Different Types of Mutual Funds Based on Various Categories

Mutual funds have become a go-to investment vehicle for both new and seasoned investors in India. They offer a convenient and diversified way to grow wealth across various asset classes, investment goals, and risk levels. But with so many options available, understanding the mutual fund types and categories is crucial to making informed decisions.

In this guide, we explore the different types of mutual funds based on multiple parameters—like asset class, structure, risk, and more—so you can pick the suitable fit for your financial journey.

Types of Mutual Funds in India

At its core, a mutual fund is a professionally managed investment fund that pools money from investors to invest in stocks, bonds, or other securities. Based on how these funds are constructed and managed, they can be classified into various types of mutual funds.

Let’s dive into these classifications one by one.

1. Classification by Organisation Structure

1.1 Open-Ended Schemes

• Open-ended schemes are perpetual, with no fixed maturity.
• They are available for subscription and redemption on all business days.
• Investors can buy or sell units at the prevailing Net Asset Value (NAV).

1.2 Close-Ended Schemes

• Have a fixed maturity period
• Units can be purchased only during the New Fund Offer (NFO) period
• Redeemable only at maturity but tradable on stock exchanges to offer liquidity

1.3 Interval Schemes

• Combine features of open-ended and close-ended funds
• Purchase and redemption allowed only during specified intervals
• These schemes must be listed on stock exchanges

2. Classification by Portfolio Management Style

2.1 Active Funds

• Fund Manager actively manages the portfolio by selecting securities to buy, hold, or sell
• Aim to outperform a benchmark index (generate alpha)
• Higher potential returns but come with higher risk and expense ratios

2.2 Passive Funds

• Track a market index or benchmark with minimal fund manager intervention
• Examples include Index Funds and Exchange Traded Funds (ETFs)
• Relative Lower cost, Relative lower risk (market risk only), suitable for cost-conscious investors

3. Classification by Investment Objective

3.1 Growth Funds

• Aim for capital appreciation over the medium to long term
• Invest primarily in equity and growth-oriented assets
• Suitable for investors with high-risk appetite and longer time horizons
• Returns can be volatile in the short term

3.2 Income Funds

• Focus on generating regular income
• Invest in fixed income securities like government bonds, corporate debentures
• Suitable for conservative investors looking for predictable cash flows
• Income is not guaranteed and depends on interest rates and credit risk

3.3 Liquidity / Money Market Funds

• Provide high liquidity and capital protection
• Often structured as Liquid Funds, which invest in money market instruments with maturities not exceeding 91 days
• Ideal for short-term parking of surplus funds
• Returns depend on short-term interest rates

Money Market Instruments include Treasury Bills, Commercial Papers, Certificates of Deposit, Call Money, etc.

4. Classification by Underlying Portfolio

4.1 Equity Funds

• Invest primarily in stocks
• Sub-categories include Large Cap, Mid Cap, Small Cap, Value Funds, etc.
• Suitable for long-term investors seeking capital growth

4.2 Debt Funds

• These debt funds invest in fixed-income securities such as bonds and government securities
• Offer relatively stable returns and lower risk than equity funds

4.3 Hybrid Funds

• Hybrid funds invest in a mix of equity and debt
• Aim to balance risk and return, making them suitable for moderate-risk investors

4.4 Money Market Funds

• Focus on short-term debt and money market instruments
• Aim to preserve capital while offering reasonable returns

4.5 Gold & Commodity Funds

• Invest in gold or other commodities, either directly or through ETFs
• Often used as a hedge against inflation

4.6 Multi-Asset Funds

• Allocate investments across at least three asset classes, such as equity, debt, and gold

5. Thematic / Solution-Oriented Funds

These funds cater to specific investor goals or themes:

• Tax Saving Fund (ELSS) – Offers tax deductions under Section 80C
• Retirement Benefit Funds – Long-term investment options for retirement planning
• Child Welfare / Education Funds – Designed to fund a child's future needs
• Arbitrage Funds – Exploit price differences across markets for low-risk returns

6. Other Fund Categories

6.1 Exchange Traded Funds (ETFs)

• Trade like stocks on exchanges
• Typically track indices, commodities, or sectors
• Offer intraday liquidity and lower expense ratios

6.2 Overseas Funds

• Invest in international equities, debt, or global mutual funds
• Help diversify geographically and reduce home-country bias

6.3 Funds of Funds

• Funds of Funds invest in other mutual fund schemes instead of directly investing in stocks or bonds
• Offer built-in diversification across asset classes and fund managers

Matching your personal risk profile to the types of mutual funds ensures better financial outcomes. If you’re looking to strengthen your understanding, this detailed guide on what are mutual funds can offer valuable insights.

Conclusion

With so many types of schemes in mutual fund, it’s important to understand their unique characteristics before choosing one. From asset class and structure to risk appetite and investment objectives, each fund type serves a purpose.

Whether you're a conservative saver or an aggressive wealth builder, there are types of mutual funds to invest in that align with your goals. By understanding these distinctions, you're one step closer to making smarter investment decisions and building a resilient portfolio. To make informed investment decisions, it may be helpful to understand the potential advantages of investing in mutual funds.

Frequently Asked Questions

1. How to choose the right type of mutual fund for your goals?

Selecting the right mutual fund starts with clearly understanding your financial goal, how long you can stay invested, and how much risk you are comfortable with.

• For short term goals, you may consider debt or liquid funds, which typically carry lower risk.
• For long term goals, such as retirement or wealth building, equity oriented funds may be suitable, keeping in mind the associated market volatility.
• If you are looking for a mix of growth and stability, hybrid funds offer a balanced approach by investing in both equity and debt instruments.

2. How do I decide which mutual fund category fits my needs?

Choosing the right mutual fund depends on your financial goals, how long you plan to invest, and your comfort with risk. It is advisable to carefully read the Scheme Information Document (SID) before investing to ensure the product is suitable for your individual risk and return expectations.

3. What are different categories in Mutual Fund?

Mutual funds are categorized based on asset class, investment goal, risk level, structure, market cap, and management style. Examples include equity funds, hybrid funds, Index Funds, and more.

 

Disclaimers

Investors may consult their Financial Advisors and/or Tax advisors before making any investment decision.

These materials are not intended for distribution to or use by any person in any jurisdiction where such distribution would be contrary to local law or regulation.  The distribution of this document in certain jurisdictions may be restricted or totally prohibited and accordingly, persons who come into possession of this document are required to inform themselves about, and to observe, any such restrictions.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.