Want to invest in mutual funds? Know the different schemes and risks before you start

Mutual funds are pooled investment vehicles that allow people to invest in broad asset classes such as equities debt real estate and commodities such as gold and silver indirectly But what are the mutual fund schemes that are available for investment purposesEquity fundsEquity funds invest in a portfolio of equity shares and equityrelated instruments and thus the risk and return from the scheme will be similar to those associated with direct investment in equity marketsEquity funds can be classified as active funds passive funds diversified funds and funds based on market capitalisationActive funds are funds that look to provide higher returns than the market benchmark indices Sensex and Nifty while passive funds mirror the benchmark indices buying the constituent companies in the same weight as the indicesIn diversified funds the investment is spread across sectors categories and different sizes of companies As the investment is diversified it generally has lower risk as the poor performance of one or two stocks wonrsquot weigh as heavily on the investment portfolioMutual funds also offer schemes based on the market capitalisation of companiesLarge cap funds invest in stocks of large liquid bluechip companies with stable performance and returns and these companies have market capitalisation of more than Rs 20000 crore Mutual fund houses are mandated to invest around 80 per cent of the investment in equities of such companies if the scheme is specified as a large cap schemeMidcap funds are investments in companies with market capitalisation of above Rs 5000 crore and less than Rs 20000 crore which have potential for higher growth and returns But these companies could get impacted by economic downturns and the risk involved is higher than the investment in bluechip or large cap stocks To be classified as a midcap fund at least 65 per cent of the total assets should be invested in equity instruments of such companiesSmall cap funds are the investments in companies with small market capitalisation less than Rs 5000 crore with high growth potential However the risks involved is higher than large cap and midcap funds To be classified as a smallcap fund at least 65 per cent of the assets need to be invested in such small cap companiesFund houses also offer a combination of large and midcap funds where at least 35 per cent has to be invested to stocks of large cap and midcap companies eachBesides they also offer multicap and flexi cap funds which invests in large mid and smallcap companies Fund houses also offer schemes where they invest in specific sectors such as banks and technology or it could be thematic where they invest the funds in multiple sectors allied to the themes For example if the theme is infrastructure the fund house can invest in infrastructure companies but also in banking construction logistics and cementsEquitylinked savings schemes offered by mutual funds provide tax deduction benefits under section 80C of the Income Tax Act However you need to stay invested in these schemes for at least three yearsDebtoriented schemesFor slightly conservative investors mutual fund houses offer debtoriented schemes The risk involved in debt market is lower than that of equity markets and the expected returns are lower than what one can expect in an equity market Depending on the type of securities in the portfolio the duration of the instruments and credit risk debt funds can be categorised Some of the debt market instruments include corporate bonds commercial papers government securities or specific sectors such as banking and PSU funds where they invest in debt papers of banks public sector undertaking public financial institutions and municipal bondsIn hybrid schemes the mutual fund house will invest the corpus collected from the investors in both debt and equity marketsOther fundsFund of funds is a scheme through which a mutual fund invests in other mutual funds schemes rather than investing in stock market or debt market by itself This is done for diversification purposes and the mutual fund analyses funds their performance and strategy selecting the ones that fit closely to its investment objectiveExchange traded funds is an investment fund holding multiple underlying assets and is listed on stock exchanges Just as how one would buy or sell shares on the stock market you can similarly trade these funds The return and risk on ETFs are linked to the underlying index or assetHowever it is important to remember that mutual fund investments also involve some risk and you need to analyse your financial objectives your risk capacity and a funds performance a fund managers track record transactional costs involved Ensure that your investment objectives align with a funds investment objective