Types of Mutual Funds

Types of Mutual Funds IMAGE

Mutual funds are new age investment offering flexibility and more options to the investor. Mutual funds help to diversify the investment horizon by offering different mutual fund types based on financial goals, be it long term or short term. The risk portfolio of mutual funds is clearly divided into different asset classes such as equity, debt and money market


1. Based on Structure

a. Open-Ended mutual funds

Open-ended fund is the most common type of mutual fund available. Mutual fund houses trade units of mutual funds at NAV (Net Asset Value). Open-ended funds provide exit anytime for the investor and make pay out on the basis of the NAV, which is published by the fund houses daily.

b. Close-Ended Mutual Funds

On closing of New Fund Offer (NFO), investors cannot trade their units. The price of the closed-ended mutual funds is based on the demand and supply just like stocks. Closed-ended mutual funds are not liquid and the prices are less than the normal price per unit due to less volume of trading. Investors cannot enter nor exit from the scheme till the term of the scheme ends.

c. Interval Funds

The funds which have a features-mix of open-ended and closed-ended are called interval funds. Interval funds are closed funds with an option to transact funds directly for a certain pre-decided period. They have open-ended feature during that pre-defined period and close-ended for the rest of the time.


2. Based on Asset Class

a. Equity Funds

Equity funds are mutual funds which invest majorly in equity stocks of the company. Equity funds are considered to be risky but they tend to give higher returns in the long term.

The equity funds are further classified as below:

  1. Small-Cap Funds

    Small-cap funds are those equity funds that predominantly invest in equity and equity-linked instruments of companies with small market capitalisation. SEBI defines small-cap companies as those that are ranked after 251 in market capitalisation.

  2. Mid-Cap Funds

    Mid-cap funds are those equity funds that invest primarily in equity and equity-linked instruments of companies with medium market capitalisation. SEBI defines mid-cap companies as those that are ranked between 101 and 250 in market capitalisation.

  3. Large-Cap Funds

    Large-cap funds are those equity funds that invest mostly in equity and equity-linked instruments of companies with large market capitalisation. SEBI defines large-cap companies as those that are ranked between 1 and 100 in market capitalisation.

  4. Multi-Cap Funds

    Multi-Cap Funds invest substantially in equity and equity-linked instruments of companies across all market capitalisations. The fund manager would change the asset allocation depending on the market condition to reap the maximum returns for investors and reduce the risk levels.

  5. Sector or Thematic Funds

    Sectoral funds invest principally in equity and equity-linked instruments of companies in a particular sector like FMCG and IT. Thematic funds invest in equities of companies that operate with a similar theme like travel.

  6. Index Funds

    Index Funds are a type of equity funds having the intention of tracking and emulating the performance of a popular stock market index such as the S&P BSE Sensex and NSE Nifty50. The asset allocation of an index fund would be the same as that of its underlying index. Therefore, the returns offered by index mutual funds would be similar to that of its underlying index.

  7. ELSS

    Equity-linked savings scheme (ELSS) is the only kind of mutual funds covered under Section 80C of the Income Tax Act, 1961. Investors can claim tax deductions of up to Rs 1,50,000 a year by investing in ELSS.

b. Debt Funds

Debt funds are mutual funds which usually invest in the government securities, corporate bonds etc. Debt funds are more stable and less volatile to the market conditions.

  1. The debt funds are further classified as below:

    1. Dynamic Bond Funds

      Dynamic Bond Funds are those debt funds whose portfolio is modified depending on the fluctuations in the interest rates.

    2. Income Funds

      Income Funds invest in securities that come with a long maturity period and therefore, provide stable returns over time. The average maturity period of these funds is five years.

    3. Short-Term and Ultra Short-Term Debt Funds

      Short-term and ultra short-term debt funds are those mutual funds that invest in securities that mature in one to three years. These funds are ideal for risk-averse investors.

    4. Liquid Funds

      Liquid funds are debt funds that invest in assets and securities that mature within ninety-one days. These mutual funds generally invest in high-rated instruments. Liquid funds are a great option to park your surplus funds, and they offer higher returns than a regular savings bank account.

    5. Gilt Funds

      Gilt Funds are debt funds that invest in high-rated government securities. It is for this reason that these funds possess lower levels of risk and are apt for risk-averse investors.

    6. Credit Opportunities Funds

      Credit Opportunities Funds mostly invest in low rated securities that have the potential to provide higher returns. Naturally, these funds are the riskiest class of debt funds.

    7. Fixed Maturity Plans

      Fixed maturity plans (FMPs) are close-ended debt funds that invest in fixed income securities such as government bonds. You may invest in FMPs only during the fund offer period, and the investment will be locked-in for a predefined period.

c. Money Market Funds

A money market refers to the mutual funds that are highly liquid and where the money is invested in short-term investments like deposits certificates, treasury bills etc. You can have your money invested in money market funds for a duration like a day.

d. Balanced or Hybrid Funds

Balance or hybrid funds are a mix of equity and debt funds. They tend in to invest an equal amount in equity and debt funds to keep the risk level balanced in the investment.

The debt funds are further classified as below:

  1. Equity-Oriented Hybrid Funds

    Equity-oriented hybrid funds are those that invest at least 65% of its portfolio in equities while the rest is invested in fixed-income instruments.

  2. Debt-Oriented Hybrid Funds

    Debt-oriented hybrid funds allocate at least 65% of its portfolio in fixed-income instruments such as treasury bills and government securities, and the rest is invested in equities.

  3. Monthly Income Plans

    Monthly income plans (MIPs) majorly invest in debt instruments and aim at providing a steady return over time. The equity exposure is usually limited to under 20%. You can decide if you would receive dividends on a monthly, quarterly, or annual basis.

  4. Arbitrage Funds

    Arbitrage funds aim at maximising the returns by purchasing securities in one market at lower prices and selling them in another market at a premium. However, if the arbitrage opportunities are not available, then the fund manager may choose to invest in debt securities or cash equivalents.


3. Based on Investment Objective

a. Growth Funds

The money is invested in growth funds with the prime objective of getting a capital appreciation. Although growth funds are risky, they tend to offer high returns in the long run.

b. Income Funds

Money gets invested in fixed income instruments like government bonds and debentures under income funds. The objective of the income fund is stable income on investment with modern growth of capital.

c. Liquid Funds

The money gets invested in short-term financial instruments like treasury bills, deposit certificates for the purpose of providing ease of taking out money anytime. Liquid funds are considered to be low risk with average returns and are ideal for people looking for short-term investment.

d. Tax-Saving Funds or ELSS

ELSS or tax saving mutual funds come under the section 80C of the Income Tax Act, 1961 and qualify for a deduction of up to INR 1, 50,000 for a financial year. The majority of the investment gets invested in equity stocks. There is a lock-in period of 3 years on the ELSS investment.

e. Capital Protection Funds

The primary objective of these funds is to protect the money invested and thus the funds get split in between equity and fixed income investments.

f. Fixed Maturity Funds

In fixed maturity funds, the investment is made in closed-ended debt funds having a fixed date of maturity.

g. Pension funds

Money invested in pension funds are for a long period of time keeping in mind the long-term objective of getting a regular pension to the investor when he retires. The money in the pension funds gets invested in equity and debt instruments where equity helps the investment grow and debt funds maintain a balance of risk in the investment. The returns on the pension fund can be withdrawn as a lump sum or as regular pension or even the combination of the both.


4. Based on Specialty

a. Sector Funds

Sector funds are the funds that stick to one sector of the industry when investing. For example – Real Estate mutual funds will only invest in those companies which are in real estate business or sector. The returns of the investment also depend on the performance of the particular sector.

b. Index Funds

The index fund is a type of investment which is made to match the working of a market index like BSE. These funds provide broader exposure to the market, less operating cost and low portfolio turnover.

c. Fund of Funds

Funds of funds are the types of mutual funds that invest in other mutual funds. The returns solely depend upon the performance of the target fund. These types of funds are also referred to as multi-manager funds.

d. Emerging Market Funds

In emerging market funds, the investment is made in the developing countries which are growing economically at a good rate. These funds are considered risky as a lot of other factors depend on the performance of political and economic situations of the particular developing country.

e. International Funds

International funds invest their money in the international companies located in other parts of the world. International funds are also known as foreign funds. The money in international funds will not be invested in the investor’s own country.

f. Global Funds

These are similar to international funds and invest their money in the companies located in all the parts of the world. The only difference from international funds is that investment can also be made in the same country of the mutual fund investment.

g. Real Estate Funds

As the name sounds, the real estate funds invest their money in real estate business. The investment in a real estate project can be made at any phase of the project.

h. Commodity Focused Stock Funds

The investment is done in companies that are working in the commodities market, for example, mining companies or producers of commodities. Performance of these funds is directly linked to the performance of those commodities in the market.

i. Market Neutral Funds

These funds do not invest directly in the market. They invest in securities, treasury bills with the aim of steady and fixed growth.

j. Inverse/leveraged Funds

These funds don’t operate as a normal mutual fund. They make a profit when the market falls and incur a loss when the market does well. The risk factor in such funds is very high as they can make you huge loss or profit as per the market conditions.

k. Asset Allocation Funds

These funds allow the portfolio manager to adjust the allocated assets to achieve results. The amount of investment gets divided into such funds to invest in different instruments like bonds and equity.


5. Based on Risk

a. Low Risk

These types of mutual funds invest in debt market where the risk to the investment is very low. The investments tend to be long-term but due to the low risks associated with it, the returns are also moderate. Example of a low-risk mutual fund will be debt funds where the investment is made in very safe government securities.

b. Medium Risk

These investments carry medium risk to the investor. Medium risk mutual funds are ideal for those who are willing to take some risk to get good returns on their investment. The investment portfolio is a mixture of debt funds and equity funds.

c. High Risk

These investments are high and are for those who are willing to take a high risk on their investment for an expectation of high returns. High-risk investment invests a majority of the money (investment) in equity stocks of the company.