This article is the continuation of the previous one, in which we discussed the categorization of the mutual funds. SEBI has categorized the mutual funds into 5 main categories.

Categorization of mutual funds – According to the SEBI

We have read about the most popular type of mutual fund, i.e. equity funds. Going further, we will discuss the remaining types of mutual funds.

Read👉 Types of mutual funds – Part 1

Visit official website ➡️ SEBI MF categorization

Categorization of mutual funds

Debt funds –

Debt funds are not directly related to the stock market. When a mutual fund primarily invests in the bonds and other debt securities, it becomes a debt fund.

Bonds and securities represent a commitment to repay the invested capital with interest upon maturity, thereby constituting secure investment choices.

Read ⇾ What is a debt instrument ?

The investment in bonds, government securities and other debt instruments is like giving a loan to these bond issuers. When a company needs funds or money, they have options such as issuing shares, taking a loan from banks, or raising money through bonds, etc. When we invest in their bonds, we give them a loan.3

The debt funds invest in long-term and short-term bonds, debentures, G-sec, etc.

A government issues Government securities when it needs funds. The G-sec bonds are the safe investment among all of these investments.

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Sub-categorization of debt mutual funds –

The SEBI has categorized the debt funds into sixteen types. Here, we will discuss only a few of them, as many of these types are similar to each other. The types are based on maturity period, who issued the bonds, short-term, long-term and mid-term funds, etc.

What is maturity period ? = maturity period is a time period up to a specific date at which the investment amount is returned to the investor. The interest earned is also returned to the investor.

Overnight debt fund –
- The overnight debt funds invest in securities with maturity of only 1 day.

Liquid debt funds –
- These funds invest in the securities with maturity of up to 91 days only.

Low duration debt funds –
- These types of funds invest in securities with maturity of 6 months to 12 months.

Money market debt funds –
- These funds invest in money market instruments. The maturity period is less than a year.
- The short term investment is low risk and it is highly liquid.

What is money market ? ⇾ Money market is a marketplace where the lending and borrowing takes place for short-term duration (i.e. less than a year).

Corporate bond funds –
- Corporate bonds are issued by the companies to raise funds. This category of MFs is required to invest at least 80% of their assets into AA+ and above rated corporate bonds.
  - AA+ is a rating of an asset or bond, stock, etc. BB, BB+, AA, etc. are some other ratings which are lower ratings compared to the AA+ rating.
- The maturity of these bonds depends on the type of the scheme.
- The duration of the maturity varies from less than 1 year to 10 years or even more.

Also read ⇾ What is a bond ?

Banking and PSU funds –
- At least 80% of the investment of the fund goes towards the debt instruments of banks and public sector undertakings (PSUs).
- These funds also purchase municipal bonds under these schemes. When a municipal corporation needs money, the corporation issues municipal bonds.

Gilt funds –
- The 80% of the investment must be in the Government securities (in all maturities).
- G-securities = gilt edge securities because of the high rating and low risk.

Hybrid funds –

Whenever the word hybrid comes, it means it is the combination of two or more things.

In the context of mutual funds, these hybrid funds are a type of mutual funds that invest in both equity and debt instruments. Hybrid funds give us the choice of going with risk and stability at a time.

This means, the hybrid funds buy/invest in both shares and bonds. This is a balanced approach that gives us growth with stability in returns.

SEBI has categorized these hybrid funds into 7 categories –

Conservative hybrid fund –
- This type of hybrid fund plays safe.
- They invest 10% to 25% in equity and 75% to 90% of their funds in debt instruments.

Aggressive hybrid funds –
- These type of hybrid funds are opposite of the conservative hybrid funds. The aggressive funds invest more in equity and less in debt instruments.
- Investment = 65% to 80% investment in equity and 35% to 20% in debt instruments.

Solution Oriented Schemes –

The pooled investment of the investors is directed towards a specific goal that investors desire. These mutual funds have a lock-in period.

What is Lock-in period ? ⇾ Lock-in period is similar to maturity period. When we invest in a mutual fund, there is a time period until which we can not withdraw our investment from that fund. This time period is called as lock-in period.

We can withdraw our invested amount from a mutual fund at any time, but if we withdraw it before the lock-in period, we need to pay a fee called as exit load.

There are 2 solution oriented schemes –

Retirement funds –
- The goal of the fund is described in its name.
- Lock-in period = at least 5 years or until retirement age, whichever is earlier.

Children’s fund –
- Lock-in period = at least 5 years or until a child completes 18 years of age, whichever is earlier.

Other Schemes

Index funds and ETFs –
- The index such as Nifty-50, Sensex, etc. are tracked by these funds.
- The performance of these funds depends upon the performance of the index they are tied to.
- e.g. A Nifty-50 index fund will mimic the performance of the Nifty-50 index.
- Investment = at least 95% of the total assets in the securities of that particular index.

Fund of funds –
- This type of mutual fund invests in other mutual funds. That’s why it is called as fund of funds.
- Investment = at least 95% investment in the underlying mutual funds.

In this post, we discussed the categorization of mutual and the sub-categorization of MFs. This will help you choose a fund to invest according to your needs.

Types of mutual funds – Part 2