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.
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.
- 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.
- 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.
- 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.
- 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.
- 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:
- 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.
- 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%.
- 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.
- 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.
Essential tools for all mutual fund investors
