- Aggressive Growth Funds - In Aggressive Growth Funds,
fund managers aspire for maximum capital appreciation and invest in
less researched shares of speculative nature. Because of these
speculative investments Aggressive Growth Funds become more volatile
and thus, are prone to higher risk than other equity funds.
- Growth Funds - Growth Funds also invest for capital
appreciation (with time horizon of 3 to 5 years) but they are
different from Aggressive Growth Funds in the sense that they invest
in companies that are expected to outperform the market in the
future. Without entirely adopting speculative strategies, Growth
Funds invest in those companies that are expected to post above
average earnings in the future.
- Speciality Funds - Speciality Funds have stated criteria
for investments and their portfolio comprises of only those
companies that meet their criteria. Criteria for some speciality
funds could be to invest/not to invest in particular
regions/companies. Speciality funds are concentrated and thus, are
comparatively riskier than diversified funds.. There are following
types of speciality funds:
- Sector Funds: Equity funds that invest in a
particular sector/industry of the market are known as Sector
Funds. The exposure of these funds is limited to a particular
sector (say Information Technology, Auto, Banking,
Pharmaceuticals or Fast Moving Consumer Goods) which is why they
are more risky than equity funds that invest in multiple
sectors.
- Foreign Securities Funds: Foreign Securities Equity
Funds have the option to invest in one or more foreign
companies. Foreign securities funds achieve international
diversification and hence they are less risky than sector funds.
However, foreign securities funds are exposed to foreign
exchange rate risk and country risk.
- Mid-Cap or Small-Cap Funds: Funds that invest in
companies having lower market capitalization than large
capitalization companies are called Mid-Cap or Small-Cap Funds.
Market capitalization of Mid-Cap companies is less than that of
big, blue chip companies (less than Rs. 2500 crores but more
than Rs. 500 crores) and Small-Cap companies have market
capitalization of less than Rs. 500 crores. Market
Capitalization of a company can be calculated by multiplying the
market price of the company's share by the total number of its
outstanding shares in the market. The shares of Mid-Cap or
Small-Cap Companies are not as liquid as of Large-Cap Companies
which gives rise to volatility in share prices of these
companies and consequently, investment gets risky.
- Option Income Funds*: While not yet available in
India, Option Income Funds write options on a large fraction of
their portfolio. Proper use of options can help to reduce
volatility, which is otherwise considered as a risky instrument.
These funds invest in big, high dividend yielding companies, and
then sell options against their stock positions, which generate
stable income for investors.
- Diversified Equity Funds - Except for a small portion of
investment in liquid money market, diversified equity funds invest
mainly in equities without any concentration on a particular
sector(s). These funds are well diversified and reduce
sector-specific or company-specific risk. However, like all other
funds diversified equity funds too are exposed to equity market
risk. One prominent type of diversified equity fund in India is
Equity Linked Savings Schemes (ELSS). As per the mandate, a minimum
of 90% of investments by ELSS should be in equities at all times.
ELSS investors are eligible to claim deduction from taxable income
(up to Rs 1 lakh) at the time of filing the income tax return. ELSS
usually has a lock-in period and in case of any redemption by the
investor before the expiry of the lock-in period makes him liable to
pay income tax on such income(s) for which he may have received any
tax exemption(s) in the past.
- Equity Index Funds - Equity Index Funds have the
objective to match the performance of a specific stock market index.
The portfolio of these funds comprises of the same companies that
form the index and is constituted in the same proportion as the
index. Equity index funds that follow broad indices (like S&P
CNX Nifty, Sensex) are less risky than equity index funds that
follow narrow sectoral indices (like BSEBANKEX or CNX Bank Index
etc). Narrow indices are less diversified and therefore, are more
risky.
- Value Funds - Value Funds invest in those companies that
have sound fundamentals and whose share prices are currently
under-valued. The portfolio of these funds comprises of shares that
are trading at a low Price to Earning Ratio (Market Price per Share
/ Earning per Share) and a low Market to Book Value (Fundamental
Value) Ratio. Value Funds may select companies from diversified
sectors and are exposed to lower risk level as compared to growth
funds or speciality funds. Value stocks are generally from cyclical
industries (such as cement, steel, sugar etc.) which make them
volatile in the short-term. Therefore, it is advisable to invest in
Value funds with a long-term time horizon as risk in the long term,
to a large extent, is reduced.
- Equity Income or Dividend Yield Funds - The objective of
Equity Income or Dividend Yield Equity Funds is to generate high
recurring income and steady capital appreciation for investors by
investing in those companies which issue high dividends (such as
Power or Utility companies whose share prices fluctuate
comparatively lesser than other companies' share prices). Equity
Income or Dividend Yield Equity Funds are generally exposed to the
lowest risk level as compared to other equity funds.
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