Understanding the various mutual fund types is crucial for making an informed decision. From an investor's perspective, mutual funds are broadly categorised into equity funds, offering growth potential through investments in stocks; debt funds, providing stable returns by investing in fixed-income securities; hybrid funds, blending both equity and debt to balance risk and return; and money market funds, ensuring liquidity through short-term investments. Additionally, sectoral, and thematic funds focus on specific industries or themes, while index funds replicate market indices. Different types of mutual funds cater to different risk appetites and investment objectives, empowering investors to diversify portfolios and achieve financial goals effectively.
What are the different types of mutual funds?
The majority of mutual funds can be classified into four primary categories: Bond funds, Money Market funds, Target date funds, and Stock funds. Each category possesses distinct characteristics, risks, and potential returns. Below is a comprehensive enumeration of mutual fund types.
- Equity Funds
- Debt Funds
- Hybrid Funds
- Money Market Funds
- Index Funds
- Sectoral or Thematic Funds
- Tax-Saving Funds (ELSS)
- Liquid Funds
- Gilt Funds
- International Funds
- Growth Funds
- Income Funds
- Tax-Saving Funds
- Aggressive Growth Funds
- Capital Protection Funds
- Fixed Maturity Funds
- Pension Funds
Different types of mutual funds are structured to enable investors to select a mutual fund scheme according to their risk tolerance, investable amount, financial objectives, investment horizon, and other relevant factors.
Mutual fund types based on risk
Listed below are types of mutual funds based on risk:
- High-Risk Funds: High-risk funds, such as sector funds and aggressive growth funds, pursue higher returns by investing in more volatile assets/ asset classes/ sectors, like specific industry/sectors or growth-oriented equities.
- Medium-Risk Funds: These funds strike a balance between risk and return by investing in a mix of equities and debt securities.
- Low-Risk Funds: Low-risk funds invest in relatively stable assets such as high-quality corporate bonds and conservative equities.
- Very Low-Risk Funds: These funds prioritize capital preservation and invest in highly stable instruments like government securities and money market instruments.
Mutual fund types based on asset class
Mutual funds are categorised based on asset class into equity funds (investing in stocks), debt funds (holding fixed-income securities), and hybrid funds (balancing both stocks and bonds), catering to varying risk appetites and investment objectives. Let us know about these in detail:
- Equity Funds: These funds primarily invest in stocks or equities. They are known for their potential to deliver substantial returns over the long term, but they also come with higher risk due to the volatility of the stock market.
- Debt Funds: Debt funds invest in fixed-income securities like government bonds, corporate bonds, and other debt instruments. They are considered less risky compared to equity funds and provide regular income through interest payments.
- Hybrid Funds: Also known as balanced funds, these invest in a mix of both equities and fixed-income securities. They aim to balance risk and return by diversifying across asset classes.
- Money Market Funds: Money market funds are mutual funds investing in short-term, low-risk securities like treasury bills, commercial paper, and certificates of deposit. They aim for capital preservation and liquidity, offering stable returns. Ideal for investors seeking safety and liquidity, they provide easy access to funds while maintaining a conservative investment approach.
Read more: What are money market funds?
Mutual fund types based on investment goals
Mutual funds based on investment goals include equity funds for long-term growth, debt funds for income generation, and hybrid funds for balanced growth and income. Each type targets specific investor objectives, offering diverse opportunities to achieve financial goals while considering risk tolerance and time horizon. Let us look at these types in detail:
- Growth Funds: Growth funds focus on capital appreciation over the long term. They invest primarily in equities with the aim of achieving high returns.
- Income Funds: Income funds aim to generate a steady stream of income for investors by investing in bonds, certificate of deposits, and securities amount other investment avenues.
- Liquid Funds: Liquid funds invest in very short-term debt instruments and provide high liquidity. They are ideal for parking surplus funds for a short period while earning some interest.
- Tax-Saving Funds: Also known as Equity-Linked Savings Schemes (ELSS), these funds offer tax benefits under Section 80C of the Income Tax Act. They primarily invest in equities.
- Aggressive Growth Funds: These funds adopt a high-risk, high-reward approach by investing in growth-oriented equities with the potential for substantial returns.
- Capital Protection oriented Funds: These funds aim to protect the initial investment while providing some opportunity for growth by investing in a mix of equities and debt securities.
- Fixed Maturity Funds: These debt funds have a fixed maturity date, ranging from one month to five years, and they invest in debt instruments with a similar maturity profile.
- Pension Funds: Pension funds are designed for long-term retirement planning, investing in a diversified portfolio that balances risk and return.
Read more: What are Fixed Maturity Plans?