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What Are The Different Types Of Mutual Funds In India?

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Created on
July 25, 2022

Summary

What’s Inside

There are so many different types of mutual funds in the market right now — it can be a little daunting. But, the truth is, they are one of the most trending forms of investment options today. I like to call them the friendly neighbourhood investing instruments as they are relatively secure and offer returns to investors with minimal risks. Besides, mutual funds are periodically regulated and monitored by SEBI in India. 

Each individual invests in mutual funds with a different purpose and goal, and to cater to these individuals, there are various classes of mutual funds. They are broadly divided based on structures, asset class, investment objectives, speciality and risks.

Types of Mutual Funds

1. Based on Structure

Class of Mutual Funds

Types of Mutual Funds

About the Mutual Funds

Based on Structure

Open-Ended Funds

These mutual funds often have active fund managers that take care of the investment portfolio. You can invest and withdraw any amount at any time. 

A larger fee may be associated with such funds since it is dynamically managed and ensures you stay liquid while your invested capital grows.

Close-Ended Funds

This comes with an initial lock-in period beyond which you can’t invest or divest the promised capital. You can purchase the funds only during the new fund offer (NFO) period.

 The invested units can be redeemed at a specified maturity date, depending on the terms and conditions of the fund.

Interval Funds

These funds entail a mix of both open-ended and close-ended mutual funds. In other words, you can invest or divest your investment at a given period set by the fund manager or the organisation. There may be a limit set for such transactions as well. 

2. Based on Asset Class

Class of Mutual Funds

Types of Mutual Funds

About the Mutual Funds

Based on Asset Class

Equity Funds

These mutual fund options invest in a selection of stocks and shares of businesses listed on the share market. The risk associated with such funds is high and they also ensure high returns based on the market's performance in the given maturity period. 

Debt Funds

Debt funds are one of the most secure mutual funds. It offers the investor a safe return policy as these funds invest in company debentures, treasury bonds and other stable or fixed assets. 

Besides, these funds don’t have a definite tax deduction, so the investor is liable to pay tax on the interest earned if it surpasses ₹ 10,000. 

Money Market Funds

Money Market or Cash Market funds usually invest in liquidity instruments such as Treasury Bills. There are often many risks associated with such funds, including interest, credit, and reinvestment risks. These are great for those looking to store a portion of their surplus savings for moderate yet fast returns. 

Balanced/Hybrid Funds

These combine the positives and negatives of both Equity Funds and Debt funds in a way that ensures medium risk or medium returns based on the markets' performance.  

3. Based on Investment

Class of Mutual Funds

Types of Mutual Funds

About the Mutual Funds

Based on Investment Objective

Growth Funds

As the name suggests, growth funds come with an opportunity to leverage your investments with the possibility of high returns or high risk. It is ideal for investors who want to invest their surplus capital for long-term gains. 

Income Funds

These are fund schemes that prioritise securities. These types of mutual funds invest in treasury bonds and company debentures which are relatively more stable when compared to equity or growth funds. It is suitable for those looking for funds in a low-risk zone.

Liquid Funds

Ideally, these mutual fund options are short-term schemes. These funds invest in Treasury Bills, CPs and other short-term liquid assets and offer low-risk and moderate returns to the investors.

Tax-Saving Funds

Commonly known as ELSS (Equity Linked Savings Schemes) funds. These funds usually qualify for income tax deductions and are generally exposed to equity securities. These funds also come with a mandatory lock-in period of three years. 

Capital Protection Funds

These are relatively low-risk funds that invest in both equity shares and fixed income instruments. They are close-ended hybrid schemes with a goal of high protection for the invested capital. 

Fixed Maturity Funds

These funds have a definite maturity date. They invest in assets such as debt+cash market instruments and have more predictable returns.

Pension Funds

Pension funds often invest in balanced assets, including equity shares and fixed income assets. These are ideal for those looking for moderate and regular returns with less risk in the long run. 

4. Based on Speciality

Class of Mutual Funds

Types of Mutual Funds

About the Mutual Funds

Based on Speciality

Sector Funds

Sector funds are mutual funds that invest in a particular sector of the industry. The risk and rewards also depend on the performance of the chosen sector. A few sectors with mutual funds include infrastructure, finance and banking, insurance, etc. 

Index Funds

These funds invest in the high-performing assets listed on a particular index. The returns for such funds depend on the performance of the given index. 

Fund of funds

These are unique types of mutual funds that invest in other established mutual funds. Its performance depends on the performance of the target fund and is known as a multi-manager fund. Fund of funds has lower risk and returns as compared to the target fund. 

Emerging market funds

These funds typically invest in high-performing assets in developing nations to project the capacity of that country in the near future. 


They are often a gamble for the investors since a slight change in the socio-economic or political landscape can drastically affect the associated gains. 

International Funds

Foreign funds or international funds are companies that invest in funds that are not located in the market of the investor’s nation. These funds could also be located in underdeveloped and developing countries. 

Global Funds

Similar to foreign funds, these funds can invest in assets anywhere around the globe. The assets may also be listed in the investor’s national markets.

Real-Estate Funds

This type of mutual fund is a subset of sector funds that only invest in real-estate sector assets, including realtors, property management companies, construction businesses, home loan agencies, land, et al.  The risk-reward profile varies on the nature of the assets invested. 

Commodity focused stock funds

These funds invest in businesses that operate in the commodities markets and not in the commodities themselves. The performance of such a fund depends largely on the performance of the commodities it is related to. 

Market-neutral Funds

These types of mutual funds often invest with a fixed target in mind and offer steady growth. These assets can range from treasury bonds, ETFs and other secured assets that are relatively less volatile. 

Inverse/Leveraged funds

Unlike traditional mutual funds, inverse or leveraged funds perform better when the markets plummet and vice versa. They often carry high risk and also offer high returns to the investors.  

Gilt Funds

Gilt funds are a type of investment option where the capital is invested in virtually risk-free government securities. These offer lower rewards and are long-term mutual funds. 

Exchange-Traded Funds

ETFs are a blend of open-ended and close-ended funds which are passively managed and can offer liquidity to the investor. These entail a low service charge as compared to hybrid/balanced mutual funds. 


So, Which Fund Suits You?

While there is an array of funds at your disposal, choosing which funds to invest in will only make sense if you’re clear on your end goal. This will make sure that you opt for a fund that meets your needs and delivers liquidity when you need it the most. It’s recommended that you carefully check out the types of mutual funds with examples, read the fine print for each of them and take the help of financial experts before finalising.

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Frequently Asked Questions

1. What are the types of mutual funds?

Mutual funds are a professionally managed portfolio of stocks. As the name implies, cash from many investors gets pooled into it. Money managers, regulated by the Government, place the investments in a selection of stocks and bonds. Their goal? Try & make this fund profitable over time. They are broadly divided based on structures, asset class, investment objectives, speciality and risks.

2. Which type of mutual fund is best and why?

There’s no clear-cut ‘best mutual fund’. Anyone who claims that is duping you. Each individual’s investment needs vary. Some are in it for the long run, and others have high-risk appetites. Invests in mutual funds after setting clear goals; once that’s done, you will find various classes of mutual funds to choose from. It’s recommended that you carefully read every fund’s scheme document, understand the fine print for each and take a well-informed decision before placing your money in it.

3. What is the safest mutual fund?

When it comes to playing it safe, your best bet is on Debt funds. Debt funds invest in safe bonds where payback is consistent — less risky than equity. Compared to other types, it is one of the most secure mutual funds. Debt is a way for companies/governments to raise money; your investment is a loan to them. These (usually) creditworthy borrowers typically return the cash in monthly/yearly interest payments & a principal payout. Besides, these funds don’t have a definite tax deduction, so the investor is liable to pay tax on the interest earned if it surpasses ₹10,000. 

Disclaimer

Investment and securities are subject to market risks. Please read all the related documents carefully before investing. The contents of this article are for informational purposes only, and not to be taken as a recommendation to buy or sell securities, mutual funds, or any other financial products.
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