp\/v2\/markets\/12540\/revisions"}],"predecessor-version":[{"id":55538,"href":"https:\/\/www.5paisa.com\/finschool\/wp-json\/wp\/v2\/markets\/12540\/revisions\/55538"}],"up":[{"embeddable":true,"href":"https:\/\/www.5paisa.com\/finschool\/wp-json\/wp\/v2\/markets\/12525"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.5paisa.com\/finschool\/wp-json\/wp\/v2\/media\/21880"}],"wp:attachment":[{"href":"https:\/\/www.5paisa.com\/finschool\/wp-json\/wp\/v2\/media?parent=12540"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.5paisa.com\/finschool\/wp-json\/wp\/v2\/categories?post=12540"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}