1. Various asset classes are – equity, debt, gold, real estate. Based on investor’s needs, investment horizon and risk-taking ability, the asset class and scheme category which is most appropriate for the investor should be decided.
  2. Example – An investor who wants low risk in equity funds will choose index funds, those who can take higher risk will choose growth fund.
  3. An investor should have a core portfolio which he must invest as per long term goals and a satellite portfolio which he must invest to take advantage of short-term opportunity.


Active Vs. Passive Funds
  1. Passive Funds- Index Funds and ETF are examples of passive funds. The portfolio of these funds has the same stocks as the index and in the same weightage. The fund manager has no role in creating the portfolio, hence the expense ratio of these funds is also less. Suitable for investors who do not have the aggressive objective of beating the benchmark.
  2. Active Funds- Any fund other than passive funds which aims for beating the benchmark like diversified equity fund is called Active fund. The expenses ratio, risk and expected returns are also higher and these are suitable for seasoned investors.
Open ended Vs. Closed Ended
  1. Open-ended- Benefit of liquidity through redemption at current NAV. Disadvantages are Exit load (up to max 7%), diluted returns since some assets are always kept liquid, risk of large fluctuation in net assets because of heavy repurchase.
  2. Close-ended-Offer liquidity through stock exchange where the price of units may be lower or higher than the NAV, freedom for fund manager to invest in stocks that will take some time to give returns. Disadvantage are – limited buyers on stock exchange hence exit is not very easy, must match the maturity of the scheme with when they will require the funds.
Diversified, Sector or Thematic
  1. Diversified Funds invest in many sectors and also across market segments (Large cap, mid cap, small cap).If actively managed, fund manager invests in better performing sectors hence suitable for the core portfolio of an investor.
  2. If an investor wants to reduce his risk even more then he should invest in a diversified fund that has invested only in large-cap stocks.
  3. Sector Funds are risky because they invest in only one sector. If that sector performs poorly, the scheme will perform poorly. These funds are suitable for satellite portfolios.
  4. Only experienced investors should invest in sector funds because skill and knowledge are needed to identify the entry and exit time. To earn returns in the sector funds an investor should enter before the up-cycle in the sector starts and exit before the sector starts to perform poorly.
  5. Thematic Funds are appropriate for some investors who like to invest as per an investment theme (e.g. infrastructure) rather than just one sector (e.g. cement, steel). These are less risky than sector fund but more risky than diversified funds.
Large-cap vs Mid-cap vs Small-cap Funds
  1. Large-cap funds invest in large-cap stocks of companies which have a good track record of surviving competition and recession and have stable revenues and profitability for long period of time.
  2. When the economy starts to boom, large cap stocks become very expensive. At this stage, investors start to explore the mid-cap and small-cap stocks.
  3. Mid-cap and Small-cap funds invest in mid-cap and small-cap stocks. These companies are in initial stages of growth. When the economy is booming, these companies give better returns to the investor. However, during downturn in the economy, their value erodes fast and they generally give poor returns.
  4. Over a long period of time, some mid-cap and small-cap companies will become large-cap.
Growth vs Value Funds
  1. Growth Funds invest in the stocks that are expected to grow at rates higher than the market. These perform better in the bull market, but normally fall harder in the bear market.
  2. Value Funds invest in those stocks which are relatively cheap because, the market has not fully appreciated their value and are suitable when the investment horizon is long. These funds perform better during a downturn in economy, because these stocks were cheap to begin with so the fall in their value will not be much.
International Equity Funds-
  1. When an Indian investor invests in International Equity Funds, he takes two exposures of international equity market and the exchange rate of rupee– If the investor has invested in America, and the US dollar becomes strong, the value of investment in rupee terms will rise.
  2. The investor might invest in International Equity Funds to earn attractive overall returns, Asset Allocation and Diversification and Opportunity in International Markets.
  3. Such funds can be part of satellite portfolio of the investor.
Monthly Income Plans (MIPs) have large portion of debt securities and small portion of equity (5 to 30%) securities. Fixed Maturity Plans (FMPs)
  1. FMPs are suitable when investment horizon matches scheme’s maturity, returns are superior than fixed deposits and more stable than conventional debt schemes.
  2. FMPs are not suitable when the investor might require fund at any time. In such a case, he should invest in open-ended debt scheme.
Diversified Debt Funds or Income Funds invest in a mix of Government and non-Government securities. Government securities provide safety and Non-Government securities provide higher yields, though they carry credit risk. the fund can change its portfolio based on market condition to benefit from yield spread and credit spread. This can be part of the core portfolio of the investor. Short Term Debt Funds
  1. Short term debt funds which can be used to park funds invest in securities with a tenor of 1 to 3 years where expectation is of rise in interest rates. While evaluating these funds, exposure in long term securities and credit risk need to be checked.
  2. Short term debt funds can form part of the core portfolio of the investor with low risk-taking abilities.
Liquid Schemes invest in money market securities of up to 91 days and can be compared with savings bank account with negligible volatility and high liquidity and ideal for parking funds for a short period. Ultra-short-term debt funds also serve the same purpose though they invest in securities of longer period. Floating Rate Funds or Floaters invest in floating rate instruments. They hold their values even if interest rates fluctuate. Their NAV remains steady. Hybrid Schemes
  1. Investment in Hybrid scheme can give an investor exposure to both debt and equity. The equity component of the scheme will provide gain in value and debt component will provide stability of returns.
  2. However, the investor will not have control on the mix of equity and debt, the scheme may be taxed as equity or debt depending on the structure of the scheme.
  3. There is a variant of hybrid scheme called flexible asset allocation scheme which can drastically change the debt and equity component. They carry high risk. If the fund manager takes a wrong call, the scheme’s returns would suffer.
Gold Funds
  1. Gold ETF and Gold Sector Funds are different from each other-Gold sector funds invest in the shares of the companies involved in gold mining and gold processing, Gold ETF, on the other hand, tracks the price of gold.
  2. When gold prices increase, the shares price of companies with large reserves of gold would increase much more than increase in the value of gold. Further, their share price will not be affected by the value of gold alone. Other factors impact profitability as well.


  1. The investor should check whether fund manager follows the promised investment style or not. Example –In a Value Fund, if a large portion of portfolio comprises of fully valued front line stocks – fund manager is not being true to the promised investment style.
  2. Investors in non-gilt debt schemes should check Credit quality and Sector concentration, even if securities have high credit rating.
  3. Investors should identify on the basis of past track recordwhich fund managers and AMCs were better able to predict the change in market trends.
  4. A fund’s performance should be checked and compared with its benchmark and its peers in terms of CAGR for at least 5 years for equity and 3 years for debt funds. For liquid funds, performance of 7 days, 15 days and 1 month is provided as that is more relevant.
  5. In a Fund Portfolio of an equity fund, things to be checked are Diversification across stocks and sectors, Market segments in which the fund invests, Cash holding, Length of stock holding, Churn in portfolio and Strategy of stock selection and portfolio management.
  6. In case of debt funds, aspects to be checked are Average maturity of portfolio, Credit risk, Contribution of interest and capital in total return and Liquid holdings
  7. Under Fund Age, a fund that has existed longer is preferable to a new fund. Fund age becomes more important in equity, where there are many investment options.
  8. Fund Size -for diversified large-cap equity funds, large fund size will be better because it will help in diversification and economies of scale. For a sector fund or mid-cap fund, small size will be better because it will be better able to take advantage of market opportunities.
  9. Portfolio Turnover Ratio = (Value of Securities Purchased+ Value of Securities Sold) ÷ Average Size of Net Assets
  10. Hence, if ?10,000 crore securities were sold and purchased and the average size of net assets is ?5,000 crore, portfolio turnover ratio is 200%.
  11. Scheme Running Expenses/expense ratio are to be considered carefully particularly in Debt fund since returns are lower and in Index funds since fund manager has no role in the return.
  12. Mutual Fund Research Agencies study the schemes on various parameters like return, risk, risk adjusted return and award rankings and ratings to the schemes. An investor must also remember that it is not just performance but also exit load that can affect his returns.


  1. Investor needs to evaluate the three options within a scheme – dividend payout, dividend re-invest and growth from Taxation and Liquidity Under growth option, money grows in the fund on gross basis. In dividend payout, money flows to the investor but attracts dividend distribution tax (DDT). In dividend reinvestment scheme, the declared dividend is reinvested in the scheme but DDT is attracted.
  2. Normally, dividend payout is chosen by those investors who want regular income. However, dividend will be paid only if there is any surplus to distribute.
  3. For investors falling in low tax bracket, like pensioners, this is unnecessary taxation. Hence, investors who would like regular income should instead choose SWP (SWP attracts STT in equity schemes and capital gain tax implication).


  1. Mutual funds provide product literature like Fund Factsheets, Product Notes and Brochures which contain the Suitability (Scheme objective/Asset class/Holding period/Riskometer), Cumulative Returns compared with benchmarks and Portfolio description.
  2. In case of equity, Portfolio Description will tell Extent of diversification across stocks/sectors and strategy of stock selection (large cap/Mid cap and Growth/Value). In case of debt, investor can determine Tenor and Credit quality and in case of hybrid, investor can determine Allocation to different asset classes and the way different asset classes are managed.
  3. Fund Factsheet which is the official communication by a mutual fund is not mandatory but mutual funds still issue them. Information in factsheets is subject to SEBI’s advertisement guideline.
  4. Factsheets contain information like objective, performance, portfolio, Fund manager’s views on economy and market, Basic information about schemes like – Inception date, corpus size, current NAV, benchmark, Comparison of fund’s performance with benchmark for different periods, SIP Returns, Portfolio allocation, PE, risk measures such as Beta, SD, Sharpe, etc., Credit rating, average maturity in case of debt funds, Minimum investment amount, plans and options, Load, expense ratio and availability of systematic transaction facility
  5. Periodic Updates about market and Economy are issued by Mutual Funds to help investors better understand their schemes and get information about the current investment climate like Level of Market Indices and Yield, Analysis of corporate results, Industry-wise analysis of earnings and demand forecasts, Inflation rate, Change in interest rate etc.

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