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To Invest in Mutual Fund one should know the types of Mutual Fund Available in the market. These are: Equity funds, Debt funds, Balanced schemes, Sector funds, Gilt funds, Index funds, MIPs(Monthly Income Plans), MMFs(Money Market Funds) ETFs etc. Each one of these schemes follows a different investment strategy. Most of the schemes have “growth oriented” or “dividend oriented” plans, which either re-invest or pay out the dividend collected from underlying stocks.

Equity Schemes: This type of fund predominantly invests in equity shares of companies. It provides returns by way of capital appreciation. This type of fund is exposed to high risk and hence return may fluctuate. As it invests only in stocks, it is riskier than debt funds. The returns will depend on the performance of the company that the fund invests in. However, on the flipside, this fund has a high return capability since equities have historically outperformed all other asset classes. There are several types of equity schemes based on different categorization parameters.1.Large cap funds / blue chip funds – invest in large company stocks, typically from BSE 100 index. Generally low risk investment with moderate returns.2.Mid cap / small cap funds – Mid cap & small cap funds are generally considered riskier because smaller companies have higher business risks. At the same time, they can give multi bagger returns because smaller companies can grow multi fold if they are successful.3.Sector Funds: These funds are the riskiest amongst equity funds as these invest only in specific sectors or industries. The performance of sector funds depends on the fortunes of specific sectors or industries. This type of funds maximizes returns by investing in the sector, when the sector is expected to boom and gets out before it falls. You should invest in these funds only if you really understand the sector and its trends.4.Index Funds: These funds track a key stock market index like BSE Sensex or NSE S&P CNX Nifty. It will invest only in those stocks which form the market index, as per the individual stock weightage. The idea is to replicate the performance of the bench marked index. The performance should ideally be better than or at least the same as the concerned index. The exit load of these schemes is usually lower than regular schemes.

Debt Schemes: Debt Schemes invest mainly in income bearing instruments such as bonds, debentures, government securities and commercial paper. This type of fund basically invests in FD like instruments that pay interest based on various market factors. Its volatility depends on the economy reflected by factors such as the rupee depreciation, fiscal deficit and inflationary pressures. Broadly speaking, the returns from pure debt schemes will be in line with bank FDs. There are short term, medium term and long term debt funds based on the time horizon they cater to.1. Gilt Funds: This is a sub-type of debt funds, which invests only in government securities and treasury bills. They are generally considered safer than corporate bonds and are more tuned towards long term investments.2.Monthly Income Plans (MIPs): This is basically a debt scheme which invests a marginal amount of money (10%- 25%) in equity to boost the scheme’s return. This fund will give slightly higher return than traditional long term debt scheme.3.Money Market Funds (MMFs): These are also known as Liquid Funds. These funds are debt schemes that invest in certificate of deposit (CDs), Interbank call money market, commercial papers and short term securities with a maturity horizon of less than 1 year. The funds objective is to preserve principal while yielding a moderate return. It is a low risk- low return investment which offers instant liquidity.

Hybrid Schemes: This kind of a scheme adopts the principles of both debt and equity schemes. The aim is to reduce the amount of risk that the investor is taking and increase the profit potential at the same time. This type of a scheme usually gives a reasonable amount of return to the investor that is acceptable to the type of investor who invests in this kind of a fund based on their expectations.

Fund of Funds: Fund of fund is a secondary fund, which invests in different types of funds based on market conditions. E.g. if the stock markets are in a bearish mood, it might be prudent to invest in debt, and not equity. So this kind of a fund will sell its equity holdings and buy units of debt fund of the same fund house. “Asset allocation funds” is also a term used for these kinds of funds that take a macro call and invest in equity, debt, gold or some other security.

ETF’s or exchange traded funds as they are more commonly known: This kind of a fund is trade on the markets as a general fund. The investor does not need to worry about an exit load or a penalty to stop paying for the fund and cash out. You just pay the regular brokerage charges with this kind of a fund as an investor. ETF’s extend to the gold index as well. This type of an investment is suitable to short term traders who are more positional in nature of investing or advising.

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