In brief, the various types of Equity Mutual Funds are as follows:
1. Equity Savings Fund – These are the safest of the equity funds. These are best for people nearing the retirement age and who have never invested in Mutual Funds before. The fund invests about a third in bonds, a third in shares and a third of their money in arbitrage. That sounds like a dangerous word, but in this case, it is safe. Returns are around 8 – 10%
2. Balanced funds – These funds invest upto 65% of the money in shares and the rest in bonds. They are a bit riskier than the Equity Saving Funds, but are excellent if you don’t want to maintain a separate debt investment. These funds take care of it.
3. Large Cap Funds – These funds invest in the top 100 companies (by size) on the stock exchange. Since these companies are so large, it is difficult for them to grow too much. Also, there is less chance of them falling, so a 12 – 15% return can be expected from these funds. These funds are also less volatile, which means their price does not swing up and down too much.
4. Diversified Equity Fund or MultiCap Fund – These funds can invest across the board. They can choose in invest in Large, Mid or Small Caps. I consider these funds slightly riskier than the Large Caps, but safer than the MidCaps.
5. Tax Savers (or ELSS) – Generally, these funds are Diversified Equity Funds. The only difference being that they have a lock in period of 3 years. The money invested in them can be set off against that year’s income, upto Rs.1,50,000 to reduce the tax payable.
6. Mid Cap Funds – These funds invest in the 101 – 250 ranking companies (by size) on the stock market. The hope is that these companies do well and become large companies and their share prices will go up rapidly. The returns by these funds are higher – 20% and above. However, they tend to be volatile – there could be a large movement of their NAV or market price. Generally, they are riskier than the Large Caps.
7. Small Cap Funds – These funds invest in the smaller companies. The share prices of small companies can be manipulated quite easily as most of them have a total capital of a few crores only, it is rather risky to invest in these funds. However, in a good market, sometimes one can get even 50% returns in such funds. These funds are highly volatile, so one should be prepared for a 50 – 60% swing in the NAV.
8. Sectoral funds – These funds invest in a sector, like automobiles, pharma, banking, etc. If you feel that the pharma companies will do well in the next few years, you should invest in a pharma fund. These are the riskiest of all the funds and in my opinion, should be avoided at all costs. This is because say, pharma companies are expected to do well in the next year, then the managers of the other funds are also allowed to invest in these Pharma companies. If however, the Pharma companies are expected to do badly, most of the fund managers have the ability to sell their Pharma stocks and move into another sector.