• Mutual Funds are an important financial intermediary for an

investor.
• They are a vehicle to mobilise money from investors, to invest
in different avenues, in line with the investment objectives of
the scheme.
• Professional expertise along with diversification becomes
available to an investor through Mutual Fund route of
investment.
 Advantages of Mutual Funds

A) Portfolio Diversification
B) Professional Management
C) Diversification of Risk
D) Liquidity
E) Convenience and Flexibility
F) Low Cost
 Types of Mutual Funds

a) Money Market or Cash or liquid Funds

b) Debt Funds
c) Equity Funds
d) Hybrid Funds
e) Exchange Traded Funds (ETFs)
f) Fund of Funds
 a) Money Market / Liquid Funds

• a) Money Market / Liquid Funds-These Mutual Funds invest

the investor’s money in most liquid assets, like, Treasury Bills,
Certificates of deposit, Commercial papers etc.
• These are considered to be most liquid and least risky
investment vehicles.
• Though interest rate risk and credit risk are present, the impact
is low as the investment vehicle’s maturities are short and
quality of papers is sound.
• These are ideal for investors looking to park their short term
surplus with an objective of high liquidity with high safety.
• They carries the maturity date of 1 year or less than 1 year
depending upon the maturity date chosen by client.
 b. Debt or Income Funds

These funds invest in fixed income generating debt instruments,

issued by
• government,
• private companies,
• banks,
• financial institutions, and other entities such as infrastructure
companies/utilities.
• The main objective of these funds is to generate stable income at a
low risk for the investor. As compared to the Gilt funds these debt
funds have a higher risk of default by their borrowers.
These funds can further be categorized as,
• a) Diversified Debt funds,
• b) Short Term Debt funds,
• c) High Yield Debt funds,
• d) Fixed Term Plans,
• e) Gilt Funds
 • Diversified Debt Funds

• These funds invest in a diversified basket of debt securities.

They can invest in debentures issued by Government,
companies, banks, public sector undertakings, etc.
• The objective of these schemes could be to provide safety of
capital and regular income.
• At the same time, some funds may also have an objective of
generating higher returns than traditional debt investments.
• This objective can be achieved by proper management of
certain risks, viz.
1. credit risk,
2. interest rate risk or
3. liquidity risk.
 • Gilt Funds

• These funds invest in government securities. Since the funds

invest largely in the securities issued by Government of India,
the credit risk can be assumed to be non-existent.
• However, these government securities, also called dated
securities, may face interest rate risk, which means as the
interest rates rise, the NAV of these funds fall (and vice versa).
• The NAVs of these funds could be highly volatile, if the
maturity is long.
• These funds are also known as Government Securities Funds
or G-Sec Funds
 Short Term Debt Funds

• In order to reduce interest rate risk, some funds are mandated

to invest in debt securities with short maturity, generally less
than 3 years.
• Such funds earn large part of returns in form of interest
accrual and are less sensitive to interest rate movements.
• These funds may or may not take liquidity and credit risks. One
would be advised to read the scheme objectives and
investment style to know more about specific schemes
 High Yield Debt Funds

• High quality (those having high credit rating) debt securities

offer low interest rates and hence some investors are not
happy with such low returns.
• They are willing to take some risk without getting exposed to
the risk of equity.
• High yield debt funds are ideally suited for such investors.
These funds invest in debt securities with lower credit rating.
The lower rating ensures securities offer higher interest rates
compensating the investor for the extra risk taken.
 • Fixed Term Plans

• As seen earlier, debt funds are subject to interest rate risk and
the NAVs of these funds fluctuate if the interest rates change.
Investors willing to hold
• the investments for a defined term face the risk when they
need to take the money out of the scheme.
• If there was an option where the investor’s risk could be
reduced as the withdrawal time approaches, it serves a major
purpose for the investor. Fixed term plans, popularly known as
FMPs (Fixed maturity plans), have a defined maturity period;
say 3 months, 6 months, 1 year, 3 years, etc.
• The maturity of the debt securities in which the fund invests,
and the maturity of the scheme are almost the same.
• when the scheme matures and money has to be returned to
the investors, the fund does not have to sell the bonds in the
market, but the bonds themselves mature and the fund gets
maturity proceeds.
• Since the fund does not have to sell the bonds in the market,
the fund is not exposed to interest rate risk.
 c) Equity Funds
• These funds invest in equities and depending on the type of equities .
• these funds have been further classified as,
• a) Growth funds,
• b) Value funds,
• c)Dividend Yield funds,
• d) Large Cap funds,
• e) Mid Cap or Small Cap funds,
• f)Speciality funds or Sector funds,
• g) Diversified Equity funds and
• h) Equity
• Index funds. Certain equity funds have tax benefit under
section 80C of the Income-tax Act, 1961 and have a lock in
period of three years.
• These are Equity Linked Savings Schemes popularly called as
ELSS.
• These funds have higher risk, but potential for higher returns.
 • Growth funds

• These funds invest in the growth stocks, which i.e stocks that
exhibit and promise above average earnings growth.
• Managers using the growth style select stocks which are
normally quite high profile. Such stocks being high growth are
more visible and also have high investor interest.
 • Value funds

• As the name suggests, value funds buy value stocks as we

discussed earlier.
• Such stocks are generally out of favour with most investors in
the market and hence the market price is low as compared to
the inherent value of the business. The value style managers
generally hold the stocks for longer time horizon than their
growth style counter parts.
 • Dividend yield funds

• One of the valuation parameters a value style fund manager

looks for is high dividend yield.
• However, there is a category of funds that consider this one
parameter as the most important factor to select stocks. As
compared to other parameters of considering value, dividend
is believed to be more reliable as it involves cash movement
from the company account to the share holder account and
hence there is no room for any subjectivity.
 Large cap funds / Mid cap funds / Small
cap funds
• Equity mutual funds can be classified based on the size of
companies invested in. In capital market terms, the size of the
companies is measured in terms of its market capitalisation,
which is the product of number of outstanding shares and the
market price.
• Larger the market capitalisation, larger the company. In
popular usage, the word market capitalisation is referred to as
“cap”.
• Fund investing in stocks of large companies are called Large
Cap Funds and
• Those investing in stocks of midsized companies are called
Small Cap Funds.
 Speciality / sector funds

• Certain funds invest in a narrow segment of the overall

market. The belief here is that stocks in similar industry move
together, as companies in such sectors are similarly impacted
due to some factors.
• There are funds that invest in stocks of only one industry, e.g.
Pharma Funds, FMCG Funds or broader sectors, e.g. Services
Sector Fund or Infrastructure Fund. Similarly,
• There could be thematic or speciality funds that invest based
on some common theme, e.g. PSU Funds or MNC Funds.
 Diversified equity funds
• These funds invest in stocks from across the market
irrespective of size, sector or style. The fund manager has a
greater freedom to pick up stocks from a wider selection.
• Most advisors advise investors to have diversified funds as
core part of their portfolio.
• These funds, being diversified in nature, are considered to be
less risky than thematic or sector funds.
 d) Hybrid Funds

• These are mixed equity and debt funds. Depending on the objective
these funds can be further classified as a) Balanced funds, b)
Monthly Income Plans (MIP) and c) Asset allocation funds.

Balanced funds
• The most popular among the hybrid category, these funds were
supposed to be investing equally between equity and fixed income
securities. However, in order to benefit from the provisions of the
prevailing tax laws, these funds invest more than 65% of their assets
into equity and remaining in fixed income securities
 • Asset allocation funds

Advisors have a choice of either constructing portfolios

for their clients through careful selection of components.
Alternately, they can also look at readymade solutions
available in the form of “Asset Allocation Funds”
launched by certain mutual fund companies.
These funds are designed with certain investor profiles in
mind and most of the fund houses also offer tools to
match the investor profile with the various options under
these fund
 Exchange Traded Funds (ETFs

• These funds combine the best features of open and closed mutual fund
schemes, and trade like a single stock on stock exchange. Thus these
funds can be purchased and sold at real time price rather than at NAV,
which would be calculated at the end of the day. These funds, available
in India track indices (e.g. Nifty, Junior Nifty or Sensex) or commodities
like Gold (Gold ETFs). Recently, active ETFs have also been introduced
in Indian market.

• ETFs are very popular in other countries, especially USA. The biggest
advantage offered by these funds is that they offer diversification at
costs lower than other mutual fund schemes and trade at real time
prices
 Fund of Funds (FOF)

• Mutual funds that do not invest in financial or physical assets,

but invest in other mutual fund schemes, are known as Fund of
Funds.
• Fund of Funds maintain a portfolio comprising of units of other
mutual fund schemes, just like conventional mutual funds
maintain a portfolio comprising of equity/ debt/money market
instruments or non financial assets.
• There are different types of ‘fund of funds’, each investing in a
different type of collective investment scheme. Fund of Funds
provide investors with an added advantage of diversifying into
different mutual fund schemes with even a small amount of
investment, which further helps in diversification of risks.