Introduction 

Mutual Funds have been gaining a lot of popularity in the recent past as an effective investment channel. Choosing the right type of fund for your investment needs will depend on your investment goal. A mutual fund is a trust that collects money from a number of investors who share a common investment objective. Then, it invests the money in equities, bonds, money market instruments and/or other securities. Each investor owns units, which represent a portion of the holdings of the fund. 

There are several other types of funds offered by the asset management companies in the country. These are generally segregated based on structure, asset class, investment objective, speciality, and risk. 

Classification of Mutual Funds

The most common types of mutual funds in India are listed below:

  • Equity funds

  • Debt funds

  • Money market funds

  • Index funds

  • Balanced funds

  • Income funds

  • Fund of funds

  • Speciality funds

Mutual Fund Types – Based on Structure

  • Open-Ended Funds: Mutual funds in which units are open for purchase or redemption through the year are called open-ended funds. Purchases/redemption of units is done at prevailing NAVs in these funds. These allow investors to remain invested as long as they want. There is no cap on the amount that can be invested in the fund. They are also usually actively managed with a fund manager who decides the investment allocation. Open-ended funds usually charge a fee which can be higher than passively managed funds because of the active management. These are an ideal investment for people who want investment along with liquidity because they are not bound to any specific maturity periods. Investors can withdraw their funds at any time they want when it comes to open-ended funds.

  • Close-Ended Funds – In close-ended funds, units are allowed to be purchased only during the initial offer period. Units can also be redeemed at a specified maturity date. Such schemes are often listed for trade on a stock exchange in order to offer liquidity to investors. Once the units or stocks are bought, they cannot be sold back to the mutual fund, instead, they need to be sold through the stock market at the prevailing price of the shares.

  • Interval Funds – Interval funds carry the features of open-ended and closed-ended funds in that they are opened for the repurchase of shares at different intervals during the fund tenure. The fund management company offers to repurchase units from existing unitholders during these intervals. If unitholders wish to offload shares in favour of the fund, they can do so in interval funds.

Mutual Fund Types – Based on Asset Class

  • Equity Funds - Equity funds, as the name suggests, invest in equity stocks/shares of companies. These are considered high-risk funds but also aim to provide high returns. Equity funds could also include speciality funds such as infrastructure, fast-moving consumer goods and banking, etc.

  • Debt Funds - These funds invest in debt instruments such as company debentures, government bonds and other fixed-income assets. They are considered safe investments and provide fixed returns. Tax is not deducted at source in debt funds so if the earning from the investment is more than Rs. 10,000 then the investor is liable to pay the tax on it himself.

  • Money Market Funds - These funds invest in liquid instruments such as T-Bills, CPs etc. These are considered as safe investments for investors looking to park surplus funds for immediate but moderate returns. Money markets are also referred to as cash markets and come with risks in terms of interest risk, reinvestment risk and credit risks.

  • Hybrid Funds - These funds invest in a mix of asset classes. Some funds may have a higher proportion of equity than debt while others could have higher debt. Risk and returns are balanced out this way. 

Mutual Fund Types – Based on Investment Objective

  • Growth funds – In Growth funds, money is invested primarily in equity stocks with the purpose of providing capital appreciation. These are considered to be risky funds and are ideal for investors with a long-term investment timeline. Since these are risky funds, they are also ideal for those who are looking for higher returns on their investments.

  • Income funds – As part of Income funds, money is invested primarily in fixed-income instruments e.g. bonds, debentures etc. with the purpose of providing capital protection and regular income to investors.

  • Liquid funds – In liquid funds, money is invested primarily in short-term or very short-term instruments e.g. T-Bills, CPs etc. with the purpose of providing liquidity. They are considered to be low on risk with moderate returns and are ideal for investors with short-term investment timelines.

  • Tax-Saving Funds (ELSS) - These are funds that invest primarily in equity shares. Investments made in these funds qualify for deductions under the Income Tax Act. They are considered high on risk but also offer high returns if the fund performs well.

  • Capital Protection Funds – Under these, funds are split between investment in fixed income instruments and equity markets. This is done to ensure the protection of the principal that has been invested.

  • Fixed Maturity Funds - Fixed maturity funds invest mainly in debt and money market instruments where the maturity date is either the same as that of the fund or earlier than it.

  • Pension Funds - Pension funds invest with a really long-term goal and are primarily meant to provide regular returns around the time that the investor is ready to retire. The investments in such a fund may be split between equities and debt markets where equities act as the risky part of the investment providing higher return and debt markets balance the risk and provide lower but steady returns. The returns from these funds can be taken in lump sums, like a pension or a combination of the two.

Mutual Fund Types – Based on Risk Type

  • Low risk - These mutual funds are meant for investors who do not have a high-risk appetite. Low-risk funds focus on the debt market and tend to be long term investments. As a result of them being low risk, the returns on these investments are also low. One example of a low-risk fund would be gilt funds where investments are made in government securities.

  • Medium risk – Medium risk mutual funds are ideal for those who are willing to take some risk with the investment and tends to offer higher returns. These funds can be used as an investment to build wealth over a longer period of time.

  • High risk – High-risk mutual funds are ideal for those who are willing to take higher risks with their money and are looking to build their wealth. One example of high-risk funds would be inverse mutual funds. Even though the risks are high with these funds, they also offer higher returns.

Other Mutual Fund Categories

Some of the other mutual fund categories are as follows:

  • Sector Funds

  • Index Funds

  • Fund of funds

  • Emerging market funds

  • International funds

  • Global funds

  • Real estate funds

  • Commodity focused stock funds

  • Market neutral funds

  • Inverse/leveraged funds

  • Asset allocation funds:

  • Gilt Funds

  • Exchange-traded funds

End Note

Mutual funds are one of the most popular ways Indians invest, thanks to their ease of use and built-in diversity. Every mutual fund is designed to spread around risk while capturing wider market gains. Some types of funds carry a higher amount of risk than others, but also higher potential rewards. It makes sense for every investor to go through the various types of available mutual fund options before narrowing down on one.