To choose mutual fund scheme(s) that fit best in your portfolio, it is important to know little bit more about them
Mutual Funds are a great investment avenue for all types of investors. They offer schemes that would meet the requirements of a risk averse investor and also offer investable options for investors looking to generate high returns and are amenable to assuming higher risk. In order to choose the mutual fund scheme(s) that fit best in your portfolio, it is important to know a little bit more about them.
- Equity: These schemes invest in stocks of publicly traded companies. They are usually categorised basis market capitalization (large cap, mid cap or small cap), sector (information technology, auto etc) and/or theme (consumption, growth, value etc).
- Debt: These schemes invest in debt securities or money market instruments issued by the government of India or corporates. Their risk level varies depending upon the credit rating of the securities they invest in.
- Money Market: These schemes primarily invest in ultra-short-term securities such as Treasury Bills, Certificate of Deposits and Commercial Papers. These securities typically have a maturity of about 3 months and are ideal for short-term investments.
- Hybrid: These schemes seek to leverage upon the benefits of both equity, as well as, fixed income instruments. Such schemes can be a good option for investors who are looking to benefit from the growth potential of equities but would like to limit the downside of their portfolios by giving it the protection of debt. Dynamic asset allocation schemes, that allocate to both debt and equity in a certain proportion, are a good example of hybrid schemes.
- Open-ended: These schemes do not have a fixed maturity period, which means you can easily invest or redeem from these schemes whenever you want.
- Close-ended: These schemes have a fixed maturity period and investors can only invest in these schemes during the “New Fund Offer” period and redeem or reinvest when its maturity period ends.
- Interval: These schemes combine the benefits of both open-ended and closed-ended schemes. Interval schemes allow investors to purchase or redeem the units of the scheme only at intervals specified by the mutual fund house. For periods outside these specified intervals, the scheme remains closed for transactions.
- Growth: These scheme generally invest in the stocks of publicly traded companies that offer reasonable potential for growth over the long-term. Investors looking to create long-term wealth and achieve financial goals that have a time horizon of at least five years, can consider such schemes.
- Income: As the name suggests, these schemes are suitable for those who seek income on a regular basis. They generally invest in debt securities that offer interest income periodically.
- Liquidity: These schemes invest in ultra-short-term money market instruments with a maturity of less than 90 days. As they generally offer returns that are better than savings accounts and are liquid, investors can consider such schemes to park their excess cash.
- Tax-Saving: There are certain mutual schemes that offer a tax advantage Under Section 80C of the Income Tax Act. Investments in Equity-Linked Savings Scheme (ELSS) are available for deduction under section 80C, with a limit of INR 1,50,000. Compared to other tax saving instruments, an ELSS offers the benefit of having the shortest lock-in period of three years.