Mutual funds are a great way to diversify your portfolio. While there are endless subsets of mutual funds, the three core asset classes in mutual funds are equity, debt, and hybrid. Equity funds invest in equity stocks of companies listed on the stock exchange. They carry medium to high risk and range from relatively safer investments like large cap funds to risky investments (mid and small cap funds). Debt funds are comparatively safer as they invest in fixed interest generating investments like fixed deposits, commercial papers, certificates of deposits, treasury bills etc. They are ideal for conservative investors looking to beat inflation without exposing their capital to equity markets. Hybrid funds are a mix of both equity and debt. There are six types of hybrid funds each with a unique mix of equity and debt. These are ideal for beginners to test the waters, before going all in with equities.