A mutual fund represents collective savings of investors who invest in capital market instruments. It is an attractive investment opportunity for an investor as it offers an opportunity to invest in a diversified, professionally managed basket of securities at a relatively low cost. Mutual funds can be categorised by investment objective as under:

These are also known as debt funds since they primarily invest in debt instruments issued by the government, private companies, banks and financial institutions. By investing in debt, these funds target low risk and stable income to the investors. While returns in these funds may be regular, their scale may fluctuate depending on the prevailing interest rates and the credit quality of the debt securities.

These are also known as money market funds. They invest in securities of short term nature, typically securities of less than one-year maturity like treasury bills issued by the government, certificate of deposits issued by banks and Commercial Paper issued by companies as well as in the inter-bank call money market. These funds are considered to be at the lowest rung in the hierarchy of risks.

As the name suggests, these funds invest in the equity market securities. They are exposed to the equity price fluctuations risk at the market level, industry level and also the specific company level. These price movements are caused by external factors, political and social as well as economic factors. Thus the net asset values of these funds fluctuate with all price movements. Equity investments are for a longer time horizon and a well managed equity fund can get you higher returns but also carries higher risks.

These funds invest in government paper called dated securities. As the investments are in government paper these funds have little risk of default and hence offer better protection of principal. However, one must recognise the potential changes in values of debt securities held by the funds that are caused by changes in the market price of these securities as a result of change in the market price of these debt securities.

These funds, as the name suggests, are a mix of both equity and debt funds. They invest in both equities and fixed income securities in line with pre-defined investment objectives. The aim at providing a balanced mix of capital appreciation through investments in equities coupled with investments in stable instruments like bonds.