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Types of Mutual Funds in India

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Various types of mutual funds in India is continuously evolving. In our modern world earning money is not just enough. In order to lead a comfortable lifestyle, bank’s interest rate is inadequate. One has to do smart invest management. Pros recommend that don’t put all your eggs in one basket. You must save some of the resources thinking for any future mishaps. This is one of the most important rules of investment. As investment always comes with risk, a wise investor’s money spread across different types of investment.

Mutual Fund is such an investment vehicle that trades in diversified holdings, funded by investors. The professionals manage these funds. Basically, the mutual fund is a professionally managed SEBI registered financial institution that pools the savings of investors and invests money on their behalf in securities like stocks, bonds,  money market instruments, commodities etc. They have their own professional financial adviser, research analyst, broker to generate maximum profit from the huge amount of investment. Types of mutual funds in India are as follows:

Types of Mutual Funds in India

I have made a chart to make the classification of mutual fund easier. See the chart below:

types of mutual funds in India

As I have stated above that there are various types of mutual funds in India. The chart consists of all the available classification of mutual funds. The classification is based on three main categories which are Asset-based, Structure-based and fund management based. Let’s start with the asset-based classification.

Mutual funds based on Asset:  

In this category, there are three types of funds, Equity Fund, Debt Fund and Hybrid Fund.

Let’s have a look at the sub-division of equity fund.

Equity Fund:

Equity-oriented funds invest money only in stocks or shares of companies. The fund bears high risk but also tend to provide a huge return. However, under this category there are eight sub-division as listed below:

Types of Mutual Funds in India equity
  • Large-cap fund In order to understand the large cap, mid cap, and small cap fund, you need to understand market capitalization first. Market cap is the value of a company, calculated by multiplying the present market value of a stock by the total number of outstanding shares in a company. A company with more than 75,000 cr. belongs to large-cap. These types of fund invest its money only in large-cap companies.
  • Mid-cap fund–  The fund infuse investors money in those companies which have the market cap less than 75,000 cr. but more than 13,000 cr, consider as the mid-cap fund.
  • Small-cap fund- Small cap companies deal with below 13,000 cr capitalization. This kind of mutual fund invests only in small-cap companies.
  • Sector fund- Such investments are concentrated on a specific sector. Therefore, the risk factor is high here. To get e high return from this fund, entry and exit point is important as the fortunes of sectors changing in different cycles in the economy. For example, Reliance media and entertainment fund invest only in media and entertainment sector. SBI pharma fund invests in the pharma sector.
  • Diversified equity fund- The fund depends on the market view of the fund manager, invest in different market capitalization and sectors. This category is not related to a single sector or a specific market cap. Hence, the risk is quite lower than the previously described funds.
equity fund
  • Dividend yield scheme- When a company shares some of their profit with shareholders, is called dividend. Company’s board of directors takes the decision of providing dividend and it is optional. The fund generates regular income from the dividends. Dividend yield (dividend per share/prevailing price of the stock) funds invest in companies that provide high dividend yields.
  • ELSS or Equity linked savings scheme- It is a tax saver mutual fund scheme. Here you will lock your investment for three years. It doesn’t just help to save tax, but also provide an opportunity to raise money. You can save tax up to 1.5 lakh.
  • Thematic fund- Investment happen only in theme-based funds. For example, Rural Indian Theme, E-commerce Theme etc. Just like HDFC housing opportunities fund’s theme is housing (cement, construction, paint, metal).

Debt Fund:

The term ‘debt’ indicate various instruments like debenture, bonds, certificates, mortgages, leases etc. This categorized fund invest money only in debt instruments. The fund considers less risky than the equity fund. It also has four sub-divisions, as stated below.

debt fund
  1. Gilt fund- Debt fund invest exclusively in Govt. securities refer to gilt funds. As the Government itself issues Govt securitie, that’s why default risk is zero. Therefore, it doesn’t carry any credit risk. There are two types of gilt funds, short-term and long-term.
  2. Junk bond scheme- Here default risk is much higher than gilt fund but the return is much higher. Therefore, investors get a huge amount of return. It is a fixed income instrument.
  3. Fixed maturity plan- Just like banks, the fund also has specifically predefined maturity. Investment areas are the certificate of deposit, commercial papers, corporate bonds etc. However, the return is much higher than banks interest rates.
  4. Liquid funds- Under this category investment happens through in money market instruments. By using the money market instruments such as certificates of deposit, treasury bills, commercial papers, term deposits etc funds manager generates short-term interest. Investors who want to infuse their money short-term basis can try for the scheme. The return is higher than banks. The risk factor is low along with low volatility. Investors can take out their investment anytime they want.

Hybrid Fund:

This fund is a composition of both equity and debt fund. Under this category, fund manager invests money in both equity and debt. The hybrid fund is divided into three sub-divisions, as follows:

  1. Monthly income fund- Under Monthly income fund managers infuse 60% to 90% invested money in the debt instrument and rest of the money goes into equity. As the maximum percentage of invested amount infuse in the debt instrument, the risk is much lower here. However, it isn’t completely risk-free fund.
  2. Balanced fund- Though the fund is called balanced fund, the ratio of investment in the equity and debt is not balanced or same. 60% to 85% of the invested amount goes in equity and rest of it in debt. As the equity percentage is higher, so as the risk factor.
  3. Arbitrage fund- Arbitrage fund concentrates on the difference between cash and derivatives markets. This fund exploits the difference to generate returns. Arbitrage funds are suitable for investors in the highest tax bracket looking to park money for a short time period.

Mutual funds based on Structure:

Under this category, there are three types of mutual funds. These are as follows:

Open-ended fund:  Investors can buy and sell units at any time they want at NAV related price. Therefore, it doesn’t have any fixed maturity period. Here issues are unlimited. Investors can redeem this fund on a continuous basis.

Close-ended fund: It is reverse of the open-ended fund. The maturity period is predecided or fixed. One can’t buy or sell units at any time.  For example, The maturity period can be between 3-6 years. A close-ended fund is open for subscription only during a specified time of launch of the scheme which is the NFO (New Fund Offer). It is listed on the stock exchange. As liquidity is quite low here, the buying-selling problem is generated.

Interval fund: Very few funds come under this category. Basically, it is the combination of open-ended and close-ended funds. These schemes are open for both redemption and purchase during pre-specified intervals.

Mutual funds based on Fund Mangement:

actively passively managed mutual fund

Actively managed:  If fund managers actively participate in the investment process, known as actively managed fund.

Passively managed: If fund managers don’t take part actively in the investment process, refers to a passively managed fund.

These are some of the basics types of mutual funds in India. However, by the different types of mutual funds in India, investment process becomes easier these days.

Types of Mutual Fund FAQ

What is a Mutual Fund and its type?

A mutual fund is a fully professionally managed investment fund that pools money from many investors to buy securities. The investors may retail or institutional. A mutual fund can be of different types that cover different segment in the financial market.

What are the four different types of Mutual Funds?

If we broadly divide, there are four types of mutual fund.
Equity (Stock), Long-term Debt, Hybrid Fund, and Fix-income Fund. Each of them carries a different risk and profit level. The riskier the security, the more profit-making probability it has. Like Equity is more risky than a Debt fund.

What is Blue Chip fund?

The blue-chip fund invests in those companies which are established and have a credible track record. Simply, blue-chip companies are safe, stable, profitable. Big companies with large market capitalization termed as the Blue-Chip.

How do I choose Mutual funds?

First, estimate your investing and risk-taking capacity.
Second, looking for an experienced management team.
Third, be analytical when choose your fund house.
Fourth, invest as per your risk-taking ability.

What are the three basic structures of mutual funds?

If mutual funds are divided structure-wise, we will get three basic structures of mutual funds. These are open-ended fund, close-ended fund and Exchange-traded fund (ETF).

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