As the name suggests, mutual funds are a collective pool of funds which are managed by a professional fund manager. The companies providing mutual fund services have various schemes, having different mandates. Under each scheme, funds are collected from a vast pool of investors which is then deployed in various market instruments like equities, debt, gold etc. depending on the scheme objective.
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What are Mutual funds?
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with retirement planning?
What are the various types of mutual funds?
Equity Mutual Funds
Equity mutual funds invest the majority (at least 65%) of their assets in shares of listed companies across market capitalisations. Equity mutual funds generate the highest returns of all mutual fund types. The higher returns come with higher volatility (or risk) and hence it is advisable to be invested in equity mutual funds for at least 5 years.
Equity funds are further divided into various categories
Large Cap funds
These funds invest >65% of assets in shares of top 100 companies by market capitalisation.
Mid Cap funds
These funds invest >65% of assets in shares of companies which are ranked 101-250 by market capitalisation.
Small Cap funds
These funds invest >65% of assets in shares of companies which are ranked 251 or below by market capitalisation. These schemes carry a higher risk.
Flexi Cap funds
These funds are market cap agnostic and have large, mid and small cap equity exposure.
ELSS
Equity Linked Savings Schemes (ELSS) are similar to flexi cap funds but are wrapped so that they receive income tax benefit under section 80C.
Sectoral funds
These funds invest in shares of companies falling under specific sectors like Pharma, BFSI, Infrastructure etc.
Thematic
These funds invest according to a particular theme like consumption, manufacturing, EV etc. These funds try to generate excess returns
by banking on the success companies which stand to gain from a particular theme.
Taxation of equity mutual funds: Equity mutual funds taxation is dependent on the capital gains, i.e. difference between selling price and purchase price. Taxation of the said gains is dependent on the tenure. Please refer to the table below to understand in more detail.
| Short-term gains | Long-term gains | |
|---|---|---|
| Holding period | Less than 1 year | More than 1 year |
| Tax rate | 15% | 10% (exempt upto 1L gain) |
Debt Mutual Funds
Debt mutual funds invest in interest earning instruments like corporate bonds, government bonds, treasury bills, corporate FDs etc. They are usually less volatile than equity funds and hence can be considered for shorter tenures upto 5 years. Debt mutual funds are a good alternative to bank FDs as their tax treatment is more favourable than FDs.
Debt funds are further divided into various categories
Liquid
These funds invest in debt securities with a maturity upto 91 days. Safest mutual fund product.
Ultra short duration
These funds invest in debt securities with a maturity of 3-6 months.
Low duration
These funds invest in debt securities with a maturity of 6-12 months.
Short duration
These funds invest in debt securities with a maturity of 1-3 years.
Medium duration
These funds invest in debt securities with an average maturity of 3-5 years.
Long duration
These funds invest in debt securities with an average maturity of more than 5 years.
Corporate bond
These funds invest in bonds issued by corporations
Banking & PSU
These funds invest in bonds issued by banks and public sector companies.
Credit Risk
These funds invest in debt securities of issuers with less than satisfactory ratings in order to achieve higher yields.
They are the riskiest category in bond funds.
There are other categories of debt funds as well but they are similar to the ones discussed above.
Taxation of debt mutual funds: Debt mutual fund taxation is dependent on the capital gains, i.e. difference between selling price and purchase price. Please refer to the table below to understand in more detail.
| Short-term gains | Long-term gains | |
|---|---|---|
| Holding period | Less than 3 years | More than 3 years |
| Tax rate | Slab rate | 20% with indexation benefit |
Hybrid Mutual Funds
As the name suggests, hybrid mutual funds aim to give you a holistic exposure to debt and equity funds. They work on an asset allocation strategy where they may be either equity focussed or debt focussed depending on where the maximum return opportunity lies. They do not work in extremes, i.e. only debt or only equity, but a combination of both, where equity provides the upside, while debt provides stability.
They are suitable for people who want to invest for the long-term but are wary of equity funds’ volatility.
Taxation of hybrid mutual funds: If they are more equity heavy, taxation is same as equity mutual funds, while if they are debt heavy, taxation is same as debt mutual funds.
International Funds
These are equity funds which invest in companies listed outside India. They provide a good way to diversify your exposure and get access to international markets. Just like equity funds, they are riskier and since we are dealing with foreign equities, there is enhanced risk due to limited information available. They are suitable for people with a long time horizon.
Taxation of international mutual funds: International mutual funds are taxed the same way as debt mutual funds.
| Short-term gains | Long-term gains | |
|---|---|---|
| Holding period | Less than 3 years | More than 3 years |
| Tax rate | Slab rate | 20% with indexation benefit |
Solution Oriented Funds
Solution oriented funds try to address an underlying need like retirement, children’s education etc. They have a mix of debt and equity both. They come with a lock-in period and hence we don’t advise investing these funds as the same goals can be achieved via other equity/debt funds.
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