Types of Mutual Funds: Objectives, Structures & Tips

Schemes for every type of investor are responsible for the widespread popularity of mutual funds in India. All these available options make it difficult for the investors.

Mutual Fund Types

Mutual funds can be classified based on the asset class, investment objective, structure, speciality, and even risk. Classifications based on the asset class, investment objective, and structure are more common.

Types of Mutual Funds Based on Asset Class

Asset class-based classification depends on the assets in which a mutual fund scheme has invested. These consists of following funds-

Equity Funds:

Equity funds invest in equity (stocks) and related instruments. They carry the highest returns potential but also come with the highest level of risk. Equity funds are recommended for investors with at least 3-5 years of investment duration. Equity funds can be of various types. They can be further classified based on their market capitalisation.

Debt Funds:

Debt funds invest your money in debt instruments, such as government bonds, company debentures, and other securities delivering fixed income. They are one of the safest types of mutual funds and can be regarded as short-term and long-term investments. Just as equity funds, debt funds can be of various types based on the maturity period of the debt and money market instruments.

Type of Debt Fund Maturity of Its Investments
Ultra-short Duration Funds 3-6 Months
Short Duration Funds 1-3 Years
Medium-duration Funds 3-4 Years
Medium-to-Long Duration Funds 4-7 years
Long-duration Debt Funds More than 7 years

Apart from these, there are a few other types of debt-funds too, these include:

Balance/Hybrid Funds

They are funds that invest in two or more asset classes as per the investment objective and other factors. Hybrid funds further include:

Equity-oriented Hybrid Funds

When a fund invests 65% or more in equity and equity-related instruments and the rest in debt, it is considered an equity-oriented fund. For taxation purposes, such funds are considered equity funds.

Debt-oriented Fund:

When 60% or more is invested in debt, it is a debt-oriented hybrid fund. For taxation purposes, such funds are considered debt funds.

Arbitrage Fund:

These are funds that invest majorly in the futures and options to generate returns. Since they always have an equity exposure of more than 65%, they are considered as equity funds for taxation purposes.

Types of Mutual Funds Based on Investment Objective

All the different types of mutual funds have specific investment objectives. While some aim to help you grow your capital, others focus on a fixed income, save taxes, and more.

Apart from these, there are a few other types of equity funds including:

  • Growth Funds:

    The primary goal of such funds is to grow your capital in the longer run. These are generally equity funds with higher returns potential and higher risk. The funds are not recommended for risk-averse investors especially when investing for a shorter tenure.

  • Liquid Funds :

    Liquid funds invest your money in instruments with short to very-short maturities (not more than 91 days) to ensure liquidity. They are low on risk and ideal for short-term investments. However, lower the risk, lower the return potential.

  • Income Funds:

    If regular income from your mutual fund investment is your goal income funds can be a great option. Money is mostly invested in debentures and bonds that have fixed maturity and provide fixed income.

  • Tax-Saving Funds:

    Popularly known as Equity Linked Savings Scheme (ELSS), these are eligible for a tax deduction of up to Rs. 1.5 lakhs in a financial year. Tax-saving funds are equity-oriented diversified funds, with more than 65% of the portfolio invested in equity.

Types of Mutual Funds Based on Structure

The classification of mutual funds can also be done based on their structure. There are three different types of funds based on structure-

  • Open-Ended Funds:

    These can be purchased and sold throughout the year. Here, fund managers try to invest in instruments with higher returns potential. Buying and selling of open-ended funds are done as per the current Net Asset Value of the fund.

  • Close Ended Funds:

    Close-ended funds can only be purchased during the New Fund Offer (NFO) period. The investment in close-ended schemes can be redeemed after fixed maturity. These funds are also listed on stock exchanges, but liquidity is generally very low.

  • Interval Funds:

    These funds combine the features of open-ended and close-ended funds. The fund house opens the fund for buying and selling at intervals. The fund houses generally repurchase the units from the investors during the interval period if the investor wants to exit.

Selecting the right mutual fund for your investment

Now that you know a little more about mutual funds and their types, you are more equipped to make the right decision. Select a reputed fund house and focus on factors like your risk appetite, investment horizon, and financial goals to invest confidently and successfully.