Mutual Funds
by 5paisa Research Team Last Updated: 2023-07-04T12:53:20+05:30
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Mutual Fund categories are vital for mutual funds investment. It helps investors invest in mutual funds according to their financial goals and risk appetite. Mutual funds by category help investors filter mutual funds schemes according to their needs and preferences.

Types of Mutual Funds based on asset class

The Mutual Fund asset class that you select is essential for two reasons. Firstly, because it will affect your return, suppose you choose to invest in a Tax-Sensitive fund (equity). In that case, your returns will be affected by the tax structure at different levels – from taxes imposed when you purchase the fund (Stamp Duty, Service Tax etc.,) to the tax structure at the individual level when you sell your shares. The second reason is that some funds have different features since they have been classified into different categories and come with specific benefits.

Here are some of the most common mutual funds categories in India:

Equity funds

These funds invest in the stock market, buying stocks listed on the Bombay Stock Exchange (BSE). They might also invest in other securities such as bonds or derivatives. Because these investments tend to be volatile, equity funds can be hazardous.

Equity mutual funds invest in companies, promising a capital gain over time. There are two distinct types of equity mutual funds- Closed-ended and Open-ended funds.

Debt Funds

Debt mutual funds invest in bonds issued by the government, public sector undertakings (PSUs), financial institutions and corporate entities, etc. The returns from these investments depend on the credit quality of such debt securities.

These are managed by professionals who look at market factors, fiscal considerations, interest rates, maturity structure, and currency fluctuations before making investments.

Hybrid Funds

Hybrid funds are a combination of equity and debt. Professionals manage them to exploit market opportunities in the best possible way. In this case, the investment portfolio is primarily debt-based, while the asset allocation will be balanced with equity instruments and bonds.

It is a combination of two different kinds of investments, allowing investors to take advantage of stocks' growth potential and the stability that comes from bonds.

Solution-Oriented Funds

Solution-Oriented funds invest in stocks or similar securities expected to deliver good returns in the long run. If the fund's performance is poor, you can rest assured that it will rebound because the underlying stock or security is a good investment.

The goal of a solution-oriented fund is to find great investments that have specific characteristics that make them stand out as a good choice for investors.

Balanced Funds

They take a more mature view of investments. They are less likely to gamble with their portfolios, which means less risk for investors. However, short-term gains are expected in the portfolio for most balanced funds, so they are not always perfect for retirement planning.

It belongs to the mutual funds in India designed for investors who want to do better in both the market and the fixed income side of their portfolio. It does not have any particular investment objective or investment strategy. It aims to provide a return on investment similar to the general market indices such as the S&P 500 Index or Nifty 50 Index.

Why is the Categorisation of Mutual Funds Necessary?

The categorisation of Mutual Funds is necessary to quickly identify the various categories and sub-categories and make it easier for the investors to compare Mutual Fund schemes. It is also done for ease of understanding by the investors about the various schemes and options are available in the market.

Mutual funds are categorised into different categories and sub-categories based on their objectives, investment objective, investment style, asset allocation, risk profile, investment methodology and other similar factors. Similarly, each category (sub-category) has a specific minimum amount of assets that one can invest in it.

The categorisation of mutual funds is necessary for two main reasons:

1. It helps the investors compare the products across categories and within the category, thus making it easier for them to select the right products.

2. It provides a framework so that fund managers can focus on their specific objectives instead of changing them often.

The Asset Management Companies (AMCs) have been instructed to categorise their existing and future schemes into defined 'mutual fund categories' with sub-categories that must be similar across all AMCs. The goal is to enable investors to make an informed decision while choosing the right investment products based on clearly defined objectives.

With any industry, there is a massive amount of self-regulation. For mutual fund companies, the Securities and Exchange Board of India (SEBI) acts as the self-regulator for these financial institutions. While there are currently close to two dozen mutual funds in India, SEBI regulates only the financial institutions that manage them.

The SEBI Act mandates that each asset management company must have a board of directors with a minimum of three directors and meet basic corporate governance standards in place.

The categorisation is expected to help investors make more informed decisions while choosing a scheme as they can now assess different schemes based on their investment objectives. The Securities and Exchange Board of India (SEBI) has made it mandatory for AMCs to categorise their mutual fund schemes.

The categorisation is done to ensure transparency, comparability, and standardisation. The following are the top benefits of the categorisation of mutual funds:

  • It helps in uniformity among different schemes.
  • It establishes an appropriate benchmark for each category and thus helps in relevant comparison between the products.
  • It helps to evaluate the performance of schemes relative to their peers over time, thereby enhancing investor confidence.
  • It helps in customised recommendations based on investor risk profile and financial goals.

What are the norms, categorisation, and SEBI regulation

The common questions that you consider. These entities have a separate set of rules that they must follow, including writing up their documents outlining compensation plans, annual budgets, and performance goals and objectives. This means that each organisation is wholly independent of one another; they have their boards and internal control mechanisms.

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