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Types of Mutual Funds- Explore Various Mutual Funds Types

Schemes for every type of investor is one of the most significant reasons for the widespread popularity of mutual funds in India. But all the different options often make selection challenging for new investors.

Take a look at some of the most popular funds.

Factors that Determine Mutual Funds Selection

Every investor is different. Factors like finances, risk appetite, and investment objectives vary between investors. It is necessary to select an investment option that best meets your custom investment profile, to be a smart investor.

This makes mutual funds such a popular choice in India. With various types of mutual funds now available, one can easily select a fund that perfectly meets their requirements. But the abundance of options also proves very confusing to someone new to mutual funds.

Some of the most popular mutual funds are listed below-

Mutual Fund Types

Mutual funds can be classified in many ways. For instance, you can organise them 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.

  1. 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 as compared to other types of funds but also come with the highest level of risk. Equity funds are generally recommended for investors with a longer investment horizon of at least 3-5 years. Equity funds can be of various types. They can be further classified based on their market capitalisation

    • Large-Cap Equity Funds:

      These are equity funds that have invested 80% or more of its funds in large-cap (companies ranked between 1-100th as per their market capitalisation) companies.

    • Mid-Cap Equity Funds:

      These are funds that have allocated 80% or more of its corpus to mid-cap (companies ranked 101-250th as per their market capitalisation) companies.

    • Small-Cap Equity Funds:

      These are funds that have allocated 65% or more of its corpus to small-cap (companies ranked 250th and above as per their market capitalisation) companies.

    • Apart from these, there are a few other types of equity funds; these include:

      • Equity Linked Savings Scheme (ELSS) Funds

      • Index funds

    • Debt Funds:

      Debt funds invest your money in debt instruments, such as government bonds, company debentures, and other securities that can deliver fixed income. They are generally considered one of the safest types of mutual funds and can be regarded as for 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:

      • Liquid Funds

      • Income Funds

    • Balance/Hybrid Funds:

      As the name suggests, balanced or hybrid funds 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 of its corpus 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 as equity funds.

      • Debt-oriented Fund:

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

      • Arbitrage Fund:

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

  2. 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.

    • Growth Funds:

      The primary goal of such funds is to help you grow your capital in the longer run. These are generally equity funds with higher returns potential but a higher level of risk too. The funds are not recommended for risk-averse investors, primarily when they are 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. But the lower the risk is, the lower is the returns potential too.

    • Income Funds:

      If you are aiming to earn a regular income from your mutual fund investment, income fund 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 ELSS, these are mutual funds that 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.

  3. 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:

      Open-ended mutual funds can be purchased and sold throughout the year. These are actively managed funds where 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 (NAV) 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 mostly be redeemed or withdrawn 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 its types, you are more equipped to make the right decision.

But before investing, make sure that you do understand the selected fund type in detail. Select a reputed fund house and focus on factors like your risk appetite, investment horizon, and financial goals to invest confidently and successfully.