Classification of Mutual funds in India

With the exponential growth of the mutual fund business in India, mutual funds are further customized to suit Indian investment needs.  Thus mutual funds are further classified into 3 different funds namely Equity, Debt and Balanced funds.
An equity fund can be best described as an open or closed ended fund that invests primarily in stocks, allowing investors to buy into the fund and thus buying a basket of stocks more easily than purchasing each security individually.
Let’s understand a bit more about equity funds in detail. Generally equity funds include aggressive growth funds which seek to maximize capital appreciation in the long term. One of the major advantages of investing in equity funds is that it allows for risk diversification along with more potential reward by offering a broader exposure to various stocks and sectors. Investing in equity stocks is risky business and for a layman it is very much possible to lose a good portion of his money if he is not aware of the dynamics of the market and how one should position himself during times of bullish and bearish market returns.
However, when one invests in an equity fund, his equity risk is diversified. This is because numerous investors like him invest in the same fund. When the investment call is taken by the appointed fund manager he uses his market knowledge to select and invests only in cherry picked equity stocks.  In my belief it’s always prudent to follow the rule of ‘Not investing all of one’s eggs in one basket’, hence like minded investment advisors always suggest investments in both equity and debt funds. Debt funds largely comprise of fixed income products. The principal objective of a debt fund is preservation of capital followed by generation of income on the capital invested by the investor. Debt funds have two important advantages, one that they offer diversification against investing in an all equity oriented portfolio’s, and second for the ultra-conservative investor who   is more inclined to invest his savings in a fixed deposit it offers comparatively a higher return in capital invested. Also Investing in these funds offers better liquidity options as well as greater return on investments when compared against common bank deposits which come along with a lock in period.
Now for an investor who is of the opinion that he gets the best of both worlds, then he may choose the third option of mutual funds i.e. balanced funds.  These are built out of a combination of both world’s viz. equity world as well as debt world. Both are generally combined in ratio of 60:40, where 60% is allotted to equity portfolio (shares) and remaining is debt (fixed return investments like bonds).  
Balanced funds continuously rebalance their portfolios in such a manner that the general placement described above is not disturbed. Thus the profits earned from stock markets are encashed and invested in low risk investment instruments like fixed income or debt products. Thus in-conclusion, the average investor today is spoilt for choice and has multiple investment options at his fingertips.  As far as mutual funds are concerned investors can look at his risk appetite and choose to invest in a mutual fund that best suits his needs.

Disclaimer: 1. Views as are mentioned in the article are personal views of Author and nothing to link with Co., its Director and Employees.2. All investments are subject to market risk and you need to consult your financial advisor/consultant before investment.