If you have read any literature on the subject of funds, you may have heard of Equity, Debt, and Gold. However, you may not be sure where to start with or which fund would be beneficial for you. Some investors continue to prefer the traditional savings methods of Fixed Deposits or Pension Plans and it can be a tricky affair for them to invest in Mutual Funds. One can start considering this medium as there are a variety of funds available for investment and there exists more scope for investors now more than ever. We will elaborate on the working of these funds and their tax implications.

There are broadly four categories of funds – Equity, Debt, Money and Gold. Further, equity is divided into categories like Mid-cap, Small-cap, Large-cap and even Sectoral as well as Thematic funds. Equity Linked Savings Scheme (ELSS) also comes under this category of funds.

Investing in Equity Mutual Funds or ELSS requires you to do a thorough research before you can start investing because risks and returns on all such investments in this category are closely related to market movements.

As far as Debt Funds are concerned, the money is invested in fixed income instruments, corporate bonds, non-convertible debentures, government bonds and other highly rated instruments.

Let us understand these funds in greater detail:-

Equity Funds are directly affected by market movements and thus can be considered to be the riskiest of the lot. An equity fund is a mutual fund that invests principally in stocks. It can be actively or passively (e.g. Index Funds) managed. Equity Funds are also known as Stock Funds. Stock Mutual Funds are principally categorized according to company size, the investment style of the holdings in the portfolio and geography.

Money Market Funds are funds which invest in short-term fixed income securities such as government bonds, treasury bills, bankers' acceptances, commercial paper and certificates of deposit. They are generally a comparatively safer investment, but with lower potential returns as compared to other types of mutual funds.

Debt Funds are primarily long-term by nature and thus less liquid as they primarily invest in rated bonds. Government bonds may take a long time to convert but are generally considered risk free. A Debt Fund is an investment pool, such as a mutual fund or an exchange-traded fund, in which core holdings are fixed-income investments. A Debt Fund may invest in short-term or long-term bonds, securitized products, money market instruments or floating rate debt.

Gold ETFs are suitable for investors who want to take exposure to gold via mutual funds and they carry the same risk as investing in gold directly. Similar to mutual funds where the value of one's investment is a reflection of the value of underlying securities (equity or debt), in Gold ETF, gold is the underlying asset. The Gold ETF is an exchange-traded fund which can be bought and sold only on the stock exchanges, thus saving you the trouble of keeping the physical gold.

How to identify the right match of the fund for you?

To begin with, you should identify your goals, investment horizon to achieve them and your risk profile.

You should opt for equity schemes if you have:-

• Long-term goals
• An investment horizon of five years or more
• A high-risk appetite

Now that you are qualified to invest in equity mutual funds, you have to go a little deeper and find out exactly how much risk you can tolerate. In other words, you need to ask yourself this question - Are you a conservative, moderate or an aggressive investor? The answer to this question would decide what kind of equity mutual fund scheme would be suitable for you to invest.

• If you are a conservative investor, you should invest only in equity-oriented balanced schemes or large-cap mutual fund schemes.
• If you are a moderate investor, you should invest only in large-cap and multi-cap (they are also called diversified equity) schemes.
• If you are an aggressive investor, you can pick up mid-cap and small-cap schemes. You can also add sectoral schemes if you have sound knowledge about these sectors.

Many investors use a combination of these schemes to create a mutual fund portfolio.

For example, a large exposure to a sector scheme or a small cap scheme would considerably increase the risk associated with the portfolio. In short, choose schemes only if they match your risk profile. And you should be mindful of your risk profile even while adding schemes to your portfolio.

Founded in 2005 by new–age entrepreneur Abhishek Bansal, the Abans Group has evolved into a globally diversified conglomerate, providing expertise in Broking Services, Non-Banking Financial Dealings, Financial Services, Agri-Commodity Services, Warehousing, Realty & Infrastructure, Gold Dore Refinery & Manufacturing, Trading in Metal Products, Pharmaceuticals, Software Development & Wealth Management. The Group is a comprehensive financial and non-financial services and solutions provider, aiming to provide end-to-end solutions to its clients.