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When considering the alternatives to invest money, mutual funds are one popular choice for many investors. Before the individual invests, it is important to know what the options in the market are. There are many kinds of mutual funds that fall into categories such as Equity, debt, gilt, balanced MIP’s etc. All have a different approach to their investment style. Following is an explanation of the different types that exist.

A scheme invests in the shares of particular companies is called Equity Schemes. The returns are provided to the investor as the performance of the company improves. Equity schemes are more of a high-risk investment but this also means a possibility of higher return. As shown to us by historical statistical data, even though equity schemes are high risk, they have outperformed any other method of investment in the returns that they have provided. There are various types of equity schemes that exist in the Indian markets. Following is a list of the different kinds of schemes that are available to investor for this kinds of a fund:(1)Index funds: This kind of a mutual funds will track the main Indian stock markets and invest in only these stocks that belong to indexes that the key market indexes seem to focus on. The idea here is to replicate the average market index performance and try to beat it in some way. It usually doesn’t take as much of an exit load for this kind of a mutual fund.(2)Sector funds: As the name suggests, this type of a fund will focus on a specific sector on a specific industry. This type of a fund will try and capitalize on the happening so of a specific industry and will invest when an industry is at a low price per unit and is going to boom and will sell the stocks when a specific industry is expected to tank.(3)Midcap or small cap funds: These kinds of funds are generally considered more risky as an investment since the investor is putting his or her money into companies that are not as established as the bigger companies. The return potential is higher here since these small cap or midcap companies have growth potential and therefore return potential for an investor that no large cap company can give in the same amount of time.(4)(Blue chip funds: This kind of a fund usually invests in only the larger companies also called the blue chip companies. These companies are known for their brand and are therefore guaranteed returns but at a slower pace.

Securities invested in instruments such as bonds, debentures, government securities and commercial paper are called Debt Schemes. This type of fund relies on instruments that yield interest based on a range of market variables. These variables include rupee depreciation and fiscal deficit, lending it a certain degree of volatility. Depending on the time period they apply to, there are short, medium and long term debt funds.Money market funds, also called Liquid Funds, are low risk, and offer instant liquidity. Generally invested in short term securities of a maturity of less than a year, the objective is to maintain the original principle while making a medium return.Gilt funds invest only in government securities and treasury bills. They are better suited for investment on a longer term. An addition to normal long term investments are the money income plans, which make use of a small percentage of money to bolster the scheme’s return.

Balanced Schemes / Hybrid Schemes: This scheme invests in both equity shares and in income bearing instruments in such a proportion that balances the portfolio. The aim is to reduce the risk of investing in stocks by having a stake in the debt market as well. It usually gives a reasonable return with a moderate risk exposure. There can be hybrid funds that are more oriented towards equity (60-70% in equity) and there can be debt oriented hybrid funds (60-70% in debt).

Funds of funds, as their name suggests, are funds that invest in other funds depending on market factors.

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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