We are all unique in our way. When it comes to investments, the same uniqueness applies. In general, each investor will have their risk tolerance, the time interval between investments, investment amount, financial goals, and product preference to achieve those goals. Some may have long-term objectives, while others might have short-term objectives.
Mutual funds offer a broad range of investment options to suit all types of investors. Equity funds, for example, are preferred by those who are willing to take a high risk in exchange for high returns. People who are afraid of taking risks and prefer capital security over returns. Such people are more likely to seek debt financing.
Types of mutual funds
Mutual funds are divided into: equity funds, debt funds, and hybrid funds. Equity Funds are typically appropriate for investors with a high-risk tolerance, Debt Funds are appropriate for investors seeking higher returns while taking on moderate risk, and Hybrid Funds are appropriate for investors seeking the “best of both worlds.”
What are Hybrid Funds?
They are mutual funds that invest in both equity and debt securities. Hybrid Funds tend to balance out market risks by avoiding a concentrated portfolio and utilising diversification. The fund’s risk is determined by its investment stance and asset allocation into debt and equity. Such funds are appropriate for investors looking for less risky investment options that deliver higher returns than debt funds.
What are Equity Funds?
Equity funds are investment schemes that invest their assets in the shares/stocks of various companies with varying market capitalisations to generate higher returns. The mutual fund’s portfolio must contain at least 65 per cent of its assets in equity and equity-related instruments. Because these funds are highly risky, they have the potential to provide higher returns than hybrid and debt funds.
Equity funds are further classified based on market capitalisation into Large Cap Equity Funds, Mid-Cap Equity Funds, Small Cap Equity Funds, and Multi-Cap Equity Funds.
Difference between Hybrid Funds and Equity Funds
Risk Involved: The risk associated with an equity fund is higher because its performance is dependent on how the market acts at various points in time. The risk quotient in an aggressive hybrid fund, on the other hand, is relatively low due to the asset allocation method.
Return Value: The return value of a mutual fund is generally determined by the level of risk it carries. So, if you want a steady income with little risk, an assertive hybrid fund is the way to go. And, if you’re looking for high returns with a higher risk, you should consider investing in an equity fund. Before-tax returns in an equity fund can range from 10% to 12% on average.
Investor Type: Because of the different asset allocation schemes and the low risk involved, a hybrid fund is suitable for both new and experienced investors. On the other hand, an equity fund is typically preferred by investors who are willing to take on more risk.
Types of funds: A hybrid fund can be divided into several categories based on its asset allocation proportions. Some examples include debt-oriented hybrid funds, equity-oriented hybrid funds, and balanced hybrid funds. Similarly, equity funds can be divided into various categories based on investment strategy, market capitalisation, investment style and tax treatment. Large-cap, mid-cap, active, small-cap, and passive funds are among them.
Final Thoughts
There is no such thing as a risk-free mutual fund. Your investment stance and strategy, on the other hand, can help you achieve better results. Some investors believe that evaluating only historical returns is the best way to predict a fund’s future performance. A fund’s past performance is not indicative of its future performance.
Instead, to choose the best investment option, one should examine and scrutinise these factors, such as current market conditions, NAV, Costs Involved, Growth, and so on. When comparing large cap and small cap funds, each category of funds is distinct from the other. So, before you start investing, you can track market movements and understand how the fund works.
