Types of Mutual Funds in India

Mutual Funds are one of the best and most diverse investment instruments that offer an easy and flexible way to create diversified investment portfolios. From high-risk bearers to safe players, from long term to short term investors, the pool of mutual funds has something to offer everyone. There are a variety of mutual funds for investors with different risk appetites, investment goals, etc. Thereby, it becomes necessary to learn about the different types of mutual funds available in the market if you wish to make a strong portfolio with the ones that suit your financial goals. In a broader sense, mutual funds are classified into three categories- namely Open-ended funds, Close-ended funds, and Interval funds. Further, they can also be classified based on where the funds are invested. Now since mutual funds are either invested in equities, debt or in a mixture of both, they can be differentiated as Equity funds, Debt funds, Balanced funds, Hybrid funds, etc. ## Mutual Funds Types and Meaning **Mutual Fund Schemes Based on Maturity Period** Based on the maturity period, flexibility of redemption and investment, there are three types of mutual funds in India- Open-ended Funds, Close-ended Funds, Interval Funds. - ### Open-ended Funds Open-ended mutual funds are the types of mutual fund schemes where there is no fixed maturity period. An investor can redeem the invested funds along with returns as per his/her wish at any point of time. Open-ended funds can also be bought anytime. - ### Close-ended Funds Unlike Open-ended funds, close-ended funds come with a fixed maturity period where the invested amount gets redeemed automatically at the date of maturity. These fund schemes are available for investors only during an initial offer called New Fund Offer or NFO. An investor can invest in close-ended funds only during the NFO subscription period. - ### Interval Funds Interval funds are a combination of both open and close-ended mutual fund schemes. They allow investors to trade units at fixed intervals which are predefined. These funds can also be traded in the stock market, and be open for sale (if the investor wants to redeem funds) during fixed intervals at NAV related prices. Now, let us have a look at the other category of mutual funds types in India. Based on risk, liquidity and financial aim, mutual funds can be classified into six different types of funds- Equity or Growth Funds, Money Market Funds or Liquid Funds, Fixed Income or Debt Mutual Funds, Balanced Funds, Hybrid or Monthly Income Plans (MIPs), and Gilt Funds. ## [Equity Funds](https://www.indmoney.com/mutual-funds/equity-funds#detail) Equity funds are one of the most popular mutual fund schemes, particularly among risk bearing investors. These funds have high growth potential and can provide you healthy returns in the long run. Equity funds are placed under the high risk category as the funds are invested directly in the stock market. There are a variety of options to choose from a range of equity funds. These schemes can be ideal if you save a good sum and are looking to earn healthy returns from your investment in the long run. SEBI has approved a total of 11 categories of mutual funds. However, a mutual fund house can only have 10 categories because it has to decide between Value or Contra. The first 5 categories of mutual funds can be defined on the basis of the market cap of the companies in which the funds are invested. |**Market Cap Bucket**|**Mutual Fund Definition**| | :- | :- | |[Large Cap Funds](https://www.indmoney.com/mutual-funds/best-large-cap-funds#detail)|An equity mutual fund scheme with assets allocation focused mainly on large cap stocks. The scheme must have at least 80% of the total assets invested in large cap companies.| |[Mid Cap Funds](https://www.indmoney.com/mutual-funds/best-mid-cap-funds#detail)|An equity mutual fund scheme having investments predominantly in mid cap stocks. The scheme must have a minimum of 65% of its total assets invested in mid cap companies.| |[Small Cap Funds](https://www.indmoney.com/mutual-funds/best-small-cap-funds#detail)|An equity mutual fund scheme having investments mainly across small cap stocks. The scheme must have a minimum of 65% of its total assets invested in small cap companies.| |Large & Mid Cap Funds|An open-ended equity mutual fund scheme with investments in both large and mid cap stocks. The scheme must have at least 35% of its total assets invested in large cap companies and 35% in mid cap companies.| |[Multi Cap Funds](https://www.indmoney.com/mutual-funds/best-multi-cap-funds#detail)|An equity mutual fund scheme having investments across large, mid and small cap stocks. The scheme must have at least 65% of its total assets invested in equity related instruments.| The other equity mutual fund categories are as follows: |**Type of Investment**|**Mutual Fund Definition**| | :- | :- | |Dividend Yield Funds|An equity mutual fund scheme with investments majorly in dividend yielding stocks. The scheme must have a minimum of 65% of its assets invested in equities or equity related instruments.| |Value Funds and Contra Funds| Value Funds- An equity mutual fund scheme following a value investment strategy.

Contra Funds- An equity mutual fund scheme following a contrarian investment strategy.

| |Focused Funds|An equity mutual fund scheme focused on a maximum of 30 stocks. The scheme must have at least 65% of its total assets invested in equities or equity related instruments.| The remaining three types of mutual funds in India that a mutual fund company can have are- Sectoral Funds, Index Funds, and Tax Saving Funds. - ### Sectoral Funds These mutual fund schemes invest funds in a specific sector. The scheme must have 80% of its total assets invested in equities or equity related stocks of the sector it follows. For example, an IT-based mutual funds scheme will invest funds mainly in IT companies’ stocks. Subsequently, the fund’s performance also depends on the performance of the sector, i.e; if there is a growth in the IT sector stocks, the IT-specific mutual fund will also provide profits accordingly. There are a number of sectoral funds for almost all sectors- IT, Banking, Metals, FMCG, etc. Furthermore, these funds can also be based on different market cap buckets like- large, mid, and small cap funds. Funds houses have dedicated teams that channel investors’ money into different stocks and actively manage the portfolio to minimize risk and maximize returns. - ### [Index Funds/ETF Schemes](https://www.indmoney.com/mutual-funds/best-index-funds#detail) Index fund schemes aim to mimic the market indices and provide returns accordingly. For example, a Nifty 50 Index Fund tries to follow the growth trajectory of the Nifty 50 index by investing in the companies under the index. These funds do not depend on the performance of any specific sector or stock but only on the index. If the index performs well, so will the fund and vice versa. Unlike Sectoral funds, Index funds are passively managed as the only aim of the assets management team is to mimic the market index the fund mirrors. These funds are suitable for investors who do not wish to depend on fund managers. - ### Tax Saving Funds As the name suggests, these funds offer tax benefits to the investors. Tax saving funds have a lock-in period of 3 months and at least 80% of their total assets invested in equities or equity related instruments. Investors can claim annual tax deductions of up to Rs 1.5 lakh from investments under tax saving funds, under 80C of the Income Tax Act. These funds also invest in equities and thereby are also known as Equity Linked Saving Schemes or ELSS. ## [Fixed Income Funds/Debt Funds/Money Market Funds](https://www.indmoney.com/mutual-funds/debt-funds#detail) Fixed income funds invest a major part of the investors’ fund in debt instruments and thereby are also called debt mutual funds. The money goes into government securities, debentures, bonds, and other fixed coupon bearing instruments. Fixed income funds are low-risk-low-return investments options and are ideally preferred by those who have a fairly low risk appetite but want to earn a fixed income from their investments. This category also includes money market funds or liquid funds that are considered to be relatively safer investment options as the funds are invested in short-term debt instruments. Investors can earn good returns in the short term. The funds are suitable for individuals who do not want to play with the risks involved in the equity market but are looking for an alternative to bank savings schemes to park their money. SEBI has approved a total of 16 debt fund schemes, which are as follows: - **Overnight Funds:** Fund schemes having investment in securities having a maturity period of a day. - **Liquid Funds:** Schemes having investment across debt and money market securities that have a maturity period of up to 91 days. - **Ultra Short Duration Funds:** Schemes having investment in debt and money market instruments with a Macaulay duration of the portfolio between 3 to 6 months. - **Low Duration Funds:** Schemes having investment in debt and money market instruments with a Macaulay duration of the portfolio between 6 to 12 months. - **Short Duration Funds:** Schemes having investment in debt and money market instruments with a Macaulay duration of the portfolio between 1 to 2 years. - **Medium Duration Funds:** Schemes having investment in debt and money market instruments with a Macaulay duration of the portfolio between 4 to 7 years. - **Long Duration Funds:** Schemes having investment in debt and money market instruments with a Macaulay duration of the portfolio more than 7 years. - **Dynamic Bond Funds:** Schemes having investments across duration. - **Corporate Bond Funds:** Schemes having at least 80% of their total assets invested in corporate bonds. The investment should be only in the highest rated instruments. - **Credit Risk Funds:** Schemes having at least 65% of their total assets invested in corporate bonds. The investment should be in below highest rated instruments. - **Banking and PSU Funds:** Schemes having at least 80% of their total assets invested in debt instruments of Banks, PSUs, Public Financial Institutions. - **Gilt Funds:** Schemes having at least 80% of their total assets invested in government securities across maturity. - **Gilt Funds with 10 Years Constant Duration:** Schemes having at least 80% of their total assets invested in government securities with 10 years of Macaulay duration of the portfolio. - **Floater Funds:** Schemes having at least 65% of their total assets invested in floating rate instruments. - **Money Market Funds:** Schemes having investments in money market instruments with maturity up to 1 year. ## [Hybrid Funds](https://www.indmoney.com/mutual-funds/hybrid-funds#detail) Hybrid funds aim to create a risk-reward balance by dividing the investment into high-risk equities and low-risk debts. Although, the ratio of investment is not fixed and the assets management company keeps changing the mixture based on market risks. SEBI has prescribed a total of 7 categories for hybrid funds. However, a mutual fund house can only have 6 categories and has to decide between Balanced Hybrid Fund or Aggressive Hybrid Fund. |**Fund Type**|**Fund Definition**| | :- | :- | |**Conservative Hybrid Funds**|A fund scheme having investments mainly in debt instruments. The scheme must have 10-25% of its total assets invested in equities or equity related instruments, and 75-90% in debt instruments.| |**Balanced Hybrid Funds**|A fund scheme with an equally balanced investment approach in both equity and debt instruments. The scheme must have 40-60% of its total assets invested in equities or equity related instruments and 40-60% in debt instruments.| |**Aggressive Hybrid Funds**|A high-risk-high-return fund scheme with investments majorly across equities or equity related instruments. The scheme must have 65-80% of its total assets invested in equities or equity related instruments and 20-35% across debt instruments.| |**Multi-assets Allocation Funds**|A fund scheme with investment across 3 different assets classes and 10% investment in each of the classes.| |**Arbitrage Funds**|A funds scheme following investments with an arbitrage strategy. The scheme must have at least 65% of its total assets invested in equities or equity related instruments.| |**Equity Savings**|A defensive hybrid fund scheme with investments mainly focused on debt instruments. The scheme must have 65% of its assets invested in debt instruments and 10% in equity or equity related instruments. It should also state the minimum hedged and unhedged in the SID.| ## Solution Oriented Schemes There are two types of solution oriented schemes- Retirement Funds and Children’s Funds. - **Retirement Funds:** Retirement oriented schemes with a lock-in period of 5 years or until retirement, whichever is earlier. - **Children’s Funds:** Children focused fund schemes with a lock-in period of 5 years or until the child becomes major, whichever is earlier. There are a few other categories of mutual funds as well but the aforementioned schemes are the most popular ones. The comprehensive list and information will help you to become a sound investor and make a better decision while making your mutual fund investments portfolio.