Module 3: Understanding Different Types of Mutual Fund Schemes
Topic: Categorization of mutual fund schemes
These are the different categories of schemes available:
1. Equity Schemes:
These schemes primarily invest majority in stocks (equities and equity related instruments) which are listed companies on the exchange. These schemes may be suitable if you have a higher risk appetite and longer investment horizon.
2. Debt Schemes:
A debt scheme (also known as a Fixed Income fund) primarily invests in bonds or other debt securities. You can think of a bond as an instrument where the government/other entities borrow money from an individual in exchange for an interest rate that is paid to them at regular intervals. Debt schemes have the potential to preserve the capital and are less riskier than equity schemes.
3. Hybrid Schemes:
Hybrid schemes invest in a mix of equities and debt securities. They seek to find a ‘balance’ between investment growth and fixed income by investing in both equity and debt.
4. Solution-Oriented Schemes:
The Solution oriented schemes can be Retirement and Children funds. These schemes are aimed at specific financial goals and also have a mandatory lock-in period of 5 years.
5. Other Schemes:
These schemes include funds such as Index Funds, Exchange Traded Funds (ETFs) and Fund of Funds(FoFs) investing both domestically and overseas. Index Funds, Exchange Traded Funds (ETFs) invest 95% in stocks of a particular index/benchmark it tracks.
We will understand more about the concept of a benchmark below. Now that you have invested in a certain scheme, how do you assess if that scheme is performing well?
This can be done through something called Benchmarking. Every mutual fund scheme benchmarks itself to an index like the Nifty 50, Nifty 100 etc depending on the category it operates in. Benchmarking allows you to evaluate if the performance of the scheme you have invested in is higher or lower than the performance of the index.
For a detailed list of sub-categories of schemes within each of these categories of mutual funds, you can check the list here.
Task:
Can you identify the category and the sub-category of the mutual fund that you have invested in?
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Mutual Fund investments are subject to market risks, read all scheme related documents carefully.
An Investor education and awareness initiative by Zerodha Mutual Fund.
