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Know your equity mutual funds better
Posted by : Anonymous on Nov 03,2016 02:07 PM
Are you new to investing in equity mutual funds? Does the nomenclature of various funds - largecap, midcap, smallcap, multicap, diversified, focussed, sector, hybrid, and so on - confuse you? Well, not anymore. Here is a quick primer on various types of equity mutual fund schemes.
Arbitrage funds :
Strangely, these funds don't invest in equity, but they are treated as equity schemes for taxation purpose. They look to exploit price difference between the cash and derivatives markets to generate returns. In fact, this favourable taxation is their biggest USP as investments held over a year in them qualify for long term capital gains tax which is zero at the moment. These funds are ideal for investors in the highest tax bracket looking to park money for a short period.
Equity-oriented hybrid funds:
Hybrid funds or the balanced schemes invest into a mix of equity and debt. Equity-oriented hybrid schemes invest at least 65 per cent of the corpus in equity. These schemes are less volatile than pure equity funds because of their mixed portfolio. The debt investments provide stability in times of volatility. These funds are suitable for novices in the stock markets and very conservative equity investors.
These funds invest mostly in big companies. Funds identify these companies by their market capitalisation. These companies are considered safe to invest because they are likely to be well-established players and leaders in their respective field. Largecap funds are likely to offer modest returns as they carry relatively less risk.
These funds invest across market capitalisations, depending on the market view of the fund manager. Since the portfolio is spread across different market capitalisations, they are less risky than mid- and small-cap funds, but a little riskier than large cap funds. They are suitable for investors with moderate risk appetite.
Equity Linked Savings Schemes (ELSS):
These are the tax planning mutual funds suitable for investors looking to save taxes under Section 80 C of the Income Tax Act. Investments in these funds qualify for a tax deduction of up to Rs 1.5 lakh. Investments in ELSS have a lock-in period of three years.
These invest mostly in medium-sized companies. These companies can be risky as they may or may not realise their full potential. However, if they succeed, they will become large companies and investors will be rewarded handsomely. Investors with high risk appetite should bet on these funds.
These funds invest in small companies. These companies can be extremely risky, as there will be very little information on them available in the public domain. However, they can also offer phenomenal return. They are suitable only for investors with a very high risk appetite and an investment horizon of at least seven years. The category returns have been 40.57 per cent over the last three years.
These invest mostly in a particular sector or along the lines of a defined theme. Since the investments are concentrated on a single sector or theme, sector funds are considered very risky. It is very important to time the entry into and exit from them as the fortunes of sectors keep changing during different economic cycles. They are meant for investors with an intimate knowledge about a particular sector. Investors should invest only a small portion of the total portfolio in sector funds.
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