A mutual fund is not just one scheme or one type of investment. Often, people who are new to investing are under the false impression that all mutual funds are same except that there are many mutual fund companies with the difference merely being in their names. In fact, each mutual fund can be different from the other depending on the objective the scheme wants to achieve through investing. 

Mutual fund schemes are also differentiated by their investment strategies meaning, which types of companies and securities they invest in, and their percentages. These types are generally called Categories. Every AMC has more than one category of schemes and unlike in the past, an AMC can have only one scheme belonging to a category.

Mutual fund schemes are broadly classified into the following groups:

1. Equity Schemes
2. Debt Schemes
3. Hybrid Schemes
4. Solution Oriented Schemes
5. Other Schemes

SEBI divided equity mutual fund schemes into ten categories thus.

• Multi Cap Fund
• Large Cap Fund
• Large and Mid Cap Fund
• Mid Cap Fund
• Small Cap Fund
• Dividend Yield Fund
• Value Fund or Contra Fund
• Focused Fund
• Sectoral or Thematic Fund
• Equity Linked Savings Scheme

Likewise, there are 16 categories of Debt Schemes, 6 categories of Hybrid Schemes, 2 categories of Solution Oriented Schemes, and 2 categories of Schemes.

Market capitalisation of a company is the total number of shares available for trading on the stock exchanges, multiplied by the share price. Market capitalisation plays an important role in mutual funds as schemes’ objectives and strategies are often related to the market capitalisation (commonly called market cap) of the companies in which those schemes propose to invest.

In order to ensure uniformity in respect of the investment universe for equity schemes, SEBI defined large cap, mid cap and small cap companies as follows.

Large Cap 1st to 100th company in terms of full market capitalization

Mid Cap 101st to 250th company in terms of full market capitalization

Small Cap 251st company onwards in terms of full market capitalization

It is widely agreed in adviser and investor communities globally that Equity is the best asset class in comparison to other such as Realty, Gold, Fixed Income, Commodities, Currencies, Art and Antiquities, and Collectibles etc. When asset classes are compared on various parameters such as Risk, Return, Liquidity, Taxability, and Marketability, etc., Equity asset class stands out. It is possible that the financially illiterate may be sceptical about this statement, but it is proven and always verifiable that equity is the best asset class to create wealth in the long term.

Mutual Fund is the most flexible and transparent financial product and investment in India. With many options for asset allocation, within each asset class, diversification, and varieties of combinations of asset classes and categories, there is a scheme type or category for any type of investor with any target invest period and any investment objective.

Mutual funds are a great solution to achieve long term financial goals such as wealth creation, creating a retirement corpus, buying a house, or even going on a holiday. They are also suitable for short term goals such as parking money for short periods and earning higher return than savings bank account interest rate or achieving medium term goals that may be due in three to five years.

While other investment products may have some relatable benefits, mutual funds certainly stand out. Steady income, tax benefits, high return, low volatility or no risk, flexible investment options, low investment, recommended or compulsory holding period etc. may vary from one investment to another but mutual funds, depending on the choice can offer all these as a product type – a total package.

Benefits of mutual funds are many but the notable and the most significant ones are thus.

• Diversification: It is already said that mutual funds pool money from many investors. Such pooled money is invested across various securities, be it equity or debt or others, without any discrimination among investors in a particular scheme based on the amount invested individually. A mutual fund can distribute the AUM across many companies belonging to different sectors, which is not possible for an individual, who has limited resources.
• Research: Mutual fund schemes are managed by well-educated and experienced professionals. Supported by a big research team that studies the economy, sectors and companies, with access to critical and sophisticated research tools and ample money to spare no expense to deliver the highest possible return to investors, and above all adequate time, schemes managed by professional fund managers offer a lot to both – financially educated and illiterate investors.
• Low Investment: Mutual funds are often mistaken by some individuals as products meant for the rich, which is on the contrary to the fact. Mutual funds serve the needs of every type of investor be it the well-off or the destitute. With minimum investible amount as low as a hundred rupees and no limit on the maximum amount, they are suitable for all investors.
• Flexibility: The product offers varieties of investment options. It is the most flexible of all. One can make a one-time investment and hold it for any period, unconditionally. Those who cannot make a significant one-time investment can make systematic or recurring investment. Such a commitment can be broken any time in case one finds it difficult to continue the recurring investments, and there will be no penalty for that. One can make partial or full withdrawal of the investment.
• Transparency: Undoubtedly and unarguably, mutual fund is the most transparent financial product or investment available in India. While fixed income or interest based defined benefit investments such as the bank fixed deposit seem transparent, in investment parlance, the need for transparency goes beyond a guarantee of interest and principal. Mutual funds are researchable. They can be evaluated thoroughly. One can find the exact portfolio of stocks or securities in which a scheme invests and in what proportion. One can know how much a scheme churns the portfolio in a year. One can know how much a scheme has allocated to each sector and to the top companies and find the portfolio concentration risk if any. One can find critical factors such as the risk-adjusted return on investment, diverse types of risk, returns for varying periods, etc. No other product provides as much as a mutual fund does that an investor can use to take informed decisions.

While the concept of periodic and regularised investments is not a new concept that is already existent in the form of recurring deposits with banks or post offices, or premiums in cases of insurance policies, such system of investing plays a great role when it comes to investing in equity.

They call it the ‘Rupee-cost averaging’. Equity markets are volatile. There is no argument about it. And, they are unpredictable. So, there is no question of timing the market and investing exactly when the markets are low. Besides, waiting for the right time, investors may continue to wait for ever in the hope or supposition that the markets or the NAV can go down further, when they will make an investment.

1. Systematic Investment Plan: To inculcate the habit of investing, to give the benefit of investing very low amounts as a hundred, to ensure investment through the ups and downs of the markets (buy more units when the NAV is low and buy less units but rejoice when the NAV is high in profit – rupee cost averaging), mutual funds offer a feature called Systematic Investment Plan or S.I.P. In an S.I.P, investors select a date on which every month, a certain amount they decide will get debited from their bank accounts and gets invested in the mutual fund scheme of their choice.
2. Switch: Also, within an AMC, investors can move from one scheme to another, if a particular scheme is not performing or if one is not satisfied for reasons whatever. As the AMC directly buys the units from the investor in case the latter wants to withdraw or redeem the investment, there is zero issue with finding a buyer to sell it.
3. Systematic Transfer Plan: While in case of a switch investment from one scheme to another within an AMC is done as a one-time or a random transaction, in case of an STP, such switch is regularised like an SIP i.e. units for a specific amount are sold in one scheme systematically every week or month and bought in another scheme at regular intervals for a limited period or indefinitely as long as there is a balance of units or value in the source scheme.
4. Systematic Withdrawal Plan: As opposed to random withdrawals or redemption from mutual funds, one can make systematic withdrawals (exact opposite of an SIP) to meet the income needs. On a selected date every month, the scheme redeems certain number of units for the chosen amount and deposits the money in the investor’s bank account. This option helps those who do not earn a pension or who need additional income to cushion their cash outflows.

The risks associated with mutual funds are in fact related to the risk associated with the underlying securities in which they invest such as equity shares of companies, bonds, debentures, and government securities etc. The risk differs from scheme to scheme based on these types of securities in the portfolio, concentration or diversification, etc. Some of the factors that bring risk to mutual fund investments are –

• Asset Class: Theoretically, equity (shares) is regarded generally as a risk asset class while Debt (bonds, fixed deposits, debentures etc.) is less risky and Gold lesser in comparison.
• Market Capitalisation: Within equity, higher the allocation to companies with very high market capitalisation (large cap or blue-chip companies), lower is the risk. Higher the allocation to mid-cap companies, higher the risk in comparison to large cap. Small cap (based on the market capitalisation) is regarded the highest risk category.
• Concentration: The main advantage of mutual funds is diversification. When a portfolio is spread across many companies belonging to different sectors, the risk is naturally reduced to a certain extent. However, some schemes based on their investment objective and strategy may invest in fewer companies which will increase the risk, even though the portfolio is spread across large, mid and small cap companies. Also, there are some schemes which invest in companies falling under a single sector e.g. Pharma, Banking, Auto, Infrastructure etc. Such sector-specific schemes carry higher risk than any diversified large cap or mid cap schemes. In case of debt funds, quality of the papers, coupon rate, yield to maturity, interest rates and bond prices in the market etc. can influence the risk, in addition to the trading or churning of these securities by the scheme.
• Churning: Some schemes may invest in securities or companies and hold the investment for long term regardless of the volatility in the market price in the short term. However, there may be schemes that churn the portfolio frequently. Such schemes have a high turnover ratio. While churning is a risky activity but can result in higher than average expected return, wrong calls by fund managers and expenses can impact the return on investment or performance of the investment.
• Economic Factors: There are other domestic and global economic factors such as government policies, inflation, interest rates, etc. that are beyond the control of any investor or fund manager, which may impact the performance of the scheme. Though these factors are uncontrollable, an efficient, educated and experienced fund manager analyses the information, does thorough research and take informed decisions. Nevertheless, as predicting the future is impossible for anyone, it holds true to investment management also. Hence, regardless of the greatness of fund management, investments in equity or debt for various reasons are exposed to some degree of risk always.
• There can be many risk factors in addition to the above that influence the performance of a mutual fund scheme. Investors must consult their adviser or broker before investing and take informed decisions.

Taxability or tax benefits of mutual funds differ based on the asset class. Taxation of mutual funds can be discussed in three ways viz. Deduction, taxation of Income, and taxation of profits.

1. Deduction: Investments made in schemes that are categorised as Equity Linked Savings Scheme (ELSS) are eligible for deduction benefit of up to one lakh rupees under Section 80C of the Income Tax Act. For a scheme to be categorised as Equity-oriented, the minimum allocation to equity must be sixty-five percent.
2. Income: Dividend earned from mutual fund is subject to Tax Deduction at Source (TDS) at ten percent. However, if an investor, after making provisions for all deduction and exemption benefits falls below the basic tax exemption limit or paid excess tax, the TDS (tax paid in advance that is deducted by the AMC or scheme before paying the divided) can be claimed back as a refund. 
3. Capital Gain: Taxability of profit earned from the sale of mutual fund units depends on the period of holding of the units sold. This profit is called capital gain. In case of equity-oriented mutual funds, if the investment is held for a period of twelve months or more, the profit made from the sale of units is called the Long-Term Capital Gain. If the holding period is less than twelve months, it is called the Short-Term Capital Gain. In case of Debt funds, the period for calculating capital gain is thirty-six months.