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Mutual funds in India are classified into different categories based on the asset class they invest in. Some popular categories are listed below

Equity Mutual Fund

Equity funds invests majority of their assets in stocks. These funds are classified into different categories based on

Market Capitalization - 

• Large-Cap Funds: Invest at least 80% of their assets in top 100 companies by market cap.

• Mid-Cap Funds: Invest at least 65% of their assets in the next 150 (101st - 250th) companies by market cap.

• Small-Cap Funds: Invest at least 65% of their assets in companies ranked 251 and above by market cap.

• Large & Mid-Cap Funds: Invests at least 35% investment in large cap stocks and 35% in mid cap stocks.

• Multi-Cap Funds: Invest at least 25% of their assets in each of the large, mid, and small-cap stocks.

• Flexi-Cap Funds: Invest in companies of all sizes and across sectors.

Sector Specific Funds -

Invest in a particular sector such as infrastructure, banking, technology or pharmaceuticals etc.

Thematic Funds - 

Select and Invests in stocks of companies in an industry that belong to a particular theme such as Infrastructure, Service industries, PSUs or MNCs.

Value Funds -

Invest in stocks that are currently undervalued but are expected to perform well over time as the value is unlocked.

Contra Funds - 

These funds that take a contrarian view on the market. Invest in under-performing stocks and sectors that are picked at low price points with a view that they will perform in long run.

Focused Funds -

These funds cannot have more than 30 stocks in their portfolio by regulation, although there is no limitation on market cap or sectors it can invest. Hence follows a strategy of having a concentrated portfolio.

Equity Linked Savings Scheme (ELSS) -

• ELSS invests at least 80% in stocks in accordance with Equity Linked Saving Scheme, 2005, notified by Ministry of Finance.

• Has lock-in period of 3 years (which is shortest amongst all other tax saving options).

• Currently eligible for deduction under Sec 80C of Income Tax Act up to ₹1,50,000.

Debt Mutual Fund

Debt funds generate returns by lending money to Corporates and the Government by buying their debt papers. These funds are classified into different categories based on their lending period and credit quality of the papers

Categorization based on the tenor of the Securities

Categorization based on the issuer of the Securities

• Overnight (For up to a week)

• Liquid (For 1 week to 1 month)

• Ultra Short Duration (2 to 4 months)

• Low Duration (3 to 9 months)

• Money Market (6 to 12 months)

• Short Duration (1 to 3 years)

Funds to Park Money

Short Term Funds

Medium Term Funds

• Medium Duration (For 2 to 4 years)

• Banking & PSU Funds

• Corporate Bonds

Long Term Funds

• Medium to Long Duration (3 to 5 years)

• Long Duration (> 5 years)

• Dynamic Bonds

• Invest primarily in government securities

• No risk of default

• Ideal time horizon (5 years)

Gilt Funds

• Min. 80% investment in Corp. bonds with AA+ & above rating

• Deliver better returns than Bank FDs of similar duration

Corporate Bond Funds

Credit Risk Funds

• Min. 65% investment in Corp. bonds with AA & below rating

• Deliver better returns than Bank FDs but has higher risk

• Min. 80% in debt instruments of banks, PSUs, Public Financial Institutions and Municipal Bonds

Banking & PSU Bond Funds

Hybrid Mutual Fund

Hybrid Funds invest in a mix of asset classes. Most Hybrid Funds invest in equity and debt although there are funds that have more asset classes like gold, international equities, etc. in their portfolio

Hybrid Schemes

• Conservative - 10% to 25% in Equity; 75% to 90% in Debt

• Balanced - 40% to 60% in Equity; 40% to 60% in Debt

• Aggressive - 65% to 80% in Equity; 20% to 35% in Debt

Dynamic Asset Allocation or Balanced Advantage Fund

• Investment in equity/ debt that is managed dynamically

• 0% to 100% in equity

• 0% to 100% in Debt

Multi Asset Allocation Fund

• Investment in at least 3 asset classes - equity, debt & gold

• Min. allocation of at least 10% in each asset class

• Less riskier than most hybrid funds

Equity Savings

• Min. 65% in Equity

• Min. 10% in Debt

• Derivatives (min. for hedging to be specified in the SID)

• Asset allocation is a strategic approach to balancing risk and returns by investing across various asset classes

• Historically, asset classes such as equities, fixed income, debt, and gold have demonstrated low or negative correlations in their price movements

• Diversifying investments across these asset classes can significantly mitigate risk while potentially delivering superior long-term returns

• Financial experts emphasize that adopting an effective asset allocation strategy is essential for achieving your financial objectives

ASSET ALLOCATION STRATEGY

STRATEGIC ASSET ALLOCATION

• Fixed asset allocation strategy wherein you determine your equity and debt exposure and then stay fixed on the ratio

• Periodical re-balancing of portfolio based on market conditions to ensure that specified ratio is maintained

TACTICAL ASSET ALLOCATION

• Allows you to alter asset allocation to take advantage of market conditions

• Works on your ability to read and understand market movements and is often called momentum-based strategy

• You change your allocation for the short term to maximize returns or minimize risks.

DYNAMIC ASSET ALLOCATION

• No fixed allocation ratio but investment is made as per market movements

• In an uptrend market, you favor higher equity exposure, while in a downtrend, you would be cautious and invest primarily in debt