Types of Mutual Funds: Categories, Features, and How They Work

Mutual funds can be classified in several ways, but SEBI's official scheme categories provide the main framework for understanding them. Within these categories, funds can differ based on the assets they hold, their investment approach, and their structure.

The key points to remember are:

• Equity schemes primarily invest in equity and equity-related instruments.
• Debt schemes primarily invest in debt and debt-related instruments.
• Hybrid schemes invest across a mix of permitted asset classes.
• Life Cycle Funds are designed around a target period or life stage and follow the characteristics specified for this category.
• Other schemes include Fund of Fund Schemes and Passive Schemes such as Index Funds and ETFs.

• The Riskometer uses six levels: Low, Low to Moderate, Moderate, Moderately High, High, and Very High.

  
  

SEBI issued its Categorization and Rationalization of Mutual Fund Schemes circular on 26 February 2026, updating the broad classification framework. The framework groups schemes into Equity Schemes, Debt Schemes, Hybrid Schemes, Life Cycle Funds, and Other Schemes.

SEBI's classification provides a starting point for understanding mutual funds. A fund's category tells you about the type of investments it can make and the characteristics it must follow.

The broad groups are:

• Equity Schemes: These predominantly invest in equity and equity-related instruments.
• Debt Schemes: These predominantly invest in debt and debt-related instruments.
• Hybrid Schemes: These invest in a mix of permitted asset classes, including equity and debt.
• Life Cycle Funds: These follow a life-cycle or target-period approach as specified under the applicable scheme category.

• Other Schemes: These include Fund of Fund Schemes and Passive Schemes such as Index Funds and ETFs.

  
  

These broad groups contain several sub-categories. This is why two equity funds, for example, can have very different portfolios and levels of risk.

You can learn more about an asset class to understand how investments are grouped based on their characteristics.

Equity mutual funds invest primarily in shares and equity-related instruments. Their value can rise or fall with movements in the companies and markets in which they invest.

Different equity scheme categories focus on different types of companies, sectors, themes, or investment approaches. This means you should look beyond the broad term "equity fund" before selecting a scheme.

Multi Cap Funds

Multi Cap Funds invest across large-cap, mid-cap, and small-cap companies. Under SEBI's current framework, these schemes must invest at least 75% of total assets in equity and equity-related instruments, with at least 25% of total assets in each of large-cap, mid-cap, and small-cap companies.

Large Cap Funds

Large Cap Funds predominantly invest in large-cap companies. Under the current SEBI framework, these schemes must invest at least 80% of total assets in equity and equity-related instruments of large-cap companies.

Mid Cap Funds

Mid Cap Funds predominantly invest in mid-cap companies. The classification of large-cap, mid-cap, and small-cap companies is based on their position in the list of companies ranked by full market capitalisation.

Small Cap Funds

Small Cap Funds predominantly invest in small-cap companies. These companies rank from the 251st position onwards by full market capitalisation under the current classification framework.

The categories can behave differently because companies of different sizes can respond differently to changes in the economy and financial markets.

Debt mutual funds predominantly invest in debt and debt-related instruments. These can include government securities, corporate bonds, money market instruments, and other permitted fixed-income securities.

Debt funds are not risk-free. Their values can be affected by factors such as changes in interest rates, the credit quality of securities, and market conditions.

The term debt funds covers several categories, each with different investment characteristics.

Money Market Funds

Money Market Funds invest in money market instruments with a maturity of up to one year, subject to the applicable scheme characteristics.

They may be used by investors seeking exposure to short-term debt instruments, but they still carry investment risk.

Liquid Funds

Liquid Funds invest in debt and money market securities with the characteristics specified for the category. They are generally used for short-term investment needs, but they are not the same as a savings account or a guaranteed-return product.

Gilt Funds

Gilt Funds primarily invest in government securities. Although these securities are issued by the government, the fund's NAV can still fluctuate because of changes in interest rates.

Hybrid mutual funds invest across more than one asset class. Depending on the category, a hybrid scheme may combine equity, debt, InvITs, and permitted commodity-related instruments.

The proportion invested in each asset class varies by category. Therefore, two hybrid funds may have very different risk and return characteristics.

Read more about hybrid funds to understand how these schemes combine different asset classes.

Aggressive Hybrid Funds

Aggressive Hybrid Funds invest predominantly in equity and equity-related instruments while maintaining exposure to debt and money market instruments.

Balanced Advantage Funds

Balanced Advantage Funds, also known as Dynamic Asset Allocation Funds, manage their allocation between equity and debt based on the scheme's stated strategy.

Arbitrage Funds

Arbitrage Funds use price differences between markets or related positions as part of their investment strategy. Their risk and return characteristics differ from those of conventional equity funds.

The appropriate category depends on your objective, time horizon, and ability to tolerate fluctuations. A hybrid fund should not be treated as automatically low or moderate risk.

Life Cycle Funds are designed around a specified life stage or target period. Their investment approach is intended to change over time according to the characteristics of the particular scheme.

The broad concept is similar to adjusting an investment portfolio as a financial goal approaches. However, you should check the scheme's documents to understand its actual asset allocation, time horizon, and risk.

Do not assume that every Life Cycle Fund automatically moves from equity to debt in exactly the same way. The actual approach depends on the scheme.

SEBI's 2026 framework places Fund of Fund Schemes and Passive Schemes under Other Schemes.

Fund of Fund Schemes

A Fund of Fund Scheme invests primarily in other mutual fund schemes or permitted funds rather than directly building its entire portfolio from individual securities.

This structure can provide exposure to multiple underlying funds. However, you should review the scheme's costs, underlying investments, and risks before investing.

Index Funds

Index Funds are passive schemes designed to track a specified market index. Instead of trying to select securities to outperform the index, the fund generally seeks to replicate its composition, subject to tracking differences and the scheme's methodology.

Exchange Traded Funds

ETFs are passive schemes that generally track an index or basket of securities and are traded on a stock exchange during market hours.

Unlike units of many open-ended mutual funds, ETF units are bought and sold on the exchange. This means you also need a suitable demat and trading setup to transact in them.

Mutual funds can also be understood by how the scheme allows investors to purchase and redeem units.

Open-ended funds

Open-ended schemes generally allow investors to purchase and redeem units on an ongoing basis, subject to the scheme's terms.

The price at which transactions take place is linked to the scheme's NAV, subject to the applicable rules and transaction timing.

Close-ended funds

Close-ended schemes have a defined maturity period. Their units are generally offered during the New Fund Offer (NFO) period and follow the scheme's stated maturity and listing structure.

The existence of a maturity period does not mean every investor must hold the units without any possible exit route. Check the specific scheme documents for the applicable arrangements.

You can read more about a New Fund Offer before considering a newly launched scheme.

Interval funds

Interval Funds allow purchases or redemptions only during specified intervals. The frequency and conditions depend on the scheme.

Another way to understand mutual funds is by looking at how the portfolio is managed.

Active funds

Active funds are managed using research, analysis, and investment decisions made in line with the scheme's objective. The fund manager may select or change investments based on the fund's strategy.

Active management does not guarantee that a fund will outperform its benchmark.

Passive funds

Passive funds aim to track a specified index or other reference portfolio rather than actively selecting investments to outperform it.

Their costs can differ from those of actively managed schemes. Compare the applicable expense ratios and other scheme costs rather than assuming that every passive fund will be cheaper.

Market capitalisation refers to the total market value of a company's outstanding shares. Within equity mutual funds, schemes can focus on companies of different market-capitalisation groups.

SEBI's current framework classifies companies by their position in the ranking based on full market capitalisation:

• Large-cap companies: 1st to 100th.
• Mid-cap companies: 101st to 250th.

• Small-cap companies: 251st onwards.

  
  

These rankings can change as company market capitalisations change. Fund portfolios may therefore need to be rebalanced when the classification is updated.

A large-cap fund is not automatically safer than a small-cap fund, and a small-cap fund does not guarantee higher returns. The differences are mainly about the type and size of companies in which the scheme invests.

Some mutual funds focus on a particular sector or investment theme.

Sectoral funds

Sectoral funds concentrate their investments in companies belonging to a particular sector, such as banking, healthcare, or technology.

Because the portfolio is concentrated in one sector, its performance can be strongly affected by developments affecting that industry.

Thematic funds

Thematic funds invest around a particular theme that can span multiple sectors.

Under SEBI's current framework, sectoral and thematic funds must invest at least 80% of total assets in the relevant sector or theme.

This concentration means you should understand the theme and the risks involved before investing.

For example, inflation can affect different sectors and asset classes in different ways. You can read more about inflation to understand this economic factor.

Equity Linked Savings Schemes (ELSS) are equity-oriented mutual fund schemes that qualify for a tax deduction under Section 80C, subject to the applicable tax rules.

ELSS has a statutory lock-in period of three years. The lock-in period means you generally cannot redeem the units before the prescribed period ends, subject to the applicable rules.

Do not select an ELSS only because it offers a tax benefit. Consider the investment horizon, risk, and whether the scheme fits your financial objective.

There is no official mutual fund classification called "high-risk fund", "medium-risk fund", or "very low-risk fund".

Instead, SEBI requires mutual fund schemes to display a Riskometer. Its levels are:

• Low
• Low to Moderate
• Moderate
• Moderately High
• High

• Very High

  
  

The Riskometer gives you an indication of the scheme's risk level. It should not be the only factor you consider. You should also review the scheme's investment objective, portfolio, strategy, costs, and time horizon.

A fund's Riskometer can also change as the characteristics of its portfolio change.

Choosing a mutual fund category should start with your financial requirement rather than with a search for the highest possible return.

Start with your investment goal

Identify what you are investing for. Your goal could be retirement, education, buying a home, or building long-term savings.

The goal can help you determine how long you may need to remain invested and what level of volatility you can reasonably accept.

Consider your investment horizon

Your investment horizon is the period for which you expect to remain invested.

A short-term goal and a long-term goal may require different investment approaches. Do not choose an equity-oriented scheme only because you have heard that equities can deliver higher long-term returns.

Understand your risk tolerance

Risk tolerance is your ability and willingness to accept fluctuations in the value of your investment.

For example, if a temporary fall in your investment value would make you uncomfortable enough to sell prematurely, a highly volatile scheme may not match your risk tolerance.

Check what the fund invests in

Read the scheme's investment objective, portfolio, asset allocation, Riskometer, and other scheme documents.

A fund's category name alone does not tell you everything about the investment.

Compare costs

Check the expense ratio and other applicable costs before investing. Costs can affect the amount that remains invested over time.

There is no single mutual fund category that is suitable for every beginner.

A new investor should first consider the goal, investment horizon, risk tolerance, and the type of exposure they need. For example, someone investing for a long-term goal may have different requirements from someone who expects to need the money within a short period.

If you are ready to compare available schemes, you can use the Find a mutual fund that suits you. tool rather than selecting a fund only because it belongs to a particular category.

The Bajaj Broking website also provides access to mutual fund investment options. Before investing, review the relevant scheme information and Riskometer.

Your investment horizon can help you understand which categories may fit a particular goal, but it should not be used as a standalone selection rule.

For a long-term goal, you may consider equity-oriented categories if you are comfortable with market fluctuations.

For a goal that requires a lower level of equity exposure, debt or hybrid categories may be relevant, depending on the goal and your risk tolerance.

For a specific tax-saving requirement, ELSS may be relevant if it fits your tax situation and investment objective.

The important point is to match the fund's characteristics with your requirement, rather than assuming that a particular category is suitable for everyone.

Mutual fund categories help you understand where a scheme invests and how it is structured. They do not guarantee a particular return or tell you which fund will perform best.

SEBI's February 2026 categorisation framework is an important reference point because scheme categories and characteristics can change over time. The current framework should therefore be checked when comparing categories or reviewing older mutual fund content.