An equity fund is a mutual fund scheme that invests predominantly in equity stocks. In the Indian context, as per current SEBI Mutual Fund Regulations, an equity mutual fund scheme must invest at least 65% of the scheme’s assets in equities and equity related instruments. In many ways, equity funds are ideal investment vehicles for investors that are not as well-versed in financial investing or do not possess a large amount of capital with which to invest. Equity funds are practical investments for most people. The attributes that make equity funds most suitable for small individual investors are the reduction of risk resulting from a fund's portfolio diversification and the relatively small amount of capital required to acquire shares of an equity fund. A large amount of investment capital would be required for an individual investor to achieve a similar degree of risk reduction through diversification of a portfolio of direct stock holdings. Pooling small investors' capital allows an equity fund to diversify effectively without burdening each investor with large capital requirements. Equity funds are managed by experienced professional portfolio managers, and their past performance is a matter of public record. Transparency and reporting requirements for equity funds are heavily regulated by the federal government. Investing in equity mutual funds comes at slightly higher risk as compared to debt mutual funds, but they also give your money a chance to earn higher returns.
A debt fund is a mutual fund scheme that invests in fixed income instruments, such as Corporate and Government Bonds, corporate debt securities, and money market instruments etc. that offer capital appreciation. Debt funds are also referred to as Income Funds or Bond Funds. Debt funds are ideal for investors who want regular income but are risk averse. Debt funds are less volatile and, hence, are less risky than equity funds. Debt funds invest in either listed or unlisted debt instruments, such as Corporate and Government Bonds at a certain price and later sell them at a margin. In terms of operation, debt funds are not entirely different from other mutual fund schemes. However, in terms of safety, they score higher than equity mutual funds. There’s no fixed rule as to who should invest in debt funds. It depends on the requirements of investors. Different types of investors invest in different types of debt funds. If you want to avoid the market fluctuations of equity stocks and are risk-averse, consider investing in debt-oriented mutual fund schemes. A few major advantages of investing in debt funds are low-cost structure, stable returns, high liquidity, and reasonable safety. Debt funds also score on post-tax return. Dividends from debt funds are exempt from tax in the hands of investors.
Hybrid mutual funds are a unique type of mutual fund that invests in several asset classes. In other words, they combine many different types of funds. They include stocks and fixed-income securities like bonds, debentures, treasury bills, etc. Hybrid funds are a combination of the three main asset classes – equity, fixed income, and commodities. Hybrid mutual funds are fundamentally based on active risk management. They diversify their portfolio by investing in non-related asset classes like debt and equity. It allows investors to access different asset classes through a single fund. This eliminates the need for multiple investments. Hybrid funds are appropriate for individuals with longer investment horizons since they include a sizable exposure to stocks.
Solution-oriented mutual funds aim to provide a particular solution to a specific financial objective. SEBI has specified two solution-oriented funds that are: retirement fund and children’s fund. They are designed to help investors plan for their future needs such as retirement, education, marriage, etc. As their names suggest, they are meant to serve specific purposes and hence provide ‘solution’ to specific requirements.
The Other Mutual Funds are: FoFs and Index Funds/ ETFs. Fund of Funds (FoF) is a mutual fund scheme that invests in other schemes of mutual funds. Like how funds invest in stocks and bonds, the Fund of Funds invests in other mutual fund schemes. So, depending on your investment objective, this mutual fund scheme may invest in debt and equity. Index Funds are like Mutual Funds where the investment is made in securities and further diversified in shares, bonds, and commodities. Because of this, investors enjoy dual benefits of investing in risky shares with lower risk, as the index fund ensures that the investment does not fall from the benchmark, irrespective of market conditions. Index Funds provide good returns with long-term wealth creation benefits, thus gaining popularity as a convenient passive investment option for investors. ETFs or Exchange Traded Funds are funds that mostly trade in the intraday shares market and clock the profits at the end of the day. ETFs are highly transparent in nature, where investors get to know exactly where their investments are allocated.