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Yogi Zone

Useful articles for your finance management by our team of experts

Features of different types of Mutual Funds

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mutual funds

We always hear that everything happens for a purpose. Mutual funds are no different. There are various mutual fund schemes, each suiting a specific purpose. Be it equity funds, debt funds or balanced funds, they are designed for different sets of people.

Investing in mutual funds can be done with the click of a mouse these days. However, choosing which mutual fund to invest is indeed a daunting task. You need to know the pros and cons of each category of mutual fund and then pick funds from these categories. Let us see some of the mutual funds which serve specific purpose along with their features.

Diversified Equity funds

Diversified equity funds are those which invest in various sectors such as IT, pharma, telecom, FMCG, etc. As the name suggests, the fund diversifies its funds across these sectors as per the fund manager’s strategy. Such funds also hold slight portion of debt in the portfolio.

  • Tenure – 8 to 10 years
  • Goals that can be achieved – Vehicle, House, children’s education, Retirement.
  • Risk level – Medium
  • Taxation – 15% flat if sold before 1 year and Nil if sold later.
  • Expected Returns – 12-15% p.a

(Also see: How to choose mutual funds?)

Balanced funds

Balanced funds are meant for those investors who may not be able to pick different funds in equity and debt categories. These funds do the job of both. They balance the fund by investing certain portion in equity and rest in debt or vice versa. You would have the flexibility to choose funds as per your requirement.

  • Tenure – 3 to 7 years
  • Goals that can be achieved – Vehicle, Down payment for home loan, vacation and children’s education
  • Risk level – Medium
  • Taxation – 15% flat if sold before 1 year and Nil if sold later (if more than 65% is invested in equities). As per tax slab if sold before 1 year and 20% with indexation or 10% flat (if more than 65% is invested in debt).
  • Returns – 8-12% p.a

Liquid funds

As the name suggests, liquid mutual funds have been designed to provide liquidity to the investors. They are also an alternative to savings bank account which provides liquidity but generates lesser returns. Since these funds invest in government securities with shorter tenures, these are considered safer compared to equity mutual funds.

  • Tenure – 3 months to 2 years
  • Goals that can be achieved – Vehicle, Vacation, Children’s education
  • Risk level – Low
  • Taxation – As per tax slab if sold before 1 year and 20% with indexation or 10% flat (if more than 65% is invested in debt).
  • Returns – 7-9% p.a

Index funds

Index fund tracks a particular index and invest in stocks according to the weighted average suggested by the index chosen. Hence, it gives an exposure to various stocks present in the index. More often than not, returns of the index funds are on par with the index chosen.

  • Tenure – 5 to 7 years
  • Goals that can be achieved – Children’s education, Principal repayment for home loan.
  • Risk level – Low to Medium
  • Taxation – 15% flat if sold before 1 year and Nil if sold later
  • Returns – 10-12% p.a

ELSS

ELSS or Equity linked savings scheme form a special category of funds which mix tax benefits with equity investment. You would get tax deduction u/s 80C for investment in these funds. There is a 3 year lock-in for your investments, though.

  • Tenure – 5 to 7 years
  • Goals that can be achieved – Tax saving, Children’s education
  • Risk level –Medium
  • Taxation – Tax free after 3 years.
  • Returns – 10-12% p.a

FMP

Fixed Maturity Plan (FMP) is similar to a debt fund which invests in government securities with shorter tenures. These have become quite popular even since the RBI began reducing the interest rates and as a result the returns exploded.

  • Tenure – 1 to 2 years
  • Goals that can be achieved – Vacation, Vehicle, Miscellaneous expenses.
  • Risk level –Low
  • TaxationIndexation and Double Indexation benefit.
  • Returns – 8-10% p.a

Few words to remember

  • Always choose funds which suit your risk appetite and goals.
  • Choosing the best fund is as important as choosing the category to invest.
  • Compare various funds before investing. There are various online portals for this purpose.
  • Mutual funds should not be the only source of investment for you. Mix them with other traditional instruments such as PPF, FD’s, etc.
  • psiwach

    where should i invest, please guide. i have 5 lac, out of which i need 2 lac after 3 months & remaining 3 after 6 months from now.

    • AtanuGupta

      Dont invest anywhere and risk your money for a such a short tenure of 3 and 6 months.
      Keep it on bank savings or better do short term FDs for 3 and 6 months and sleep in peace.
      Hope you understand

    • Av Suresh

      You can choose liquid funds which are safe and give you option to withdraw any time. They can do the job of savings account with higher returns. You can also choose short term debt funds with 3-6 months tenure.

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