Types of Mutual Fund

Explore the diverse landscape of mutual funds in India through our comprehensive overview. Make informed decisions by understanding the different types of mutual funds.
Types of Mutual Fund
4 mins
07 Mar 2024

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?

Here is a list of some common types:

  1. Equity Funds
  2. Debt Funds
  3. Hybrid Funds
  4. Money Market Funds
  5. Index Funds
  6. Sectoral or Thematic Funds
  7. Tax-Saving Funds (ELSS)
  8. Liquid Funds
  9. Gilt Funds
  10. International Funds
  11. Growth Funds
  12. Income Funds
  13. Tax-Saving Funds
  14. Aggressive Growth Funds
  15. Capital Protection Funds
  16. Fixed Maturity Funds
  17. Pension Funds

Different types of mutual funds are structured to enable investors to select a scheme according to their risk tolerance, investable amount, financial objectives, investment horizon, and other relevant factors.

Mutual fund types 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.

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.

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Mutual fund types based on structure

  • Open-Ended Funds: These funds allow investors to enter or exit at any time, offering high liquidity. The fund size can vary based on investor demand.
  • Closed-Ended Funds: For closed-ended funds, the predetermined unit capital is used for investment. This indicates that the fund management company is restricted from exceeding the agreed-upon quantity of units for sale. A New Fund Offer (NFO) period is defined by the Trustees during which the new scheme sells its units. NFOs are accompanied by a predetermined maturity period, and fund managers are accommodating of any fund size.
  • Interval Funds: Interval funds combine features of open-ended and closed-ended funds. They allow investors to buy or sell units during specific intervals at ex dividend NAV.

Types of mutual funds based on portfolio management

Mutual funds exhibit diversity not only in their investment objectives but also in their portfolio management approaches.

  1. Active Funds: Active funds are under the dynamic management of fund managers who leverage their expertise, experience, and analytical research to make informed decisions about buying, selling, or holding assets. The primary goal of active funds is to construct an investment portfolio that yields optimal returns, aiming to outperform the benchmark against which their performance is measured.

  2. Passive Funds: Passive funds, in contrast, replicate or track an underlying index without attempting to surpass it. In this category, fund managers adopt a passive stance, abstaining from using their judgment to select underlying assets. Index funds represent a prevalent example of passive funds, aligning their performance closely with the benchmark they mirror.

Explore more about passive vs actively managed funds.

Types of mutual funds based on market capitalisation

Market capitalisation serves as a key criterion for classifying equity mutual funds into distinct categories.

  1. Large Cap Mutual Funds: These funds allocate a significant portion of their assets to shares of companies with substantial market capitalization. Typically, these companies enjoy a strong reputation in the market, and large cap funds, by nature, tend to be less volatile compared to mid- and small-cap funds.

  2. Mid Cap Funds: Mid cap funds focus on equity shares of companies falling within the range of 101 to 250 as per SEBI's classification. By investing in mid-sized companies, these funds aim to strike a balance between the stability of large caps and the growth potential of small caps.

  3. Small Cap Funds: Small cap funds channel a considerable portion of their funds into shares of small-cap companies. While these funds carry a heightened level of risk, they also present the opportunity for greater returns compared to large-cap and mid-cap funds.

Types of mutual funds based on risk

Mutual fund types categorised by risk include:

  1. High-risk funds: Suited for risk-tolerant investors seeking substantial returns, high-risk mutual funds require active management and regular performance reviews due to market volatility. While returns can reach up to 15%, most provide around 20% returns, predominantly in interest and dividends.

  2. Medium-risk funds: These funds strike a balance by allocating a portion to debt and the remainder to equity. With less volatile Net Asset Values (NAVs), they offer average returns of 9-12%.

  3. Low-risk funds: During periods of rupee depreciation or national crises, investors seek refuge in less risky options. Fund managers often recommend investing in liquid, ultra short-term, or arbitrage funds. Returns typically range from 6-8%, offering flexibility to switch investments as market conditions stabilise.

  4. Very low-risk funds: Liquid and ultra-short-term funds (with durations of one month to one year) offer minimal risk, resulting in relatively low returns (up to 6%). Investors opt for these to meet short-term financial goals and safeguard their capital.

Specialised mutual funds

  • Sector Funds: These funds focus on specific sectors of the economy, such as technology, healthcare, or energy.
  • Index Funds: Index funds replicate the performance of a specific market index like NIFTY, offering a passive investment approach.
  • Funds of Funds: These funds invest in other mutual funds, providing diversification across multiple funds and asset classes.
  • Emerging Market Funds: Emerging market funds invest in securities of developing economies, aiming to capitalise on their growth potential. They can prove to be a risky investment avenue sometimes, so investors need to be careful before investing in them.
  • International/Foreign Funds: These funds invest in securities of foreign companies or markets, providing exposure to global markets.
  • Real Estate Funds: Real estate funds invest in real property, providing an indirect way for investors to enter the real estate market.
  • Commodity-Focused Stock Funds: These funds invest in companies engaged in commodity-related industries.. The only commodity in which mutual funds can directly invest in India is gold.
  • Market Neutral Funds: Market neutral funds aim to deliver returns regardless of market direction by employing strategies that offset long and short positions.
  • Inverse/Leveraged Funds: Inverse funds aim to profit from declining markets, while leveraged funds amplify returns through borrowing and derivatives.
  • Asset Allocation Funds: These funds dynamically adjust their asset allocation based on market conditions to manage risk and return.
  • Exchange-Traded Funds (ETFs): ETFs are like mutual funds but trade on stock exchanges like individual stocks, offering flexibility and real-time pricing.

Key take aways

  • India's mutual fund industry is diverse, offering options for investors with different risk appetites, investment goals, and preferences.
  • Equity funds focus on growth, while debt funds prioritize stability.
  • Specialized sector funds target specific industries, and passive index funds track market indices.
  • Investors should evaluate their financial objectives, risk tolerance, and time horizon before choosing a mutual fund.

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Frequently asked questions

Which is the best type of mutual fund?

The best mutual fund type depends on your financial goals and risk tolerance. Equity funds offer high returns but come with higher risk, while debt funds provide stability. Hybrid funds combine both.

What are different categories in mutual fund?

Mutual funds can be categorised based on asset class, structure, and risk. Some common categories include equity funds, debt funds, and money market funds.

What is the most common type of mutual fund?

Most common type of mutual fund are equity funds. They invest in stocks and have the potential for significant returns. However they tend to possess higher risk factor.

Which type of mutual fund gives highest return?

While there is no guaranteed highest return, historically, equity funds have provided substantial returns over the long term. However they possess higher risk factor, so investing according to your risk appetite is advisable.

How many types of mutual funds are there in India?

There are several types of mutual funds available in India. These includes equity funds, debt funds, hybrid funds, and gold funds.

What is the maturity period of a mutual fund?

The maturity period of a mutual fund varies based on the type of fund. Close-ended funds have a stipulated maturity period, typically ranging from 3 to 5 years. Fixed Maturity Plans (FMPs) also feature predetermined maturity periods, often extending beyond 3 years. Some funds may have shorter or longer durations.

Which mutual fund is risk free?

No mutual fund is entirely risk-free. However, liquid funds and money market funds are considered relatively low-risk.

What are the 4 types of mutual funds?

Based on asset class, there are equity funds, debt funds, hybrid funds, and gold funds.

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