Types of mutual funds based on their asset class

The first distinction which can be done in mutual fund scheme is based on the fund’s asset allocation. Based on the assets in which the fund invests, mutual fund schemes can be of the following types –

  • Equity mutual funds Equity mutual funds are those funds which invest at least 65% of their portfolio in equity and equity oriented securities. Since equity exposure of these funds is high, the fund is exposed to market volatility and has a high risk. However, the returns promised by these funds are also high and the funds are suitable for risk loving or aggressive investors.
  • Debt mutual funds

    Debt mutual funds, on the other hand, invest 65% or more of their portfolio in fixed income instruments and debt securities. Since the securities have fixed returns, the fund has very little risk. The returns promised are low and debt funds are suitable for risk-averse individuals.

  • Hybrid or Balanced Funds

    These funds combine the benefits of equity and debt funds. The investment of the fund’s portfolio is done partly in equity and partly in debt. That is why the high risk associated with equity exposure is balanced by debt investments and the low returns of debt investments are offset by the high returns of equity. Hybrid funds, therefore, have moderate risks and give moderate returns.

  • Money Market Funds

    Money market funds are those funds which invest in money market instruments like bonds, treasury bills, certificates of deposits, etc. The underlying assets of this fund are traded in the money market and hence the name. Moreover, the assets yield interests which are paid back to investors in the form of dividends.

Types of mutual funds based on structure

There are three types of mutual funds based on their structure. These include the following –

  • Open ended mutual funds Open ended funds are those which allow purchases any time. You can buy and sell units in this scheme any time that you want. There is no time limit to buy or sell.
  • Close ended mutual funds These mutual funds have a time limit for buying or selling units. The capital which is to be invested in the market is decided beforehand and so these funds issue a specified number of units. Once the units are sold, you won’t be able to buy the funds. Close-ended funds might also launch a New Fund Offer for a limited time period. Even the maturity tenure of the fund might be fixed.
  • Interval funds These funds combine the structures of open ended and close ended funds. They have a specific window for buying or selling the investment. The rest of the time, the funds are not open for subscription or redemption. When you buy an interval fund, no transaction would be allowed in the first two years.

Types of mutual funds based on the goal of investment

The following types of mutual funds are categorised based on the type of investment strategy that the fund managers follow when managing the portfolio of these funds.

  • Growth funds Growth funds are those which reinvest the returns generated from their portfolio in the portfolio itself. As the returns are reinvested, the value of the portfolio grows which also increases the Net Asset Value. When you, subsequently, redeem the fund, the units would be redeemed on the increased Net Asset Value generating substantial returns. Growth funds invest primarily in equity oriented stocks and are, therefore, equity mutual funds. They aim at capital appreciation and have a high risk profile due to equity investments.
  • Aggressive growth funds Aggressive growth funds invest in risky securities which also have the potential of yielding the highest returns. These funds are highly prone to market fluctuations and you should invest in them only if you have sufficient risk appetite.
  • Income Funds Unlike growth funds, income funds promise regular pay-out of incomes. These funds are, majorly, debt oriented mutual funds which invest in fixed interest instruments like bonds, deposits, etc. As the interest is earned on the underlying instruments, the interest is paid to the investor quarterly, half-yearly or annually. Income funds are suitable for those who are looking for regular incomes from their mutual fund investments.
  • Liquid funds Liquid funds are very short-term debt funds which invest in instruments having a maturity period of 1 day to 91 days. These funds aim to provide liquidity and are ideal for parking your surplus funds for a time being. Moreover, liquid funds are a better alternative to keeping money in your bank savings account as these funds promise better returns than saving accounts of banks.
  • Tax saving funds As the name suggests, tax saving mutual funds are mutual funds which aim to save you tax liability. Equity Linked Saving Schemes (ELSS) are the only tax-saving mutual funds available which allow tax benefits on the money that you invest. The investment done in ELSS schemes qualifies for tax deduction under Section 80C up to a maximum of INR 1.5 lakhs. Thus, ELSS funds give you tax advantage and since they are a type of equity mutual fund, the returns are also good.
  • Capital protection funds Under these mutual funds, the capital that you invest is kept safe. Fund managers invest your investment in equity and debt instruments but the aim is to protect the invested amount at all costs. Returns under these funds are low but you are assured the safety of your invested amount. Capital protection funds also come with a lock-in period of 3 years during which you cannot withdraw from your investments.
  • Fixed maturity funds As is evident from the name, fixed maturity funds have a fixed date of maturity. These are, therefore, closed ended mutual funds where the investment period ranges from 1 month to up to 5 years. Fixed maturity funds are a type of debt mutual funds which invest in fixed-income securities. The fund managers of the fund try and invest in instruments which have the same maturity tenure as that of the fund so that at the time of maturity the interest earned from the investments can be passed down to the investors.
  • Pension funds Pension funds are mutual funds which invest to create a retirement corpus for your golden years. The fund managers of the fund invest in securities with a long-term investment horizon. Though pension funds are meant to create a fund after retirement, you can withdraw from the fund in advance too. Redemption of pension funds can be done in one lump sum or you can also choose to receive regular incomes from the fund.

Types of mutual funds based on investment risk

Mutual funds can also be classified based on the type of investment risk that the fund carries. The following are the main sub-divisions of the types of funds based on their risk profile –

  • High risk funds Equity funds which invest primarily in equity related securities fall under this category. Since the portfolio is invested in equity, it is exposed to market risks and equity and equity oriented mutual funds are called high risk funds.
  • Medium risk funds Hybrid or balanced funds, which combine equity and debt investments are said to have medium risks and fall in this category.
  • Low risk funds Basically, all types of debt funds are classified as low risk funds since they invest in debt which are fixed-income securities. Debt investments are not exposed to market risks and therefore have low risks.
  • Very low risk funds Debt funds which have no investment risk, credit risk or interest rate risk are called very low risk funds. Liquid and ultra-short term debt funds fall in this category since they invest in very dhort tenure instruments.

Other types of specialised funds

There are also mutual funds belonging to specific categories and so they fall under the category of specialised funds. Here are the types of such funds –

  • Sector specific funds These funds invest in a specific sector. The stocks of the companies operating in the chosen sector are bought using the mutual fund assets. Some common sector funds include banking funds, IT funds, pharma funds, etc.
  • Fund of funds Under this type of mutual fund scheme, fund managers invest in a mutual fund which, in turn, invests in other funds. This scheme, therefore, diversifies the risk to the maximum possible extent and the returns depend on the targeted fund.
  • Index funds Index mutual funds are passively managed schemes which invest in the stocks of a particular index like the Nifty 50, BSE, etc. The performance of the fund mirrors the performance of the index into which the fund has invested.
  • International funds Under international or foreign mutual fund schemes, the portfolio is invested in stocks of international companies operating in other countries for better returns
  • Emerging markets fund These mutual fund schemes invest in developing countries whose economies have high potential of growth.
  • Global funds These are like international funds which invest in securities of international companies operating in different parts of the world. However, in global funds, unlike in international funds, investment can also be made in securities in the Indian market.
  • Commodity focused stock funds These mutual funds invest in commodities or the stocks of companies dealing in commodities. These funds have a high risk profile and are suitable for risk taking investors.
  • Leveraged funds These funds have a completely opposite investment approach compared to other mutual funds. Under these funds, maximum returns are generated when the stock market falls and there is a loss in case the market rises.
  • Asset allocation funds Under these mutual funds, the fund manager has complete flexibility of choosing the asset profile for the portfolio. The manager can, therefore, choose to invest in equity and debt in any ratio with an aim of generating the maximum returns.
  • Gilt Funds Mutual funds which invest only in Government securities are called Gilt Funds. Since the securities carry fixed rate of returns, these funds have marginally low risks.
  • Exchange Traded Funds ETFs are like index funds which track a particular index or a commodity or multiple types of similar assets. These funds can be freely traded on the stock market and facilitate intraday purchases as well.

So, these are the main types of mutual fund investments. Know these types, their asset allocation and their risk profile to choose the most suitable fund based on your investment strategy.

Frequently Asked Questions

Q- What are direct mutual funds?

Ans. Direct funds are those funds which are to be purchased without the involvement of any broker or distributor.

Q- What is SIP?

Ans. SIP stands for Systematic Investment Plans wherein a fixed amount of money is invested in a chosen mutual fund scheme every month.

Q- Can I exit from the mutual fund scheme whenever I want to?

Ans. Unless the mutual fund scheme has a minimum lock-in period for investment, you can exit from the scheme whenever you want to.

Q- Can I invest in multiple types of funds?

Ans. Yes, you can invest in as many types of mutual fund schemes as you like without limitations. However, ensure that the schemes you choose suit your risk profile and investment goals.

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CA Abhishek Soni
CA Abhishek Soni

Abhishek Soni is a Chartered Accountant by profession & entrepreneur by passion. He is the co-founder & CEO of Tax2Win.in. Tax2win is amongst the top 25 emerging startups of Asia and authorized ERI by the Income Tax Department. In the past, he worked in EY and comes with wide industry experience from telecom, retail to manufacturing to entertainment where he has handled various national and international assignments.