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Equity Funds:

Equity funds predominantly invest the corpus in stocks. Investors gain exposure to profit opportunities in the stock market without direct participation thereby saving time. These schemes provide to investors to invest through lump-sum options or through Systematic Investment plan (SIP). Growth and dividend payout options can be exercised by investors as per their choice.

Equity Funds include Diversified Funds, Sectoral Funds, Thematic Funds and Tax Saving Funds (ELSS). The investor can choose a suitable Fund.

Debt Funds:

Funds that invest in income bearing instruments such as corporate debentures, PSU bonds, Gilts, Treasury bills, Certificates of Deposit, Government Securities, and other money market instruments are debt mutual funds. Some Debt funds have a small exposure to equities as in Monthly Income Plans.

The aim of Income Funds is to provide regular and steady income to investors. Such funds are less risky compared to equity schemes. However, opportunities for capital appreciation are also limited in such funds. The NAVs of such funds are affected because of changes in interest rates in the country.

If the interest rates fall, NAVs of such funds are likely to increase in the short run and vice versa. Debt Funds are recommended for investors who are willing to take lesser risks and also for those who seek regular income from their investments.

I) Hybrid Funds:

Hybrid Mutual Fund is a Portfolio that has a combination of both Equity and Debt exposure with a varied proposition as per the specification of the scheme. It gains to leverage maximum benefits which markets offer within Equity and Debt space. Hybrid Funds are ideal for moderate investors not seeking higher risks associated with market investments.

II) Fund of Funds:

A Fund of Funds (FOF) is a Mutual Fund which has an investment strategy of holding a portfolio of other investment funds rather than directly investing in shares, bonds, or other securities. It is often referred to as multi-manager investment. A Fund of Fund may be “fettered” if it invests only in funds managed by the same AMC or “Unfettered” if it invests in Funds of External AMCs.

III) FMP's:

Fixed Maturity Plans is close-ended Debt Funds that invest the corpus in Government Securities and Company Debt. Fixed Maturity Plans are great investment options and are highly tax-efficient. Here is a simple tax calculation that demonstrates the tax efficiency of FMPs vs FDs

For one year of FMP, the tax works out to 10% without indexation and 20% with indexation. Indexation benefits for Fixed maturity plans are high, since the inflation rates are high, as a result, you may have to pay very little tax for a FMP

For example, if you invest Rs 1,00,000 for a one-year FMP, and assume the Fixed maturity plan gives you a gain of 10%- approximate Rs 10000. The capital gains tax for the Fixed Maturity Plan works out to be Rs 1000 without indexation and 1250 with indexation. However, even at a conservative inflation rate of 8%, the tax with indexation applied on the Rs 1250 capital gains tax is practically nil

In contrast to the FMP, the bank fixed deposit (FD) has a tax rate of 30%, for the same investment, the capital gains tax will be around Rs 3333 In short, FMPs or fixed maturity plans are better than FDs, in terms of tax benefits for an investor- a no brainer

Liquid Funds:

Liquid funds are used primarily as an alternative to short-term fixed deposits. Liquid funds invest in short-term debt instruments with maturities of less than one year. Therefore, they invest in money market instruments, short-term corporate deposits, and treasury. The maturity of instruments held is between three and six months. A liquid fund provides good liquidity, low-interest rate risk, and the prevailing yield in the market. Liquid funds have the restriction that they can only have 10 percent or less mark-to-market component, indicating a lower interest rate risk.

Liquid funds have an exit load if the investor redeems before the lock-in period. But in most cases, the lock-in period is quite low - varying from 7 to 10 days. Liquid funds score over short-term fixed deposits. Banks give a fixed rate in the range of 5%-5.5% p.a. for a term of 15-30 days. Returns from deposits are taxable depending on the tax bracket of the investor, which considerably pulls down the actual return. Dividends from liquid funds are tax-free in the hands of investors, which is why they are more attractive than deposits. The sole disadvantage of liquid funds is that investors cannot take the advantage of higher returns being offered by long-term instruments.

We at Wealthbasket.co offer all the Mutual Fund Schemes from Various Asset Management Companies in India to our clients to exercise choice informedly.