Investment in Mutual Funds - A Step by Step Guide


INVESTMENT IN MUTUAL FUNDS – Part 2:

In the write up below, we would list and describe the various kinds of funds:

  • Large Cap Fund – Large cap funds are those funds which invest a larger proportion of their corpus in companies with large market capitalization. Trustworthy, reputable and strong are three adjectives that are often used to describe a large-cap company. The klarge cap funds invest at least 80% of their corpus in the largest 100 companies in terms of market capitalisation. These schemes carry lower risk and offer modest returns.
  • Multi Cap Fund – These are diversified mutual funds which can invest in stocks across market capitalization. Their portfolio comprises of large cap, midcap and small cap stocks and they are mandated to invest a minimum of 65% of their total assets in stocks. These schemes are ideal for investors with a moderate risk appetite.
  • Mid Cap Fund - A midcap fund is an investment fund that focuses on companies with a market cap in the middle range of listed stocks. Mid cap funds invest at least 65% of their total assets in mid cap stocks. These schemes are best for aggressive investors as these are risky and volatile.
  • Large and Mid Cap Funds – These schemes are suitable for investors with high risk appetite. These schemes are mandated to invest a minimum of 35% in both large cap as well as mid cap stocks and due to their exposure to mid cap stocks, these schemes are considered risky. 
  • Small Cap Fund – Small-cap equity funds are those which invest in shares of companies which have smaller market capitalisation and invest in the 251st company onwards in terms of full market capitalisation. In such a fund, the fund manager needs to have a minimum exposure of 65 per cent to such companies. Though these small companies have the potential to offer higher returns, they can be extremely risky too.
  • Dividend Yield Fund – A dividend yield fund is a mutual fund which invests in shares/stocks of companies that pay high dividends. This category was introduced by Sebi in the re-categorisation exercise in 2017.
  • Value Fund – A value fund is a fund that follows a value investing strategy and seeks to invest in stocks that are deemed to be undervalued in price based on fundamental characteristics. Value investing is often compared with growth investing, which focuses on emerging companies with high growth prospects. The schemes are mandated to invest 65% of their allocation in equities.
  • Contra Fund – A contra fund is defined by its against-the-wind kind of investing style. The manager of a contra fund bets against the prevailing market trends by buying assets that are either under-performing or depressed at that point in time. These schemes have a minimum of 65% allocation top equities.
  • Focused Fund - A focused fund is a mutual fund that has shares in a limited number of companies. It also holds shares in a limited number of sectors. A focused fund, typically, holds stocks in fewer than thirty companies and fewer than three sectors. The scheme would mention which market cap it tends to focus. These schemes can offer great returns if the stocks perform but, can be extremely risky in case of wrong selection of stocks. 
  • Sectoral / Thematic Funds – The Thematic Funds are a kind of mutual funds that invests across the sectors related to the common theme. These funds are much more volatile and riskier than the other market funds as their performance is solely based on the performance of the sector / sectors in which they are investing. These schemes invest a minimum 80% of their assets in equity. 
  • Equity Linked Saving Scheme – Popularly known as ELSS, these schemes are close-ended with a lock-in period of 3 years diversified across equity schemes offered by mutual funds in India. They offer tax benefits under the new Section 80C of Income Tax Act 1961. The minimum investment in equities should be 80% of total assets.