Mutual fund (MF) investments are not all about market risks. While the risks create intermittent opportunities to invest in low markets and make higher gains, they also provide opportunities for the regular investors investing in equity-oriented MF schemes through the systematic investment plan (SIP) to make superior gains in the long term.
Apart from equity – which carries highest market risks – there are also other categories of MF schemes having moderate to lower risk aspects.
Following are some broad categories of MF schemes:
Equity funds or the equity-oriented MF schemes have at least 65 per cent investments in equities or equity-related instruments at any point of time, which may be increased up to 100 per cent. Due to high equity exposure, such funds get most affected by market fluctuations and are considered very risky.
However, by withstanding the short-term fluctuations in capital invested, an investor can get superior returns in the long term.
Why equity: Equity is the only asset class that has the capability to beat inflation comprehensively and has the potential to generate long-term wealth.
Portfolio composition: The portfolio of an equity fund mostly comprises stocks of different companies and equity-related instruments.
Investment Duration: As equity funds have high market exposure, the capital invested in such funds fluctuates in the short term. To withstand such fluctuations, you should invest for more than 3 years. Higher the investment period, lower will be the risk and more will be the prospect of generating superior returns.
Equity Linked Savings Schemes (ELSS) are a special sub-category of equity funds that provide investors tax benefits u/s 80C of the Income Tax Act, but have 3-year lock in period. Other features of ELSS are similar to that of equity funds.
Debt funds or debt-oriented MF schemes have at least 65 per cent investments in debt securities or debt-related instruments at any point of time, which may be increased up to 100 per cent. Due to very low or nil equity exposure, such funds get least affected by market fluctuations and are considered q safe.
Why debt: As the underlying papers in a debt fund are fixed-return instruments having predictable return and maturity period, such funds may be used to generate regular income.
Portfolio composition: The portfolios of debt funds composed of fixed income instruments – such as government securities, Treasury Bills, Certificate of Deposits, Commercial Papers, etc.
Investment Duration: The investment duration would depend on the duration of the underlying debt papers of different debt funds. Typically, a debt fund may be used to park money for 1-3 years.
Liquid funds also fall under the debt fund category and have instruments with very short maturity periods in its portfolio. Such funds are ideal for an investment period of 1-60 days and the Net Asset Value (NAV) of such funds are determined even on Saturday and Sunday. So, redemptions are possible even in holidays. The other features are similar to that of debt funds.
Overnight Funds also fall under the debt fund category, but invest in instruments having overnight maturity periods. Other features of such funds are similar to that of liquid funds.
Hybrid funds invest in both equity and debt instruments with the aim of providing equity return with reduced risks.
Why hybrid: You may choose hybrid funds to have –
- Growth from equity
- Stability from fixed income
- Protection from market volatility
Portfolio composition: The portfolios of hybrid funds comprised of stocks, fixed income instruments and gold as well.
Investment duration: Hybrid funds may be used for investment duration of 3-5 years or even for a longer duration.