People prefer variety in all that they choose. There are different products according to the varied needs of people all round the world. Then why not with Mutual Funds? There are various types of Mutual Funds that cater to the different needs of investors as per their risk appetite and financial goals. They are divided into 4 major types - Liquid, Debt, Equity and Balanced (or Hybrid) Funds.
Liquid Funds
Liquid funds only in invest in Corporate/Government Deposits and Bonds that have a maturity of up to 91 days. They are considered the safest among Mutual Funds and are suitable for financial goals that can bear minimum risk. They are an excellent alternative to Fixed Deposits since they do not have Exit Loads/Lock-in period.
Financial Goals - Emergency Funds, Other short term goals (Less than 3 years)
Expected Annual returns - 6.5 to 7.5%
Taxation - Less than 3 years: As per tax slab, More than 3 years: 20% with Indexation.
Debt Funds
Debt funds invest in Government, Corporate Bonds and Bank Deposits. These are relatively safer investments as they do not invest in shares. They are suitable for financial goals that cannot bear stock market volatility. Many investors prefer Debt funds to Fixed Deposits due to more efficient taxation.
Financial Goals - Vacations, other Short term goals (less than 5 years)
Expected Annual Returns - 7.5 to 8.5%
Taxation - Less than 3 years: As per tax slab, More than 3 years: 20% with Indexation.
Equity Funds
Equity Mutual Funds aim to generate high returns by investing in shares of companies listed in the stock exchange. Equity funds are suitable for medium/long term financial goals and have significant volatility. There are times when few Equity funds have provided average annual return of 20% for 15 years, as well as instances when they have provided 60% loss in just 1 year. This indicates that they are NOT suitable for short term investments.
Equity funds are a crucial element to a long term portfolio since they can provide superior inflation/tax adjusted returns.
Financial Goals - Retirement Corpus, Children's Education, Children's Marriage
Expected Annual Returns - 10 to 15% over long term
Taxation - Less than 1 year: 15%, More than 1 year: No tax when profits less than 1 Lakh. 10% when profits exceed 1 Lakh.
Balanced (or Hybrid) Funds
Balanced Funds invest both in Equity and Debt. So they offer a mix of wealth creation with lesser risk than Equity Mutual Funds. They typically invest in about 70- 80% in Equity and 20-30% in Debt.
Financial Goals - Purchase of a House, Children's Education, Children's Marriage
Expected Annual Returns - 10 to 12% over long term
Taxation - Less than 1 year: 15%, More than 1 year: No tax when profits less than 1 Lakh. 10% when profits exceed 1 Lakh.
Although there are various types of Mutual Funds that cater to almost every investment need, it is important to note that your portfolio should be well diversified across different fund categories.
A planned portfolio consisting of different types of Mutual Funds depending upon the investor's risk appetite, is crucial to fulfil one's financial goals.
