Equity Funds
Medium to High
> 3 years Wealth creation

Equity mutual funds invest in individual company stocks with little debt or cash exposure. The primary objective is to provide capital growth / appreciation by investing for the long term. These funds provide considerable diversification to an investor since investment is across sectors and stocks. Returns from equity mutual funds (except ELSS funds) are tax free after 1 year from date of investment.

Balanced Funds
> 3 years Wealth creation

Equity mutual funds invest in individual company stocks and debt instruments. Since they are mandated to have a minimum exposure of 65% to equity (stocks), they are categorized as ‘equity funds’ for tax purposes – which means that returns from these funds are tax free after 1 year from date of investment. The primary objective of balanced funds is to provide capital growth / appreciation, however their exposure to debt limits the risks they take and hence they are more suitable for investors who want exposure to equity but prefer to take lesser risk as compared to pure play equity funds

Debt / Fixed Income Funds
Low to Medium
1 – 3 years Capital protection / Steady income

Debt Mutual Funds mainly invest in a mix of debt or fixed income securities such as Treasury Bills, Government Securities, Corporate Bonds, Money Market instruments and other debt securities of different time horizons. The returns of a debt mutual fund comprises of –

  1. Interest income
  2. Capital appreciation / depreciation in the value of the security due to changes in market dynamics

Debt securities are also assigned a 'credit rating', which helps assess the ability of the issuer of the securities / bonds to pay back their debt, over a certain period of time. These ratings are issued by independent rating organisations such as CARE, CRISIL, FITCH, Brickwork and ICRA. The primary objective of debt funds is to provide regular income and protect capital. Since they do not take any equity exposures, they are relatively more stable and less risky than equity investments. While debt funds are ideal for a 1-3 year time horizon, one can save taxes by investing for more than 3 years.

Liquid Funds
Any tenure Liquidity

These are debt funds which invest in 90 days CPs and CDs (zero equity exposure), thereby taking minimal risk on investments. As their name suggests, they provide high degree of liquidity to the investor (liquidity as high as 24 hours) and hence are the most preferred instrument for all the banks and financial institutions for parking their cash.

ELSS Funds
Medium to High
> 3 years Tax saving

ELSS or Equity Linked Savings Scheme Funds are equity mutual funds which provide tax advantages under section 80C of the Income Tax Act. Like equity funds, they invest in individual company stocks but they have a lock in period of 3 years from date of invest – This means that an investor cannot withdraw his investment from an ELSS fund within 3 years of making the investment.