Different Types of Mutual Funds – Mutual Fund Types Based on Asset Class, Structure, Risk & Benefits
Mutual funds have evolved a lot over the years. Initially, there were only two main types of mutual funds in India – equity funds and debt funds. High-risk investors will choose equity funds. While debt funds were ideal for low-risk investors.
But then came a third type of mutual fund – hybrid funds. These were suitable for investors who wanted to take moderate risk… Neither too much nor too little.
As the needs and demand of investors increased, so did the explosion of various mutual fund schemes. Of course, this was good news for investors.
But confusion came with different types of mutual funds. Investors were and still are confused about the meaning, scope or benefits of different types of mutual fund schemes.
But it’s time we put an end to this confusion.
In today’s article, we will answer all your queries on different types of mutual fund schemes in India. We will look at their meaning, investment strategy and benefits. So let’s start with the question of how many types of mutual funds are there.
Before talking about the different types of mutual funds, let us first understand what is mutual fund.
What is mutual funds
A mutual fund is an investment medium that collects funds from various investors. A fund manager decides which shares or bonds to buy from this pool. The profit or loss of the fund is shared equally among all investors.
Think of mutual funds as piggy banks. But this piggy bank isn’t just yours. It is shared by millions of investors. They all deposit (invest) money in this piggy bank. The total money collected is used to buy shares or bonds or both.
There are more than 29 different types of mutual funds in India. For ease of understanding, we have divided these different types of mutual funds on the basis of:
1. Fund Structure
2. Class of property
4. Investment Objective
Let’s take a closer look at each of these different types of mutual funds.
Types of Mutual Funds Based on Fund Structure
Open Ended Fund:
These funds are available for investment and redemption throughout the year. This means, an investor can buy and sell units of an open-ended fund at any time without any restrictions. There is no lock-in period and investors have the freedom to buy and sell at will.
As the name suggests, these funds are closed-ended in nature. Therefore, investors can buy them only during a specific period. Similarly, they can only be sold on a specific maturity date. Although these funds are listed on stock exchanges, their trading volume is low.
Interval funds are a mix of open and closed-ended funds. They are available for purchase at several but specific intervals.
Types of Mutual Funds Based on Asset Class
These funds invest in shares or equities of companies listed on the stock exchange. They have the potential to give high returns but also high risk. Equity funds are further divided based on market capitalization:
Large Cap Funds – The first to 100th companies listed on the exchange.
Mid cap Funds – 101st to 250th companies listed on the exchange.
Small Cap Fund – 251st forward companies are listed on the exchange.
Large cap funds offer stable returns and are perfect for conservative investors. Whereas, mid and small cap funds give better returns but with much higher risk.
There are many other types of equity funds that are permutations and combinations between large, mid and small cap funds.
Large and Mid cap Funds:
These funds will have to mandatorily invest a minimum of 35% in large-cap stocks and 35% in mid-cap stocks. They are safer than pure midcap funds but more risky than pure large cap funds.
These funds invest at least 65% of the corpus in large, mid and small cap stocks.
This is a new category introduced by SEBI in 2020. Here, the fund manager has the freedom to dynamically move the corpus into large, mid and small cap stocks.
These funds can invest in only 30 stocks related to a particular sector – large, mid or small cap.
Dividend Yield Fund:
These funds invest at least 65% of the corpus in dividend-paying stocks. They are perfect for investors who want regular income from mutual funds.
These funds invest in debt instruments such as bonds, debentures, government securities, etc. They are safer than equity funds but also offer lower returns.
Debt funds can be further classified based on:
Macaulay Period of Papers
|Debt Fund||Type of Investment Strategy|
|Short Term Debt Fund||Invest in debt instruments with Macaulay’s tenure between one and three years. When interest rates are rising, the demand for short-term debt funds is high.|
|Medium-term debt funds||Invest in debt instruments with macaulay’s tenure between three and five years.|
|Medium to Long Term Debt Funds||Invest in debt instruments with Macaulay’s duration between four and seven years.|
|Long Term Fund||Invest in funds in debt with macaulay period of more than seven years. Long-term debt funds are preferred in a scenario of falling interest rates.|
|Dynamic Bond Fund||Invests in the entire period (short-term or long-term papers)|
|Floater Fund||Invests a minimum of 65% in floating rate instruments.|
Type of borrower:
|Type of Debt Fund||Type of borrower|
|Corporate Bond Fund||Only AAA invests 80% of the corpus in rated papers.|
|Credit Risk Debt Fund||Invests at least 65% of its assets in low-rated papers that give high returns.|
|Banking and PSU Debt Funds||Invests a minimum of 80% of the assets in papers issued by banks and public sector units (PSU).|
|Gilt Fund||It is one of the lowest risk mutual funds in India. Gilt funds invest only in government securities. They carry sovereign guarantees and have zero credit risk. Gilt funds invest in long-term government securities, making them more sensitive to interest rate risk.|
Money Market Fund:
These funds invest in liquid instruments such as treasury bills, commercial papers, certificates of deposit, etc. These are considered to be the safest among all other types of mutual funds. This is because they invest in securities that mature in less than 91 days. Therefore, they face very low interest rate risk.
Money market funds can be further divided into:
|Type of Money Market Fund||Maturity period of the underlying papers|
|Overnight Fund||1 day|
|Liquid Fund||From 1 day to 91 days|
|Ultra Short-Term Debt Fund||3 months to 6 months|
|Short-term funds||From 6 months to 1 year|
These funds are a combination of equity funds and debt funds. They offer the best of both worlds – capital overvaluation from equity shares and stability from debt instruments. There are seven different types of hybrid funds in India:
|Type of Hybrid Fund||Equity allocation||Loan/Gold/Cash Allocation||Risk|
|Aggressive hybrid funds||65-80%||20-35%||High|
|Balanced Advantage Fund||0.4||0.6||Medium|
|Arbitrage Fund||–||100%||Cash less|
|Dynamic Asset Allocation Fund||0-100%||0-100%||Medium-High|
|Multi Asset Allocation Fund||Minimum 10%||Minimum 10% in Gold||Minimum-Medium|
|Conservative Hybrid Fund||10-25%||75-90%||Lower-Medium|
Types of Mutual Funds Based on Investment Objects
Everyone invests in mutual funds for different reasons. Senior citizens are not looking for aggressive growth. They just want stable returns. Similarly, a young investor can demand high-growth mutual funds. Fortunately, there are different types of mutual funds for different investment purposes.
These funds invest in high growth stocks that are trading at a high price to earnings ratio – High Price to Earnings (PE). These stocks have above-average growth potential and are a favourite among long-term investors.
These funds should invest at least 65% of their corpus in value stocks. These are stocks that are traded at a discount from their intrinsic value. Value funds help limit downside risk.
These funds invest at least 65% of their corpus in stocks. Since they are taking opposite calls on stocks, contrarian funds are highly risky.
These funds aim to generate regular income and mostly invest in government securities, corporate bonds and money market instruments. They offer stable returns with low risk. But they bear high interest rates and credit risks.
Considered to be the safest type of mutual fund, liquid funds invest in liquid instruments with low maturity i.e. less than 91 days. They offer 1% or 2% higher returns than a savings account with almost no risk.
Tax Saving Fund (ELSS):
This is a special type of mutual fund. It is used by most investors to save tax. ELSS funds also invest in stocks like equity funds. But they have a mandatory lock-in period of three years. You cannot sell your ELSS funds before three years under any circumstances. But the investment made by you is eligible for deduction of up to Rs 1.5 lakh under Section 80C of the Income Tax Act, 1961.
Capital Protection Fund:
This type of mutual fund is perfect for low-risk investors. The purpose of this fund is to protect the invested capital. That is why, it invests about 80% of the corpus in fixed income instruments such as bonds, debentures, etc. The remaining 20% is invested in equity shares. This ensures that the principal is safe and
Fixed Maturity Plans (FMP):
These funds invest only in fixed income instruments such as bonds, debentures, etc. These are closed-ended funds with a lock-in period. These funds mature when their underlying papers mature.
These are great for retired or senior citizens. Their aim is to provide financial stability after retirement.
Types of Mutual Funds Based on Specialty-
These are the most risky among all other types of mutual fund schemes. They invest in specific sectors like auto, pharma, etc. Since, all stocks in a sector behave in the same manner, sector funds are less diverse. That’s why they take a lot of risks. Only long-term aggressive investors should invest in sector funds.
These funds are managed passively and track a particular such as . Index. Their aim is to take advantage of the momentum of indices that are a little easier to predict. They have the lowest expense ratio among all other types of mutual funds.
Fund of Funds:
These funds invest in other mutual funds. Its returns depend on the performance of the fund in which the money is invested. They are also known as multi-manager funds. However, investors of these funds have to pay double expense ratio, which is not ideal.
Emerging Market Funds:
These funds invest in emerging markets such as China, Indonesia, Vietnam, etc. This is done after a thorough evaluation of future growth opportunities. These funds are very risky as the risk of political and economic instability is high.
These funds invest in internationally located good companies. For example: ICICI Prudential US Blue chip Fund invests in stocks of Amazon, Pfizer, Intel Corporation etc.
Real Estate Funds:
These funds invest in companies that are in the real estate sector. They can invest in realtors, builders, project management companies and even loan providers.
Commodity Focused Stock Funds:
These funds invest in companies that are involved in mining or production commodities such as gold, crude oil, coal, corn, soy, etc. Investors should invest 5%-10% of their portfolio in commodity funds like gold for portfolio immunity.
Asset Allocation Funds:
There are two types of asset allocation funds – target debt funds and target allocation funds. Here, the fund manager dynamically changes the asset allocation between equity, debt, gold and hybrid based on market movements.
Exchange-Traded Funds (ETF):
These are basically index funds that are listed and traded on exchanges like common stocks. An ETF is a basket of stocks that reflect an index like the Nifty 50. They are ideal for passive investors who don’t want to beat market returns.
Types of Mutual Funds Based on Risk
The risk appetite of investors varies. Some investors are comfortable with high risk, while some investors lose sleep when the fund falls by even 0.1%. Age is also an important factor here. As investors get older, their risk profile changes from high risk to medium or low risk. Depending on the risk profile, there are three types of mutual fund schemes.
These funds are low risk and are suitable for conservative investors who want to earn returns like Public Provident Fund (PPF) and Bank Fixed Deposit (FD) without any risk. Liquid funds, debt funds, and gilt funds are examples of low-risk funds.
These funds have moderate risk. This is because they invest in a mix of equity and debt instruments. They are perfect for moderately aggressive investors. Hybrid funds or large cap funds are types of medium-risk mutual fund schemes.
These funds give high returns but with high risk. For the long term, aggressive investors should invest in such funds. Mid-cap and small-cap funds are types of high-risk mutual funds.
Frequently Asked Questions on Types of Mutual Funds in India
1. Which type of mutual fund is suitable for the short term?
The definition of short term is a period of less than one year. In this case, money market funds that include liquid, overnight, low-duration, etc. are perfect for investing.
2. Which type of mutual fund helps in saving tax?
Equity linked savings scheme is the only mutual fund that helps in saving tax. Deduction can be claimed under Section 80C on investment up to Rs 1.5 lakh. But ELSS funds have a mandatory lock-in period of three years.
3. Which type of mutual fund is suitable for long-term aggressive investors?
Mid cap and small cap funds are ideal for long-term aggressive investors.
4. What types of debt funds are safest?
In the short term, money market funds are the safest but they give slightly better returns than a savings bank account. For high returns and zero default risk, gilt funds are the right choice.
5. What types of debt funds are the riskiest?
Credit risk debt funds are the most risky as they invest in low-rated debt funds as they offer higher returns.
- Different Types of Mutual Funds – Mutual Fund Types Based on Asset Class, Structure, Risk & Benefits
- How to invest in mutual funds
- what are mutual funds simple definition
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