Currently mutual funds One of the popular investment options. Mutual funds in India are likely to grow very rapidly in the coming few years. Cash inflow into mutual funds has been continuously increasing for some time. Which is proof of its popularity. There is a lot of diversity in the types of mutual funds, that is, there are many types of mutual funds. Due to so many mutual fund categories, investors may face problems in choosing a mutual fund. So today, to solve this problem, we will understand how many types of mutual funds are there.
What is Mutual Funds ?
Mutual funds are investment vehicles that pool money from multiple investors to purchase a diversified portfolio of securities. These securities can include stocks, bonds, money market instruments, and more. Mutual funds are managed by professional fund managers, making them an attractive option for those who want to invest in the financial markets without the expertise and time required for individual stock and bond selection.
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Types of Mutual Funds in India
We can mainly divide mutual fund types into two parts. First on the basis of Asset Class and second on the basis of structure.
The most popular types of mutual funds in India are listed below.
Types of Mutual Funds based on Asset Class
Equity funds :Equity funds invest money in company shares, and their returns depend on how the stock market performs. Though these funds can give high returns, they are also considered risky. They can be categorized further based on their features, like Large- Cap Funds, Mid-Cap Funds, Small-Cap Funds, Focused Funds, or ELSS among others. Invest in equity fund if you have a long-term horizon and a high-risk appetite.
Debt Funds :These are funds that invest in debt instruments e.g. company debentures, government bonds and other fixed income assets. They are considered safe investments and provide fixed returns. These funds do not deduct tax at source 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.
Debt funds can also be further divided into three categories –
(a) Gilt Fund – These funds invest their money only in government securities. Due to giving money to the government, the amount of risk in this type of debt fund is very nominal. Gilt funds are of short term and long term types.
(b) Junk Bond Scheme – In this type of fund, money is invested in corporate bonds. Corporate bonds have more risk than government bonds. These provide higher returns than gilt funds which is due to higher risk.
(c) Fixed Maturity Plans – These are low risk plans which you can think of like bank FD. These come with a fixed maturity time such as 3 years or 5 years.
Fixed maturity plans mostly invest in certificates of deposits, commercial papers, corporate bonds, etc. Their returns are higher than most bank FDs.
Hybrid funds :Hybrid funds invest in both debt and equity instruments so as to balance out debt and equity. The ratio of investment can be fixed or varied, depending on the fund house. The broad types of hybrid funds are balanced or aggressive funds. There are multi asset allocation funds which invest in at least 3 asset classes.
Hybrid funds can also be divided into different categories:
(a) Equity Oriented hybrid fund- In these, about 65% of the fund allocation is invested in equity and the rest in debt
funds. The risk level in these is slightly higher.
(b) Debt Oriented hybrid fund– In this, 60% of the fund allocation is kept in debt and equity. Due to higher share of debt, returns are lower and risks are also lower.
(c) Balanced fund– Balance funds invest in different types of asset classes, which include equities, debts, bonds and other securities. Thus, in balanced funds, equity and debt are kept in a balanced form due to which they have moderate risks.
(d) Monthly Income plans– In this type of scheme, about 90% is invested in debt while some in equity. Thus, these plans give slightly higher returns than pure debt schemes. There is a moderate risk level due to the very low share of equity in it.
(e) Arbitrage fund– In this type of funds, stock is bought at a lower price in one market and sold at a higher price in another market. Like buying from cash market and selling in derivatives market. In this way this fund generates income.
Types of Mutual Funds based on Structure
Open-ended funds :These funds do not limit when or how many units can be purchased. Investors can enter or exit throughout the year at the current net asset value. Open-ended funds are ideal for investors seeking liquidity.
Close-ended funds : Close-ended funds have a pre-decided unit capital amount and also allow purchase only during a specified period. Here, redemption is bound by the maturity date. However, to facilitate liquidity, schemes trade on stock exchanges.
Interval funds :A cross between open-ended and close-ended funds, interval mutual funds permit transactions at specific periods. Investors can choose to purchase or redeem their units when the trading window opens up.
Types of Mutual Funds based on investment Goals
Growth Funds : Growth funds usually allocate a considerable portion in shares and growth sectors, suitable for investors (mostly Millennials) who have a surplus of idle money to be distributed in riskier plans (albeit with possibly high returns) or are positive about the scheme.
Income funds : Under these schemes, 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.
Liquidity-based funds : Some funds can be categorized based on how liquid the investments are. Ultra-short-term and liquid funds are ideal for short-term goals, while schemes like retirement funds have longer lock-in periods.
Tax-Saving Funds (ELSS) :ELSS or Equity Linked Saving Scheme, over the years, have climbed up the ranks among all categories of investors. Not only do they offer the benefit of wealth maximization while allowing you to save on taxes, but they also come with the lowest lock-in period of only three years. Investing predominantly in equity (and related products), they are known to generate non-taxed returns in the range 14-16%. These funds are best-suited for salaried investors with a long-term investment horizon.
Capital Protection Funds :These are funds where funds are are split between investment in fixed income instruments and equity markets. This is done to ensure protection of the principal that has been invested.
Fixed-maturity funds (FMF) : These funds route money into debt market instruments, which have either the same or a similar maturity period as the fund itself. For instance, a three-year FMF will invest in securities with a maturity of three years or lower.
Pension Funds :Pension funds invest with the idea of providing regular returns after a long period of investment. They are usually hybrid funds that give low but have potential to provide steady returns in future.
Types of Mutual Funds based on risk
Low risk : These are the mutual funds where the investments made are by those who do not want to take a risk with their money. The investment in such cases are made in places like the debt market and tend to be long term investments. As a result of them being low risk, the returns on these investments is also low. One example of a low risk fund would be gilt funds where investments are made in government securities.
Medium risk : These are the investments that come with a medium amount of risk to the investor. They 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 : These are those mutual funds that 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 invest mutual funds. Even though the risks are high with these funds, they also offer higher returns.
Sector Funds : These funds also work on the lines of index funds. The only difference is that sector funds invest in the best performing stocks of a particular sector. Sectors like banking sector, pharma sector etc. For example, there are mutual funds of banking sector which may be made up of banks like HDFC Bank, SBI Bank, ICICI Bank etc. However, sector funds are considered slightly more risky. When an entire sector is hit by a recession, the entire sector fund underperforms for a long time.
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Conclusion
Understanding different mutual fund categories can make it simpler for you to align with individual financial goals. As an investor, you can compare your needs with the fund objective and invest accordingly to make the most of your money.
FAQs
What are the 4 types of mutual funds?
The four main types of mutual funds include equity funds, which invest in stocks; fixed-income funds, which focus on bonds; money market funds, dealing with short-term debt instruments; and balanced funds, which combine a mix of stocks and bonds to diversify investment portfolios and manage risk for investors.
What is the safest type of mutual fund?
Among mutual funds, money market funds are often considered the safest type. These funds invest in short-term, low-risk securities like Treasury bills and commercial paper. While they offer lower returns, they provide stability and liquidity, making them suitable for conservative investors seeking capital preservation and minimal market volatility.
How many types of funds are there in India?
In India, mutual funds can be broadly categorized into various types based on their underlying assets and investment objectives. The main types include equity funds, debt funds, hybrid funds, solution-oriented funds, and other specialized funds like index funds and exchange-traded funds (ETFs). Each category serves different investment goals and risk profiles.
What is the most common type of mutual fund?
The most common type of mutual fund is the equity fund. Equity funds invest primarily in stocks, representing ownership in companies. These funds aim for capital appreciation over the long term, making them popular among investors seeking growth and willing to accept a higher level of risk in their investment portfolios.
