Types of Mutual Funds in India

Mutual funds have gained significant popularity among investors in India over the years. With their diverse investment options and potential for returns, they provide individuals with a convenient way to participate in the financial markets.

However, before diving into the world of mutual funds, it is crucial to understand the different types available and their unique characteristics. In this article, we will explore the various types of mutual funds in India, providing you with a comprehensive overview of each category.

What are Mutual Funds?

Before we go into the details, let's first grasp the concept of mutual funds. Mutual funds are investment instruments that bring together money from numerous investors to create a diverse collection of securities for investment. Skilled fund managers oversee these funds and make investment choices based on the fund's objectives and strategies. Investing in mutual funds allows individuals to access different asset classes without the need to directly possess the underlying securities.

Types of mutual funds in India

Here are the different types of mutual funds available in India.

1. Equity Funds

Equity funds, which are sometimes referred to as stock funds, mainly allocate their investments to equity shares of companies that are listed on stock exchanges. These funds provide an opportunity for long-term capital growth as they take part in the overall expansion of the stock market. Equity funds can be further classified into three categories as per the market value of the companies they invest in: small-cap, mid-cap, and large-cap funds. Large-cap funds concentrate on well-established companies with a significant market value, whereas mid-cap and small-cap funds target relatively smaller companies that have a higher potential for growth.

2. Debt Funds

Debt funds primarily invest in fixed-income securities such as government bonds, corporate bonds, and money market instruments. These funds aim to provide regular income to investors while preserving capital. Debt funds are suitable for individuals seeking stable returns with lower risk compared to equity funds. They are further classified into categories such as liquid funds, short-term funds, and long-term funds, depending on the maturity profile of the underlying securities.

3. Balanced Funds

Balanced funds, also known as hybrid funds, aim to strike a balance between equity and debt investments. These funds allocate a portion of their portfolio to equity shares and the remaining portion to fixed-income securities. Balanced funds are suitable for investors looking for a combination of growth and stability. The asset allocation in these funds can vary based on the fund's investment objective and market conditions.

4. Index Funds

Index funds strive to imitate the performance of a particular market index, like the Nifty 50 or the Sensex. These funds allocate investments in the same securities and proportions as the underlying index. Index funds are considered passive investments since the fund manager doesn't actively choose securities. They provide a cost-efficient means for investors to access a wide range of the market and are well-suited for individuals who prefer a low-cost investment approach.

5. ELSS or Tax-Saving Funds

Tax-saving funds, referred to as Equity Linked Saving Schemes (ELSS), grant tax advantages as per Section 80C of the Income Tax Act. These funds predominantly allocate investments to equity shares and require a mandatory holding period of three years. Apart from offering the potential for increasing capital value, tax-saving funds facilitate tax savings for investors. They are widely favoured by individuals seeking to enhance their financial assets while simultaneously benefiting from tax exemptions.

6. Sector-Specific Funds

Sector-specific funds concentrate their investments in a particular sector or industry, such as banking, technology, or healthcare. These funds aim to capitalise on the growth prospects of specific sectors. While sector-specific funds offer the potential for higher returns, they also carry higher risk due to their concentrated exposure. Investors considering sector-specific funds should carefully analyse the prospects and risks associated with the chosen sector.

7. Exchange-Traded Funds (ETFs)

Exchange-Traded Funds (ETFs) are similar to index funds, as they aim to replicate the performance of a specific index. However, ETFs are listed and traded on stock exchanges, providing investors with the flexibility to buy and sell units throughout the trading day. ETFs offer diversification, liquidity, and transparency, making them a popular choice among investors.

8. Gold Funds

Gold funds invest in gold and gold-related securities, providing investors with an opportunity to gain exposure to the precious metal. These funds can invest in physical gold or gold mining companies. Gold funds serve as a convenient alternative to owning physical gold, eliminating the need for storage and security concerns. They are an attractive option for individuals looking to diversify their investment portfolio.

9. International Funds

International funds, also known as overseas funds or global funds, invest in securities of companies listed in international markets. These funds provide investors with exposure to global economies and industries. International funds are suitable for individuals who believe in the growth potential of international markets and wish to diversify their investments geographically.

10. Hybrid Funds

Hybrid funds, as the name suggests, combine different asset classes such as equity, debt, and gold in a single portfolio. The allocation to each asset class may vary based on the fund's investment objective and market conditions. Hybrid funds aim to provide a balanced mix of growth and stability, catering to the varying risk appetite of investors.

11. Small-Cap Funds

Small-cap funds invest in companies with small market capitalization. These funds target relatively smaller companies with high growth potential. Small-cap funds can deliver substantial returns over the long term, but they also carry higher volatility and risk. Investors with a higher risk appetite and a long-term investment horizon may consider small-cap funds to potentially enhance their portfolio returns.

12. Large-Cap Funds

Large-cap funds primarily invest in companies with large market capitalization. These funds focus on established and financially stable companies. Large-cap funds are known for their relatively lower volatility and are considered less risky compared to mid-cap and small-cap funds. Investors seeking stability and steady returns may opt for large-cap funds.

13. Mid-Cap Funds

Mid-cap funds invest in companies with medium market capitalization. These funds strike a balance between large-cap and small-cap funds, offering a combination of growth potential and risk. Mid-cap funds can provide higher returns compared to large-cap funds, but they also carry higher volatility. Investors with a moderate risk appetite may consider mid-cap funds to diversify their portfolio.

Types of Mutual fund schemes

Mutual fund schemes can be classified into the following types based on their organisation Structure:

1. Open-ended

Open-ended schemes are available for subscription and repurchase at any time on business days at the current Net Asset Value (NAV).

2. Close-ended

Close-ended schemes have a predetermined maturity date. The units are issued during the initial offering and can only be redeemed upon maturity. Close-ended schemes are listed on stock exchanges, providing an option to exit before maturity through selling or trading.

3. Interval schemes

Interval schemes allow purchasing and redemption within specific transaction periods known as intervals. The transaction period must be at least 2 days long, with a minimum gap of 15 days between two transaction periods. Interval schemes are also listed on stock exchanges.

Types of mutual funds based on investment objectives

Mutual funds offer different types of investments to help you achieve your financial goals. Here are some common objectives and their key features:

1. Capital Appreciation (Growth): These funds aim to grow your investment over time. They invest in assets like stocks that have the potential for higher returns. However, the value of your investment may fluctuate in the short term.

2. Capital Preservation: These funds focus on preserving your investment and minimising risks. They invest in safer options like bonds and government securities, aiming to provide a stable income.

3. Regular Income: These funds aim to provide a regular income stream. They invest in fixed income securities like corporate bonds, generating income from interest payments.

4. Liquidity: Funds like liquid schemes and money market funds offer easy access to your money. They invest in short-term instruments and are suitable for parking your surplus funds for short periods.

5. Tax-Saving: Some funds offer tax benefits under specific investment schemes. These funds help you save taxes while growing your investment.

Remember, different funds have different risks and returns, so it's important to choose based on your goals and risk tolerance.

Types of mutual funds based on portfolio management

Here are the two types of mutual funds based on how their portfolio is managed.

Active Funds

In active funds, the fund manager actively makes decisions on buying, holding, or selling securities and selects stocks for the portfolio. These funds have different strategies and styles to manage the portfolio, which are explained in the Scheme Information document. The goal of active funds is to outperform the benchmark index and generate better returns. The risk and return of the fund depend on the chosen strategy.

Passive Funds

In passive funds, the portfolio is designed to replicate a specific index or benchmark, such as index funds or exchange-traded funds (ETFs). In these funds, the fund manager takes a passive role as the stock selection and decision-making are driven by the benchmark index. The fund manager's job is to closely track the index with minimal deviation.

Wrapping up

Mutual funds offer a wide range of options for investors in India, catering to various investment objectives and risk appetites. Whether you are looking for long-term capital appreciation, regular income, tax benefits, or global exposure, there is a mutual fund category suitable for you. It is important to assess your financial goals, risk tolerance, and investment horizon before selecting a mutual fund. Consulting with a financial advisor can provide valuable insights and help you make informed investment decisions.

Frequently Asked Questions (FAQs)

Here are some common questions about mutual fund investments in India.

Are mutual funds a safe investment option?

While mutual funds carry some level of risk, they can be a relatively safer investment option compared to investing directly in individual stocks. However, it is essential to carefully analyse the fund's performance, portfolio composition, and risk factors before investing.

Can I invest in mutual funds with a small amount of money?

Yes, mutual funds allow investors to start with a small amount of money. Systematic Investment Plans (SIPs) enable investors to invest a fixed amount at regular intervals, making mutual funds accessible to individuals with limited funds.

How can I choose the right mutual fund for my investment goals?

Choosing the right mutual fund involves considering factors such as investment objective, risk profile, past performance, fund manager expertise, and expense ratio. It is advisable to consult with a financial advisor to align your investment goals with suitable mutual fund options.

What is the recommended duration for investing in mutual funds? 

The recommended duration for investing in mutual funds varies based on your financial objectives. Typically, equity funds are best suited for long-term investments of five years or more, whereas debt funds may be more appropriate for shorter-term goals.

Can I switch between different mutual funds?

Yes, most mutual fund companies offer the flexibility to switch between different funds within their fund family. However, it is important to consider any exit load charges and tax implications before making such switches.

Disclaimer: The content on this page is generic and shared only for informational and explanatory purposes. It is based on several secondary sources on the internet, and is subject to changes. Please consult an expert before making related decisions.