In India, mutual funds are considered a widely used investment option. These funds offer investors a managed and diversified portfolio. Mutual funds are managed by asset management companies (AMCs), which gather funds from different investors and then invest them across various financial instruments. These mutual funds are structured to suit different financial goals, risk levels, and time horizons. This article explores the different types of mutual funds in India.
Table of Contents
Types of Mutual Funds Based on Asset Class
Asset class refers to a group of financial instruments that share similar risk and returns. The categories included in the asset class are equities, bonds, and short-term debt instruments. The following are the types of mutual fund schemes based on the asset class.
Equity Funds
Equity funds invest a major portion of their capital in shares of listed companies. Some may focus on large, established firms (large-cap), while others target smaller or mid-sized businesses with growth potential (small-cap or mid-cap).
Debt Funds
Debt funds invest in fixed-income instruments, which are government bonds/corporate bonds/or debentures. The purpose of these funds is to provide a stable form of returns in the form of interest.
Capital Market Funds
The capital market funds invest in short-term debt securities such as treasury bills, certificates of deposit and commercial papers. These securities tend to be short-term and seek to provide capital protection and liquidity.
Hybrid Funds
Hybrid funds give a mix of various asset classes, especially equities and debt, within one portfolio. The percentage of allocation also depends on the purpose of the fund, thereby providing a combination of both growth and stability.
Types of Mutual Funds Based on Investment Objectives
Mutual funds can also be classified by the financial objective at which they are targeted. There are different mutual fund types which are based on the needs of investors as well as their periods.
Growth Funds
These funds invest primarily in stocks of companies that have the potential for long-term capital appreciation. They are generally chosen by investors with a longer investment horizon.
Income Funds
Income funds aim to generate regular income by investing in interest-bearing instruments such as bonds or dividend-paying stocks. They suit investors seeking periodic returns.
Liquid Funds
These funds focus on short-term debt investments with high liquidity. They are often selected by individuals who prefer quick access to their capital and minimal market exposure.
Tax-Saving Funds (ELSS)
Equity linked savings schemes (ELSS) offer tax deductions under Section 80C of the Income Tax Act. These funds invest mainly in equities and come with a lock-in period of three years.
Aggressive Growth Funds
These funds focus on sectors or stocks with high growth potential. They may experience higher price fluctuations and are intended for investors with a strong risk appetite and a long-term view.
Capital Protection Funds
Capital protection funds invest a portion of the funds in fixed-income instruments, while a smaller part may be invested in equities. The aim is to safeguard the invested capital over a defined period.
Fixed Maturity Plans (FMPs)
These funds have a defined maturity date and invest in fixed-income instruments with matching tenures. Investors usually receive their returns at the end of the term.
Pension Funds
Designed for retirement planning, pension funds invest in a mix of asset classes to gradually build a corpus over time. They are often structured with long-term growth in mind.
Types of Mutual Funds Based on Structure
The structure of a mutual fund determines how investors can enter or exit the scheme and when. These fund types differ in terms of flexibility and trading frequency.
Open-Ended Funds
With open-ended funds, investors get the advantage of buying or redeeming units at any time. This provides liquidity and flexibility in terms of entry and exit points. These funds are generally used for long-term wealth creation.
Closed-Ended Funds
These funds issue units only during a specific initial subscription period and have a fixed maturity date. After the subscription period ends, the units are listed and traded on stock exchanges, similar to stocks. These funds are suitable for investors seeking long-term capital appreciation and, in some cases, may offer potential tax benefits depending on the type of fund and applicable laws.
Interval Funds
Interval funds combine features of both open- and closed-ended funds. They accept transactions only during specific time intervals, offering periodic liquidity.
Types of Mutual Funds Based on Risk Level
Each mutual fund carries a level of risk depending on the underlying assets. Many investors now use mutual funds app to understand and compare these risk categories before making investment decisions.
Very Low-Risk Funds
These funds invest in highly liquid, short-term instruments with limited market volatility. Examples include liquid and ultra-short duration funds.
Low-Risk Funds
These funds invest in instruments such as government securities or corporate debt with high credit ratings. They aim to provide relatively stable returns.
Moderate-Risk Funds
These include balanced or hybrid funds with exposure to both equities and debt. They aim to offer growth while managing risk through diversification.
High-Risk Funds
High-risk funds primarily invest in equities or sector-specific instruments for higher growth. Their value can fluctuate more widely in the short term.
Conclusion
Exploring the different types of mutual funds helps investors choose options that match their financial goals and risk appetite. Each category, whether based on asset class, structure, or investment objective, serves a distinct purpose in portfolio planning. Selecting the right fund type can support disciplined investing and better long-term outcomes. By aligning fund features with personal needs, investors can build more focused and resilient portfolios.
Read more: Gujarat Set to Host India’s Second-Largest Space Station: A ₹10,000 Crore Game-Changer
