Mutual Fund Types, Subtypes and Risk-Return Characteristics

General Caveat: Prefer Direct MFs. You could accumulate substantial amount over longer period especially in case of Equity MFs

MF Type

Subtype

Risk-Return Characteristics

Debt

Use Debt MF along with Bank FDs, PPF to diversify overall wealth

Usually protect capital and give returns around Bank FDs

Increase exposure to Debt MF or Fixed Income Asset Class in general

(i.e. Bank FDs, Debt Mutual Funds etc.) when Equity Asset Class is over-valued

and expected to under-perform

Main Exposures are Interest Rate Risk and Credit Risk: (Note: Check Debt MF style-box)

  • Debt MF having short term debt securities are less sensitive to Interest Rate Risk

  • Debt mutual funds having long term debt securities are more sensitive to Interest Rate Risk

  • When interest rate goes down long term debt securities give much better returns than FD

  • When interest rate goes up long term debt securities under-perform FD

  • When economy is going good usually low credit quality securities give better returns

  • During recession low credit quality securities usually under-perform

Banking & PSU

Major debt securities are from Banking and PSU sectors

Corporate Bond

Check Style Box for Credit Quality of underlying securities

Increase exposure when economy is about to come out of recession

Credit Risk

Check Style Box for Credit Quality of underlying securities

Increase exposure when economy is about to come out of recession

Dynamic Bond

Usually Interest Rate Risk sensitive

Floating Rate

Prefer when inflation is expected to go up

Fixed Term Plan

There is a locking period, thus, low liquidity

Guilt

Long term Government Securities

Constant Maturity Gilt

Long term Government Securities

Usually Interest Rate Risk sensitive

Duration

Low Duration Funds (securities with short maturity) are less sensitive to interest rate risk

High Duration Funds (securities with long maturity) are more sensitive to interest rate risk

Money Market/Liquid

Short Duration Funds (securities with short maturity, usually in months) are least sensitive to interest rate risk

Use to park money while switching between asset classes

Highly liquid no exit load for short duration

Low risk and usually behave like FDs

Equity

Use Equity MF (or Diversified Equity Asset Class) to hedge inflation risk

Usually use for capital appreciation over longer term (usually 10 Years)

Increase exposure to Equity Asset Class in general when Equity Asset Class is under-valued

and expected to out-perform. Especially when economy is bottoming out of recession.

Main Risk is short term volatility: (Note: Check Equity MF style-box)

  • Small Cap Equity MF returns are usually more volatile in short term than Large Cap Equity MF

  • Growth and Value are two main investment styles

  • Growth Style MFs invest in stocks showing higher revenue growth.

    Usually stocks are expensive and returns depend on actual materialization of future growth

  • Value Style MFs invest in stocks with stable business but not showing high revenue growth

    Usually stocks are less expensive and returns depend on positive earning surprises

  • Use Sector exposed Equity MFs when that particular sector is about to outperform in coming quarters

  • Use Thematic Equity MFs when that particular theme is expected to out-perform in coming quarters

Large/Mid/Small

Large Cap Equity MFs invest in stocks of stable large companies and relatively show lower volatility risk

Mid-to-Small Cap Equity MFs invest in stocks of Mid to Small size companies and relatively show higher volatility risk

Multi Cap

Usually include stocks of large to small size companies

Watch Equity style box for size exposure

Sector Exposure

Exposure to stocks from either Pharma or IT or Infra or any other Sector

Good when you anticipate sector might out perform broader market

(IT and Pharma Sector MFs out performed in 2018, due to dollar appreciation and other factors )

Risk of returns not inline with broader benchmarks i.e. SENSEX or NIFTY

Thematic

Useful when there is an anticipation of certain theme will outperform broader market

Consumption Consumer Trend, Dividend Yield, Inflation-Interest Rate, Exchange Rate theme

Hybrid

Combination of Debt and Equity Mutual Fund

Aggressive

Higher percentage of allocation to Equity Class

Conservative

Higher percentage of allocation to Debt Class

Balanced

Usually equal weighing to both Debt and Equity