Congratulations on embarking on your investing journey through mutual funds! However, with a plethora of options available, it’s natural to feel overwhelmed and confused. Each types of mutual funds scheme has its unique investment approach and objectives, resulting in varying risk factors and asset allocations.
But fret not! In this blog, we’ve got you covered. We will delve into the various types of mutual fund schemes available in the Indian market, helping you gain a clear understanding of their characteristics and guiding you toward making informed investment decisions.
Points while comparing types of mutual fund schemes
Mutual funds are differentiated on some key factors as discussed below
Investment Objective
SEBI requires mutual fund houses to disclose and adhere to a specific investment objective for each of their funds. This objective serves as a guiding principle for investors, helping them make informed decisions that align with their financial goals. The investment objective can vary, ranging from tracking a TRI benchmark index for Index funds to participating in the Future & Options market for Arbitrage funds. It is essential for investors to comprehend these investment objectives thoroughly and invest accordingly, ensuring their investments are well-matched to their individual goals and risk preferences.
Risk Assessment
Each mutual fund scheme comes with a pre-defined investment objective that directly influences the level of risk associated with the fund. This risk profile, in turn, plays a significant role in determining the expense ratio and the fund’s past performance. The fund manager’s expertise is crucial in striking a balance between risk and return, and this expertise comes at a cost. The degree of risk varies significantly across different types of mutual funds, with index funds carrying minimal risk and arbitrage funds being associated with higher risk levels.
Regulatory risks
SEBI has established guidelines that mutual fund houses must adhere to in order to mitigate investor risk. These regulatory measures address various aspects, such as the recent freeze on fund infusion for small-cap funds, the asset allocation requirements for dynamic asset allocation funds, and the tax and legal frameworks applicable to international mutual funds. These measures aim to provide investors with a safer and more transparent investment environment while ensuring compliance with the regulatory standards set by SEBI.
Types of Mutual Funds Scheme
In this blog, we will focus on exploring some lesser-known mutual fund schemes that are not commonly discussed, rather than the typical sector-wise equity mutual funds, debt funds, or index funds. We will shed light on the following unique schemes:
Arbitrage funds are a type of mutual fund that generates income and capital appreciation by taking advantage of short-term price differences between similar securities in different markets. For example, if the price of a stock on the Bombay Stock Exchange is different from the price of the same stock on the National Stock Exchange, an arbitrage fund can buy the stock on the Bombay Stock Exchange and sell it on the National Stock Exchange to make a profit.
Fund Objective: Appreciation from short-term differences in prices
Risk Assessment: Low risk
Regulatory Risk: Risk discourse
“Hybrid Mutual Funds” bridge the gap for investors prevailing against the barriers of sorting two funds and bearing their individual charges. Hybrid mutual funds, also known as balanced funds, offer a unique combination of asset classes, combining the benefits of equity and debt instruments.
Fund Objective: Bridging the gap between Equity and Debt
Risk Assessment: Medium based on asset allocation
Regulatory Risk: Investment limits and Portfolio diversification
Diversification of a portfolio is a big win with International mutual funds. With exposure to global markets, your portfolio is bound to be diversified, and you can easily reduce your investment risks. Plus, with country-specific funds or funds that invest in top-performing companies, you can gain access to high-growth companies you would otherwise not have access to. How awesome is that? But, what about currency fluctuations? That’s where international mutual funds cover you. The exposure to different currencies helps you balance and hedge your portfolio against undue risks. Sure, market risks always pose a threat.
Fund Objective: Exposure to International markets
Risk Assessment: Currency exchange rate
Regulatory Risk: Taxation and Policy Frameworks
A mutual fund scheme that adjusts its asset allocations (equity or debt) based on current market conditions and trends is known as a dynamic asset allocation fund or balanced advantage fund. These funds employ an asset allocation strategy where they tweak the investments in securities depending on the conditions of the market. Dynamic mutual funds act as a shield against downswings in the market and they usually lose substantially less amount of money during a time when the markets are down. Hence, these funds are believed to be an ideal investment avenue in the volatile market that seems to be on a bull run.
Fund Objective: Balancing asset allocation according to market volatility
Risk Assessment: Medium depends on Asset allocation
Regulatory Risk: Portfolio Diversification and Risk Disclosure
Low-risk mutual funds are investment vehicles that prioritize capital preservation and aim to provide stable returns with minimal exposure to market fluctuations. These funds typically invest in assets with historically low volatility, such as government bonds, high-quality corporate bonds, and other stable financial instruments.
Fund Objective: Investment in fixed-income-based securities
Risk Assessment: Lock-in period not for short-term investment
Regulatory Risk: Overleveraging and diversification
