Types of Mutual Fund

There are several types of mutual funds including money market funds, equity funds, debt funds, hybrid funds, index funds, speciality funds, and balanced funds. Different types of mutual funds have different features, rates of returns, and rates of risk. Mutual Funds can be classified based on organization structure, asset classes, objectives, portfolio management, speciality, and risk appetite.
EXPLORE FUNDS
Different types of Mutual Funds in India
EXPLORE FUNDS
4 mins
12-November-2024

Mutual funds offer diverse investment options, each catering to different financial goals and risk appetites. They can be classified broadly into equity funds, which focus on stocks for growth potential; debt funds, which provide stable returns through fixed-income investments; hybrid funds, which balance risk and return by blending equity and debt; and money market funds, which prioritise liquidity through short-term investments.

Further distinctions include sectoral and thematic funds, which concentrate on specific industries or themes, and index funds, which replicate the performance of market indices. Understanding these types helps investors build well-rounded portfolios to meet their objectives effectively.

Different types of mutual funds in India

Mutual funds are generally divided into four main categories: Bond Funds, Money Market Funds, Target Date Funds, and Stock Funds. Each category has distinct features, risks, and return potential, allowing investors to choose based on their financial objectives and risk tolerance. Bond Funds offer stability by investing in fixed-income securities, while Money Market Funds focus on short-term investments for liquidity. Target Date Funds align with specific time frames, and Stock Funds provide growth through equity investments.

In addition to these categories, mutual funds are further classified by specific attributes like asset class and fund objectives. Key types include Equity Funds, Debt Funds, Hybrid Funds, Index Funds, Sectoral or Thematic Funds, Tax-Saving Funds (ELSS), Liquid Funds, Gilt Funds, International Funds, and Pension Funds. Each type suits different investment goals, time horizons, and risk profiles, empowering investors to tailor their portfolios effectively.

Mutual funds are classified based on their asset class, fund structure, and investment objective.

Mutual fund types based on risk

Listed below are types of mutual funds based on risk:

  • High-Risk Funds: High-risk funds, such as sector funds and aggressive growth funds, pursue higher returns by investing in more volatile assets/ asset classes/ sectors, like specific industry/sectors or growth-oriented equities.
  • Medium-Risk Funds: These funds strike a balance between risk and return by investing in a mix of equities and debt securities.
  • Low-Risk Funds: Low-risk funds invest in relatively stable assets such as high-quality corporate bonds and conservative equities.
  • Very Low-Risk Funds: These funds prioritize capital preservation and invest in highly stable instruments like government securities and money market instruments.
  • Specialised Mutual Funds: Specialised mutual funds focus on specific investment strategies or sectors. These funds allow investors to target niche areas of the market, such as specific industries, countries, or commodities, offering potential for higher returns but with increased risks due to limited diversification.
  • Sector Funds: Sector funds invest primarily in one specific industry or sector, such as technology, healthcare, or energy. These funds allow investors to gain exposure to high-growth industries but come with higher risks as their performance depends on the health of the chosen sector.
  • Index Funds: Index funds track the performance of a specific market index, like the Nifty 50 or the S&P 500. They are passively managed and aim to replicate the returns of the index, offering low costs and broad market exposure, making them a popular choice for long-term investors.
  • Funds of Funds: Funds of Fundsinvest in a portfolio of other mutual funds rather than directly in stocks or bonds. These funds provide diversification across different asset classes and management styles, offering a one-stop solution for investors seeking a well-rounded portfolio.
  • Emerging Market Funds: Emerging market funds focus on stocks and bonds in developing economies, such as India, China, or Brazil. They offer the potential for high growth but come with elevated risks due to political instability, currency fluctuations, and less-established financial systems in these countries.
  • International/Foreign Funds: International or foreign funds invest in companies outside the investor’s home country. These funds provide diversification benefits by giving exposure to global markets, though they carry currency risks and geopolitical uncertainties that can affect returns.
  • Global Funds: Global funds invest in companies from around the world, including the investor's home country. Unlike international funds, global funds provide a mix of domestic and foreign investments, offering broader diversification but with the complexities of managing across different markets.
  • Real Estate Funds: Real estate funds invest in real estate-related assets, such as real estate investment trusts (REITs) or companies in the real estate sector. These funds provide an opportunity to invest in property markets without directly buying real estate, offering liquidity and diversification.
  • Commodity-Focused Stock Funds: Commodity-focused stock funds invest in companies that are involved in the production or trading of commodities like oil, gold, or agricultural products. These funds give exposure to commodity markets indirectly, providing potential inflation protection but with volatility tied to commodity price movements.
  • Market Neutral Funds: Market neutral funds aim to minimize market risk by taking both long and short positions in various securities. These funds try to generate returns regardless of market direction, making them attractive for investors seeking stable returns with lower volatility.
  • Inverse/Leveraged Funds: Inverse/leveraged funds aim to provide multiplied returns on the movement of an underlying index. Inverse funds bet on declines in the index, while leveraged funds amplify returns. These are high-risk, short-term investment tools not suited for long-term buy-and-hold strategies.
  • Asset Allocation Funds: Asset allocation funds distribute investments across different asset classes, such as stocks, bonds, and cash, based on a predetermined strategy. These funds aim to balance risk and reward by adjusting the asset mix to meet the investor’s financial goals.
  • Gift Funds: Gift funds are mutual funds designed to allow investors to "gift" financial assets to family members or other individuals. These funds can be structured for educational purposes or long-term savings, offering a flexible way to transfer wealth.
  • Exchange-Traded Funds (ETFs): ETFs are investment funds that trade on stock exchanges, similar to individual stocks. They usually track an index, commodity, or asset class, offering flexibility, low costs, and liquidity. Investors can buy and sell ETFs throughout the trading day, making them highly accessible.

Mutual fund types based on asset class

Mutual funds are categorised based on asset class into equity funds (investing in stocks), debt funds (holding fixed-income securities), and hybrid funds (balancing both stocks and bonds), catering to varying risk appetites and investment objectives. Let us know about these in detail:

  • Equity Funds: These funds primarily invest in stocks or equities. They are known for their potential to deliver substantial returns over the long term, but they also come with higher risk due to the volatility of the stock market.
  • Debt Funds: Debt funds invest in fixed-income securities like government bonds, corporate bonds, and other debt instruments. They are considered less risky compared to equity funds and provide regular income through interest payments.
  • Hybrid Funds: Also known as balanced funds, these invest in a mix of both equities and fixed-income securities. They aim to balance risk and return by diversifying across asset classes.
  • Money Market Funds: Money market funds are mutual funds investing in short-term, low-risk securities like treasury bills, commercial paper, and certificates of deposit. They aim for capital preservation and liquidity, offering stable returns. Ideal for investors seeking safety and liquidity, they provide easy access to funds while maintaining a conservative investment approach.

Mutual fund types based on investment goals

Mutual funds based on investment goals include equity funds for long-term growth, debt funds for income generation, and hybrid funds for balanced growth and income. Each type targets specific investor objectives, offering diverse opportunities to achieve financial goals while considering risk tolerance and time horizon. Let us look at these types in detail:

  • Growth Funds: Growth funds focus on capital appreciation over the long term. They invest primarily in equities with the aim of achieving high returns.
  • Income Funds: Income funds aim to generate a steady stream of income for investors by investing in bonds, certificate of deposits, and securities amount other investment avenues.
  • Liquid Funds: Liquid funds invest in very short-term debt instruments and provide high liquidity. They are ideal for parking surplus funds for a short period while earning some interest.
  • Tax-Saving Funds: Also known as Equity-Linked Savings Schemes (ELSS), these funds offer tax benefits under Section 80C of the Income Tax Act. They primarily invest in equities.
  • Aggressive Growth Funds: These funds adopt a high-risk, high-reward approach by investing in growth-oriented equities with the potential for substantial returns.
  • Capital Protection oriented Funds: These funds aim to protect the initial investment while providing some opportunity for growth by investing in a mix of equities and debt securities.
  • Fixed Maturity Funds: These debt funds have a fixed maturity date, ranging from one month to five years, and they invest in debt instruments with a similar maturity profile.
  • Pension Funds: Pension funds are designed for long-term retirement planning, investing in a diversified portfolio that balances risk and return.
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Schemes based on the maturity period

Listed below are types of mutual funds based on structure:

  • Open-Ended Funds: open ended funds allow investors to enter or exit at any time, offering high liquidity. The fund size can vary based on investor demand.
  • Closed-Ended Funds: For close-ended funds, the predetermined unit capital is used for investment. This indicates that the fund management company is restricted from exceeding the agreed-upon quantity of units for sale. A New Fund Offer (NFO) period is defined by the Trustees during which the new scheme sells its units. NFOs are accompanied by a predetermined maturity period, and fund managers are accommodating of any fund size.
  • Interval Funds: Interval funds combine features of open-ended and closed-ended funds. They allow investors to buy or sell units during specific intervals at ex dividend NAV.

Types of mutual funds based on portfolio management

Mutual funds exhibit diversity not only in their investment objectives but also in their portfolio management approaches.

  1. Active Funds: Active funds are under the dynamic management of fund managers who leverage their expertise, experience, and analytical research to make informed decisions about buying, selling, or holding assets. The primary goal of active funds is to construct an investment portfolio that yields optimal returns, aiming to outperform the benchmark against which their performance is measured.

  2. Passive Funds: Passive funds, in contrast, replicate or track an underlying index without attempting to surpass it. In this category, fund managers adopt a passive stance, abstaining from using their judgment to select underlying assets. Index funds represent a prevalent example of passive funds, aligning their performance closely with the benchmark they mirror.

Types of mutual funds based on market capitalisation

Market capitalisation serves as a key criterion for classifying equity mutual funds into distinct categories.

  1. Large Cap Mutual Funds: These funds allocate a significant portion of their assets to shares of companies with substantial market capitalization. Typically, these companies enjoy a strong reputation in the market, and large cap funds, by nature, tend to be less volatile compared to mid- and small-cap funds.

  2. Mid Cap Funds: Mid cap funds focus on equity shares of companies falling within the range of 101 to 250 as per SEBI's classification. By investing in mid-sized companies, these funds aim to strike a balance between the stability of large caps and the growth potential of small caps.

  3. Small Cap Funds: Small cap funds channel a considerable portion of their funds into shares of small-cap companies. While these funds carry a heightened level of risk, they also present the opportunity for greater returns compared to large-cap and mid-cap funds.

Types of mutual funds based on risk

Mutual fund types categorised by risk include:

  1. High-risk funds: Suited for risk-tolerant investors seeking substantial returns, high-risk mutual funds require active management and regular performance reviews due to market volatility. While returns can reach up to 15%, most provide around 20% returns, predominantly in interest and dividends.

  2. Medium-risk funds: These funds strike a balance by allocating a portion to debt and the remainder to equity. With less volatile Net Asset Values (NAVs), they offer average returns of 9-12%.

  3. Low-risk funds: During periods of rupee depreciation or national crises, investors seek refuge in less risky options. Fund managers often recommend investing in liquid, ultra short-term, or arbitrage funds. Returns typically range from 6-8%, offering flexibility to switch investments as market conditions stabilise.

  4. Very low-risk funds: Liquid and ultra-short-term funds (with durations of one month to one year) offer minimal risk, resulting in relatively low returns (up to 6%). Investors opt for these to meet short-term financial goals and safeguard their capital.

Specialised mutual funds

  • Sector Funds: These funds focus on specific sectors of the economy, such as technology, healthcare, or energy.
  • Index Funds: Index funds replicate the performance of a specific market index like NIFTY, offering a passive investment approach.
  • Funds of Funds: These funds invest in other mutual funds, providing diversification across multiple funds and asset classes.
  • Emerging Market Funds: Emerging market funds invest in securities of developing economies, aiming to capitalise on their growth potential. They can prove to be a risky investment avenue sometimes, so investors need to be careful before investing in them.
  • International/Foreign Funds: These funds invest in securities of foreign companies or markets, providing exposure to global markets.
  • Real Estate Funds: Real estate funds invest in real property, providing an indirect way for investors to enter the real estate market.
  • Commodity-Focused Stock Funds: These funds invest in companies engaged in commodity-related industries. The only commodity in which mutual funds can directly invest in India is gold.
  • Market Neutral Funds: Market neutral funds aim to deliver returns regardless of market direction by employing strategies that offset long and short positions.
  • Inverse/Leveraged Funds: Inverse funds aim to profit from declining markets, while leveraged funds amplify returns through borrowing and derivatives.
  • Asset Allocation Funds: These funds dynamically adjust their asset allocation based on market conditions to manage risk and return.
  • Exchange-Traded Funds (ETFs): ETFs are like mutual funds but trade on stock exchanges like individual stocks, offering flexibility and real-time pricing.

Solution oriented mutual funds

Solution-oriented mutual funds are designed to provide specific financial goals like retirement planning and children's education. These funds have a lock-in period of at least five years or until the goal is achieved. They offer a disciplined approach to investing towards long-term goals. These funds may invest in a mix of equity and debt based on the goal's time horizon.

1. Retirement Mutual Funds

These funds are long term funds, also known as pension funds. People invest for their retirement and funds provide a regular income to investors after their retirement until the corpus is there or withdrawn by the investor. These funds have a lock-in period of 5 years or retirement age, whichever is earlier. Retirement Funds invest in lower risk options like government securities, to ensure the stability of the fund and regular income to retirees.

2. Children’s Mutual Funds

It is a specific category of mutual funds which lets people invest for the education, marriage and welfare of their children. These funds are part of long term financial planning, and have a lock-in period of a minimum of 5 years or until the child reaches adulthood, whichever is earlier. Mutual fund child plans invest in both, equity and debt securities and investors have an option to choose the asset ratio according to their risk tolerance.

Taxation rules based on mutual fund types in India

1. Equity Mutual Funds

Taxation on Gains:

  • Short-Term Capital Gains (STCG): If the holding period is less than 12 months, the gains will now be taxed at 20% (increased from 15% as per Budget 2024).
  • Long-Term Capital Gains (LTCG): If the holding period exceeds 12 months, the gains are taxed at 12.5% (increased from 10%) after an exemption limit of Rs. 1.25 lakh per year (up from Rs. 1 lakh).

Dividend Distribution Tax (DDT): There is no DDT as dividends are taxed in the hands of the investors based on their individual income tax slab.

2. Debt Mutual Funds

Taxation on Gains:

  • Short-Term Capital Gains (STCG): Gains from debt funds held for less than 24 months are added to the investor’s income and taxed as per their income tax slab.
  • Long-Term Capital Gains (LTCG): For holdings exceeding 24 months, the gains are taxed at 12.5% (reduced from 20% as per Budget 2024), but the indexation benefit has been eliminated for transactions occurring after July 23, 2024. However, investors have the option to choose between 12.5% without indexation or 20% with indexation for properties bought before this date.

3. Hybrid Mutual Funds

Taxation on Gains:

  • Equity-Oriented Hybrid Funds: If the equity exposure in the hybrid fund exceeds 65%, the taxation rules for equity mutual funds apply.
    • STCG is taxed at 20%, while LTCG is taxed at 12.5% with an exemption limit of Rs. 1.25 lakh per year.
  • Debt-Oriented Hybrid Funds: If the debt exposure is more than 65%, then the taxation rules for debt mutual funds apply.
    • STCG is taxed as per the individual’s income tax slab for holdings less than 24 months.
    • LTCG is taxed at 12.5% without indexation for holdings beyond 24 months.

4. Solution-Oriented Mutual Funds

Taxation on Gains:

  • STCG: For holdings of less than 12 months, the short-term capital gains from equity-oriented solution funds are taxed at 20%. Debt-oriented solution funds are taxed according to the investor’s income tax slab if held for less than 24 months.
  • LTCG: Long-term gains on equity-oriented solution funds are taxed at 12.5% with an exemption of Rs. 1.25 lakh, while debt-oriented funds are taxed at 12.5% without indexation after 24 months.

5. Index Mutual Funds

Taxation on Gains:

  • STCG: If the holding period is less than 12 months, the short-term gains are taxed at 20% for equity index funds.
  • LTCG: Long-term capital gains for equity index funds, where holdings exceed 12 months, are taxed at 12.5% after the Rs. 1.25 lakh exemption.

For Debt Index Funds:

  • STCG: Gains from debt index funds held for less than 24 months are taxed as per the investor's income tax slab.
  • LTCG: Gains for holdings longer than 24 months are taxed at 12.5%, with no indexation benefits post-July 23, 2024.

Key take aways

  • India's mutual fund industry is diverse, offering options for investors with different risk appetites, goals, and preferences.
  • Equity funds focus on growth, while debt funds prioritize stability.
  • Specialized sector funds target specific industries, and passive index funds track market indices.
  • Investors should evaluate their financial objectives, risk tolerance, and time horizon before choosing a mutual fund.

Conclusion

Mutual funds in India offer a wide range of options catering to diverse financial goals, risk tolerances, and investment horizons. Whether you're looking for long-term growth, stable income, or tax savings, there's a mutual fund type suited to your needs. Understanding these options can help you make informed decisions and create a well-balanced investment portfolio.

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Frequently asked questions

Which is the best type of mutual fund?

The best mutual fund type depends on your financial goals and risk tolerance. Equity funds offer high returns but come with higher risk, while debt funds provide stability. Hybrid funds combine both.

What are different categories in mutual fund?

Mutual funds can be categorised based on asset class, structure, and risk. Some common categories include equity funds, debt funds, and money market funds.

What is the most common type of mutual fund?

Most common type of mutual fund are equity funds. They invest in stocks and have the potential for significant returns. However they tend to possess higher risk factor.

Which type of mutual fund gives highest return?

While there is no guaranteed highest return, historically, equity funds have provided substantial returns over the long term. However they possess higher risk factor, so investing according to your risk appetite is advisable.

How many types of mutual funds are there in India?

There are several types of mutual funds available in India. These includes equity funds, debt funds, hybrid funds, and gold funds.

What is the maturity period of a mutual fund?

The maturity period of a mutual fund varies based on the type of fund. Close-ended funds have a stipulated maturity period, typically ranging from 3 to 5 years. Fixed Maturity Plans (FMPs) also feature predetermined maturity periods, often extending beyond 3 years. Some funds may have shorter or longer durations.

Which mutual fund is risk free?

No mutual fund is entirely risk-free. However, liquid funds and money market funds are considered relatively low-risk.

What are the 4 types of mutual funds?

Based on asset class, there are equity funds, debt funds, hybrid funds, and gold funds.

Who should invest in Equity Mutual Funds?

Investors with a long-term financial horizon and a higher risk tolerance should consider equity mutual funds. These funds are ideal for those seeking capital growth by investing in stocks and are comfortable with market fluctuations in exchange for potentially higher returns over time.

Who should invest in Debt Mutual Funds?

Debt mutual funds are suitable for conservative investors looking for stable income with lower risk. These funds invest in fixed-income securities like government bonds and corporate debt, making them ideal for individuals seeking regular income and capital preservation.

Who should invest in Hybrid Mutual Funds?

Hybrid mutual funds are best for investors who prefer a balanced approach, combining equity and debt investments. These funds cater to individuals looking for moderate risk and diversified portfolios, offering a blend of capital appreciation and income generation.

Who should invest in Solution-oriented Mutual Funds?

Solution-oriented mutual funds are designed for investors focused on long-term goals such as retirement or children's education. These funds typically have a lock-in period and are ideal for those committed to disciplined, goal-based investing with a longer time horizon.

Who should invest in Index Funds?

Index funds are suitable for passive investors who prefer to track the performance of a market index like the Nifty or Sensex. They are ideal for individuals seeking low-cost investments with broad market exposure and are willing to accept market-level returns.

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Bajaj Finance Limited (“BFL”) is an NBFC offering loans, deposits and third-party wealth management products.

The information contained in this article is for general informational purposes only and does not constitute any financial advice. The content herein has been prepared by BFL on the basis of publicly available information, internal sources and other third-party sources believed to be reliable. However, BFL cannot guarantee the accuracy of such information, assure its completeness, or warrant such information will not be changed. 

This information should not be relied upon as the sole basis for any investment decisions. Hence, User is advised to independently exercise diligence by verifying complete information, including by consulting independent financial experts, if any, and the investor shall be the sole owner of the decision taken, if any, about suitability of the same.

Disclaimer:

Bajaj Finance Limited ("BFL") is registered with the Association of Mutual Funds in India ("AMFI") as a distributor of third party Mutual Funds (shortly referred as 'Mutual Funds) with ARN No. 90319

BFL does NOT:

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In addition to displaying the Mutual fund products of Asset Management Companies, some general information is sourced from third parties, is also displayed on As-is basis, which should NOT be construed as any solicitation or attempt to effect transactions in securities or the rendering any investment advice. Mutual Funds are subject to market risks, including loss of principal amount and Investor should read all Scheme/Offer related documents carefully. The NAV of units issued under the Schemes of mutual funds can go up or down depending on the factors and forces affecting capital markets and may also be affected by changes in the general level of interest rates. The NAV of the units issued under the scheme may be affected, inter-alia by changes in the interest rates, trading volumes, settlement periods, transfer procedures and performance of individual securities forming part of the Mutual Fund. The NAV will inter-alia be exposed to Price/Interest Rate Risk and Credit Risk. Past performance of any scheme of the Mutual fund do not indicate the future performance of the Schemes of the Mutual Fund. BFL shall not be responsible or liable for any loss or shortfall incurred by the investors. There may be other/better alternatives to the investment avenues displayed by BFL. Hence, the final investment decision shall at all times exclusively remain with the investor alone and BFL shall not be liable or responsible for any consequences thereof.

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Investors are advised before investing to evaluate a scheme not only on the basis of the Product labeling (including the Riskometer) but also on other quantitative and qualitative factors such as performance, portfolio, fund managers, asset manager, etc, and shall also consult their Professional advisors, if they are unsure about the suitability of the scheme before investing.


Disclosure: Bajaj Finance Limited (BFL) is a distributor of Mutual Funds with ARN - 90319 and distributes mutual funds of Bajaj Finserv Asset Management Limited (BFSAMC). BFL receives commission towards distribution of mutual fund products. BFSAMC is a group company of BFL, carrying business on arm’s length basis without any conflict of interest and in accordance with the prevailing law / regulation.