Hello Readers!
Mutual funds have been categorized into five broad categories, and further sub-categorized in different sections by SEBI. It was basically done to bring the uniformity and to make investors clear with each fund’s investment strategy, risk, and for which objective they are best suitable.
Such classifications have made comparisons easier for investors.
However, they are some funds types that investors can safely ignore while planning their investment in mutual funds. Let us know about these.
Credit Risk Funds
It is a kind of open-fund scheme that invests in low rated corporate bonds. As per SEBI, it is mandatory for these funds to invest at least 65 percent of their assets in below the highest-rated bonds. This categorizes them as credit risk funds. Therefore, these funds invest majorly in bonds rated below ‘AAA’ – that is ‘AA’, ‘A’, or lower rate bonds.
However, their past records show that these funds have given lower growth rates than compared to a relatively safer corporate bond fund that invests at least 80 percent in the highest-rated instruments.
If we consider the risk associated with these credit risk funds, then it is not suitable for potential investors. For most fixed-income investors looking for stability and for meeting their short term requirements, these funds don’t make much sense as part of their portfolios.
Solution-Oriented Mutual Funds
These funds are like retirement funds, that is these funds can be a one-stop solution for some of your specific goals. They often follow multiple asset allocation, simply we can say these are kind of hybrid funds, that comes with a five-year lock-in period.
These funds can easily take a higher risk as compared to their counterparts, to generate more returns. Added to that if you invest in these funds then there is a chance that you may move away from your targeted asset allocation strategy. This is because you are completely unaware that what proportion of your investment is going into equities or debt.
So basically, instead of investing in these funds, its better if you mix and match your goals and invest in a combination of appropriate equity and debt funds in the proportion of your preference.
The above-mentioned funds that is credit risk funds and solution-oriented funds, don’t add a significant benefit to the investor’s portfolio, as per the evidence and analysis so far. Thus, instead of picking these funds to invest, better stick to those boring but reliable funds that will help you reach your goal much easier.
For any kind of query, you can contact us at Shri Ashutosh Securities Pvt Ltd., we are here to help you in any way possible.
Happy Investing!
(Mutual Fund investments are subject to market risk Illustrations are for example only, there is no guarantee of returns. Past performance is not an indicator/guarantee to future returns).