What are the types of mutual funds?

Mutual Funds are broadly classified into three categories viz. Equity Funds, Debt Funds and Balanced Funds.
EQUITY FUNDS

These funds invest a major part of their corpus in equities. The composition of the fund may vary from scheme to scheme and the fund manager's outlook on various scrips. The Equity Funds are sub-classified depending upon their investment objective, as follows:

* Diversified Equity Funds
* Mid-Cap Funds
* Sector Specific Funds
* Tax Savings Funds (ELSS)

Equity investments are meant for a longer time horizon. Equity funds rank high on the risk-return matrix.
DEBT FUNDS

These Funds invest a major portion of their corpus in debt papers. Government authorities, private companies, banks and financial institutions are some of the major issuers of debt papers. By investing in debt instruments, these funds ensure low risk and provide stable income to the investors. Debt funds are further classified as:

* Gilt Funds: Invest their corpus in securities issued by Government, popularly known as GoI debt papers. These Funds carry zero Default risk but are associated with Interest Rate risk. These schemes are safer as they invest in papers backed by Government.
* Income Funds: Invest a major portion into various debt instruments such as bonds, corporate debentures and Government securities.
* MIPs: Invests around 80% of their total corpus in debt instruments while the rest of the portion is invested in equities. It gets benefit of both equity and debt market. These scheme ranks slightly high on the risk-return matrix when compared with other debt schemes.
* Short Term Plans (STPs): Meant for investors with an investment horizon of 3-6 months. These funds primarily invest in short term papers like Certificate of Deposits (CDs) and Commercial Papers (CPs). Some portion of the corpus is also invested in corporate debentures.
* Liquid Funds: Also known as Money Market Schemes, These funds are meant to provide easy liquidity and preservation of capital. These schemes invest in short-term instruments like Treasury Bills, inter-bank call money market, CPs and CDs. These funds are meant for short-term cash management of corporate houses and are meant for an investment horizon of 1day to 3 months. These schemes rank low on risk-return matrix and are considered to be the safest amongst all categories of mutual funds.