What are the Different Types of Mutual Funds?

Types of mutual funds are categorised based on asset class, structure, and objectives. Through investments in stocks, equity mutual funds aim to grow long-term; debt mutual funds aim to stabilise funds with fixed-income investments; and hybrid mutual funds aim to balance risks and returns. Mutual fund types are open-ended or closed-ended based on structure. This article provides an overview of the different types of mutual funds in India. 

Types of Mutual Funds Based on Asset Class 

This classification explains how mutual funds are grouped based on the kind of assets they usually invest in. 

• Equity Funds 
  These funds generally invest in shares and equity-related instruments. They may offer growth-oriented exposure and are usually preferred by investors with a longer investment horizon. 
• Debt Funds 
  These funds usually invest in fixed-income instruments such as bonds, debentures, and government securities. They are often chosen by investors seeking relatively stable returns over short or long durations. 
• Hybrid Funds 
  These funds usually invest across equity and debt instruments. Allocation may vary based on the fund’s objective, and the approach often aims to balance growth and stability. 

Types of Mutual Funds Based on Investment Goals 

These types of mutual funds in India are grouped according to the financial objectives  they generally aim to support. 

• Growth Funds 
  These funds focus mainly on long-term capital appreciation. Usually invest in equity-oriented instruments. They may suit investors who prefer growth-focused exposure 
• Liquid Funds 
  This type of fund invests in short-term money-market instruments. They usually provide quick access to invested funds. Investors who prefer relatively faster access to funds may consider them. 
• Income Funds 
  Income funds primarily invest in fixed-income securities. Aim to generate regular cash flows through interest earnings. They may suit investors seeking predictable income-oriented exposure. 
• Tax-Saving Funds (ELSS) 
  Equity-oriented mutual fund category eligible for tax deduction under applicable tax laws. They usually invest a major portion in equity instruments and come with a compulsory lock-in period as per regulations. 

Types of Mutual Funds Based on Structure 

These types of mutual funds in India are classified based on how units are bought and redeemed.

• Open-Ended Funds
  The units can usually be bought or redeemed at any time. The transactions are based on the prevailing Net Asset Value (NAV). 
• Close-Ended Funds 
  Here, the units are generally available only during the New Fund Offer period. Redemption is allowed after the scheme’s maturity period.
• Interval Funds 
  They combine features of open-ended and close-ended structures. Buying and redemption are usually allowed only at specific intervals. 

Types of Mutual Funds Based on Risk 

This category explains how mutual funds are grouped based on their overall risk exposure. 

• Low-Risk Funds 
  They often include government bonds. The funds may be suitable for investors with relatively low risk tolerance. 
• Medium-Risk Funds 
  These type of funds commonly include balanced or hybrid funds. They aim to provide moderate growth with manageable risk exposure. 
• High-Risk Funds 
  They typically include sector-focused or equity-heavy funds. This type of fund may be suitable for investors who can handle higher market fluctuations. 

Types of Mutual Funds Based on Market Capitalisation 

This classification explains how equity mutual funds are grouped based on the size of companies they invest in. 

• Large-Cap Mutual Funds 
  The funds generally invest in companies with larger market capitalisation. These companies are usually well-established and widely tracked in the market. 
• Mid-Cap Mutual Funds 
  These type of funds typically invest in medium-sized companies. These funds may offer a balance between growth potential and stability. 
• Small-Cap Mutual Funds 
  Small-cap funds usually invest in smaller companies with developing business stages. These funds may involve higher fluctuations but can offer growth-oriented exposure. 

Conclusion 

There are several types of mutual funds, and each type basically has a different use. Depending upon the risk desire and horizon, an individual may choose a particular type of mutual fund. The choice of fund generally depends on risk preferences, investment goals, and time horizon. Investors must assess the different types of mutual funds before selecting a scheme. This will help an individual in planning their portfolio in an organised manner. Additionally, investors can use digital platforms like an online trading app for convenience and accessibility.