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Types of mutual funds in India (Choose the best for you)

types of mutual funds

There are numerous types of mutual funds in the market.

Knowing these different types of mutual funds can be beneficial for you.

Whereby you can choose the best mutual funds that meet your investment goals criteria.

Mutual funds are classified based on asset class, investment goal, structure, specialty, and risk appetite.

Types of mutual funds based on asset category

Asset class category is based on the assets in which they invest:

Equity funds

Equity funds solely invest in stocks/shares of different companies.

Their performance of funds depends on the companies’ stock in which they invest.

It is a high-risk investment because it can offer a significant return on investment.

Equity funds also have sub-categories based on stocks in which they invest.

Such types of mutual funds in India are:

  • Low cap funds: These funds invest in companies that have a market capitalization of less than
    Rs 5,000 crore.
  • Mid-cap funds: These funds invest in companies that have a market cap between Rs 5,000 crore to Rs 20,000 crore.
  • Large-cap funds: These funds invest in companies that have a market cap of more than Rs 20,000 crore.

Suggested reading: Market Capitalization: Basics & Categories

Debt funds

Debt funds primarily invest in debt securities e.g., Government bonds, corporate bonds, Notes, Treasury bills, etc…

Debt instruments in which they invest provide fixed interest rates and have fixed maturity.

Debt funds are safe investments.

If you want to diversify your portfolio by investing in debt instruments, but don’t want to invest directly, these types of mutual funds are best for you.

Suggested reading: 12 Best debt mutual funds to invest in 2022

Hybrid funds

Hybrid funds invest in a mix of asset classes. e.g., stocks, debt, money market funds, etc…

This is also known as balanced funds.

In short, these funds invest in both debt and equity to balance out the portfolio.

Hybrid mutual funds are also sub-categories.

Few of them include balanced aggressive hybrid funds, multi-asset allocation, and arbitrage funds.

Money market funds

Money market funds invest in liquid securities that have a maturity of less than a year.

Investors trade shares of companies on the stock market.

Similarly, short-term debt trade in a money market.

Examples of money market instruments are Treasury Bills (T-Bills), Certificate of Deposits (CDs), Commercial Papers (CPs), Repurchase Agreements (Repos), and Banker’s Acceptance (BA).

Money market funds are better for people who want to invest for a short period and want a better return on investment.

Types of Mutual funds based on investment goal

Growth funds

Growth funds invest in high-growth stocks with the aim of capital appreciation.

These funds are best for people who want higher returns.

Although it has the potential for higher return, is considered a high-risk investment.

It can be volatile in short term, but in the long term, it tends to perform well.

Income funds

Income funds invest in high dividend-paying stocks, bonds, money market instruments, etc…

These funds provide regular income to the investors through dividends and coupons.

It carries less risk.

These funds are best for people who want a stable and regular income.

Liquid funds

Liquid funds invest in the short-term or very short-term instruments e.g., Repurchase agreements, money market instruments, T-bills, etc…

These funds have low risk, provide a moderate return, and are better for investors who want to invest for a short period.

Fixed maturity funds

Fixed maturity funds invest in debt securities that have fixed maturity.

Mostly they invest money in securities that have the same fixed maturity as FMFs.

These funds are better for conservative investors.

Pension funds

Pension funds are types of mutual funds that invest in both equity and debt securities with the goal of the long term.

These funds provide regular income after a very long period of investments.

Because they invest in both debt and stock, it balances out risk.

Pension funds are best for people who want a steady source of income in retirement.

Capital protection funds

Capital protection funds invest partially in the debt market and the stock market.

It is considered a safe investment.

These are best for folks who want their money to be protected and also want some return on investment.

Tax-saving funds (ELSS)

Equity-linked saving schemes are mutual funds that are primarily in stocks.

In these funds, you are entitled to tax deduction under section 80C of the income tax act.

You are eligible for tax deductions up to Rs 1.5 lakh on the capital gain.

it is a high-risk investment but also can give a higher return.

Types of mutual funds based on the structure

There are 3 different types of structures in a mutual fund based on their ease of investment:

1. Open-ended funds

Open-ended funds can be bought and sold anytime at their net asset value (NAV).

You can invest as much as you want, there’s no limit to that.

It is always open to investment or redemption; therefore, it is called open-ended funds.

These funds aren’t traded in the stock market.

Despite the offer of high liquidity.

You can start investing in these funds at as low as Rs 500.

2. Close-ended funds

Close-ended funds come up with a pre-specified maturity period.

They can only be bought at the new fund offer period (NFO) and withdrawn after the lock-in period ends.

You can only invest in these types of mutual funds in India when they are launched.

They are listed on the stock market after NFO.

These funds have liquidity but only at their maturity.

3. Interval funds

Interval funds are where you invest money on NFO and can sell and buy at different intervals (decided by the fund company) during maturity.

These funds have both features of open-ended and close-ended funds.

Types of mutual funds based on specialty

Index funds

Index funds are types of mutual funds or ETFs that put money in an index. Such as BSE.

It tracks the performance of the financial market index.

It does not manage by a fund manager.

Index funds have a low expense ratio.

Index funds are the best for passive investors.

Sector funds

Sector funds invest primarily in one specific sector e.g., pharma and infrastructure.

The fund performance is thoroughly tied to one specific sector in which fund they invest.

These funds are best for people who are optimistic about some sectors.

Fund of funds

Fund of funds are types of mutual funds that invest in other mutual funds.

They hold a bunch of portfolios of mutual funds.

It is also known as multi-manager funds.

It aims to archive broad diversification by investing in other mutual funds.

It has a higher expense ratio relative to regular funds.

It is better for conservative investors because it has low risk.

International funds

International funds invest in stocks of companies outside of their own country.

It is also known as foreign funds.

These types of mutual funds are best for people who want to get the benefit from emerging economies of other countries.

Global funds

While international funds can’t invest in their own country, global funds can invest in any country including their own.

But the fund mostly focuses on foreign markets.

Emerging market funds

Emerging market funds invest in the majority of their assets in a country’s economy which think to be emerging.

This is attracting investments for investors who are looking for growth,

Real estate funds

Real estate funds invest primarily in the real estate sector.

A few examples of which they invest are mortgage loan companies and real estate-related companies.

Returns of the fund depend on the performance of the real estate sector.

Instead of investing directly in real estate, you can invest in real estate through these types of mutual funds in India.

Commodity focused stock funds

Commodity-focused stock funds invest in companies that are working in the commodity market.

They don’t invest directly in commodities.

The returns are based on the company they invest in or the commodity itself.

Exchange-traded funds

ETFs track a particular index, sector, commodity, or another asset.

Exchange-traded funds are traded in the stock market.

Thereby It offers a lot of liquidity.

They have a lower expense ratio.

Suggested reading: What Are Exchange-Traded Funds(ETF)?

Leverage funds

Leverage funds are types of mutual funds that use financial leverage to earn maximum return on investment.

Financial leverage includes short selling, buying assets on margin, options trading, etc…

Market neutral funds

A market-neutral fund is a hedge fund that seeks a profit from either an increase or a decrease in stock prices.

They do this by using long and short positions.

Gilt funds

Gilt funds are mutual funds that only invest in central or state government bonds and fixed interest instruments.

Since the instruments invested are backed by the government, it carries a low risk.

Asset allocation funds

Asset allocation funds are a portfolio of various types of assets including stocks, bonds, and cash equivalent.

The asset allocation of a fund can be fixed or variable depending on the fund company.

Types of mutual funds based on risk appetite

You can also invest money based on your risk appetite.

Low risk

Low-risk funds invest in securities that have low risk.

These funds are better for people who don’t want to take any risks.

However, the return on investments is also low.

Examples of low-risk funds are large-cap funds and debt funds.

Medium risk

Medium risk funds invest in securities that have a moderate level of risk.

It can invest in both debt and stock to balanced out.

These types of mutual funds could give a higher return if you invest for a longer period, usually 5 years or more.

They are better for people who can take somewhat risks.

Examples of medium-risk funds are income funds and hybrid funds.

High risk

High-risk funds invest in high-risk (like small-cap companies) instruments that have the potential to give higher returns.

These funds are ideal for investors who want higher returns and can take higher risks.

Example of high-risk funds is growth funds and emerging market funds.

Conclusion

These are all different types of mutual funds in India.

Don’t confuse with various mutual funds,

  • Just keep in mind what’s your goal of investing.
  • What is your risk appetite?
  • Decide what you want stable income or growth?
  • And choose accordingly.

Now it’s your turn, let me know in the comment section.

Which mutual fund is best suited for you and why?

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