Asset allocation is regarded as the right approach while planning your investments. By dividing surplus across different asset classes you reap the benefit of diversification which helps you not only in minimizing risk but also brings consistency to your investment returns.
Among the various investment options available, mutual funds are considered to be an appropriate vehicle due to several benefits it offers. However, with more than 4000 schemes to invest from different categories, creating a meaningful portfolio is a daunting task. Hence, the same asset allocation approach helps immensely in selecting the right mutual fund scheme.
Within mutual funds, there are various categories of schemes to invest. These categories sometimes bring duplication in portfolio if an investor is not clear on them. To save yourself from the costly mistakes of over investing in a limited space it’s necessary that a basic understanding of these categories is there.
Listed below are various categories of MF schemes which are present and around which the MF investors create their portfolio:
1. Large Cap Funds: In large cap schemes of mutual funds more than 80% assets is invested in large cap companies like Infosys, Reliance, HDFC Bank etc. Some of the prominent schemes from this space are DSPBR Top100 equity, ICICI Prudential Focused Bluechip Equity and Franklin India Bluechip Fund. Since large Cap companies are known for consistency and low downside, the fund aim to deliver the same.
2. Large & Mid Cap Funds: This category of schemes invest 60-80% in large cap companies and the rest among mid cap companies. Birla Sun Life Frontline Equity, HDFC Top 200 and ICICI Prudential Dynamic Funds belong to this category. The objective here is to generate higher returns along with consistency and downside protection. One of the main highlight of this category is the flexibility of fund manager to change allocation within the defined space.
3. Multi Cap Funds: Here 40-60% is invested in large cap companies and the rest is spread across companies in mid & small cap sector. The varied range gives fund manager flexibility to change allocation as per the market conditions. HDFC Equity is one of the best funds from this category.
4. Tax planning: Also known as ELSS, these schemes gives benefit under section 80C and have a lock in of three years. The investment universe of ELSS varies from large cap to multi cap funds.
5. International Funds: An international mutual fund scheme has more than 65% of assets invested abroad. These funds were launched with an objective of providing diversification to Indian investors by capturing opportunities available in the international markets.
6. Hybrid (Equity Oriented) or Balanced funds: A fund which has an exposure of more than 65% in equities is categorized as equity balanced funds. HDFC Prudence, HDFC Balanced, DSPBR Balanced are the prominent from this space. With a good exposure to debt market these funds aim to limit the downside in addition to high returns from equity markets.
7. Income Funds: Invest primarily in government securities, corporate bonds and other debt instruments. One of the prime feature of this category is that the average maturity varies according to objective of the fund.
8. Gilt Funds: These mutual fund schemes invest only in government securities with varied maturities. These in turn are classified as medium and long term based on maturities of their invested securities.
9. Debt Oriented –Aggressive: These are debt mutual funds schemes with an exposure to equity markets in the range of 25-60%.The aim is to generate regular income through debt investments and capital appreciation through equities. Aggressive MIPs fall under this category.
10. Debt Oriented-Conservative: Here the equity exposure is limited to 0-25%.Conservative MIPs are part of this space.
11. Arbitrage: These mutual fund scheme aims to capitalize on the arbitrage opportunities arising out of pricing mismatch of stocks in the equity and derivative (Futures and Options) segment of the stock market.
12. Asset Allocation: Here, the schemes invest in equity, debt or any other asset class in various proportions. The allocation gets changed in a pre-defined range, as per the market conditions. The objective of these schemes is to do diversify investors money across different asset classes.
These categories highlight the various options available to an investor while investing in mutual fund. By combining these options an investor can capitalized on capturing the broader market and diversify his investment portfolio. Which category will form your core portfolio will depend on your age, risk appetite and time horizon of your financial goals.
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