An investment vehicle that is made up of a pool of funds collected from many investors for the purpose of investing in securities such as stocks, bonds, money market instruments and similar assets. Mutual funds are operated by money managers, who invest the fund's capital and attempt to produce capital gains and income for the fund's investors. A mutual fund's portfolio is structured and maintained to match the investment objectives stated in its prospectus.
Equity funds invest in equity instruments such as shares, derivatives, and warrants. All Equity funds are subject to market risk. Classification of equity funds is based on the type of stocks they invest in. Hence, equity funds may be diversified funds, large cap funds; mid and small cap funds, sector funds, and thematic funds, depending upon the sectors and the market segment that they invest in. Performance of various Equity funds may differ as per their portfolio composition.
Mutual funds that invest in debt securities may invest in money market securities or in longer term debt securities, or a combination of the two. The primary investment objective of liquid and debt funds is regular income generation. However, since the longer term debt markets offer the scope for capital growth, debt funds are offered along the yield curve, spanning very short term to long term products.
Mutual fund products invested in a combination of debt & equity in varying proportions are known as Hybrid Funds. Predominantly debt-oriented hybrids invest mostly in the debt market, but invest 5% to 35% in equity. The objective in these funds is to generate income from the debt portfolio, without taking on the risk of equity.
A Fund of Funds (FoF) is a mutual fund that invests in other mutual funds. It does not hold securities in its portfolio, but other funds that have been chosen to match its investment objective. These funds can be either debt or equity, depending on the objective of the FoF.
Exchange Traded Funds (ETFs) hold a portfolio of securities that replicates an index and are listed and traded on the stock exchange. The return and risk on ETF is directly related to the underlying index or asset. The expense ratio of an ETF is similar to that of an index fund.