Different Types Of Mutual Funds In India

Mutual funds are an increasingly popular investment option in India. With a wide range of mutual fund types available, investors can choose the one that best suits their investment goals.

Mutual funds are a popular investment option in India, where a group of investors pool their money together to invest in a portfolio of securities such as stocks, bonds, and other assets. Mutual funds are managed by professional fund managers who invest the money (collected from investors) in various securities in order to gain returns.

There are several types of mutual funds available, each with its unique characteristics, investment objective, and risk profile. Investors can choose a mutual fund that aligns with their investment goals, risk appetite, and investment horizon. It is always important to seek professional advice before investing in mutual funds.

Types of Mutual Funds Based on Asset Class

Asset class-based classification of mutual fund schemes is determined by the type of assets in which they invest. These are the main types of mutual fund schemes based on the asset class.

  • Equity funds invest primarily in stocks and related instruments and are known to offer potentially high returns along with high risk. These funds are generally recommended for investors with a long-term investment horizon of at least 3-5 years. Equity funds can also be classified based on the size of the companies they invest in.

     Read more about: What are Equity Funds?

  • Debt funds invest in fixed-income securities such as government bonds, company debentures, and other similar instruments. These funds are considered to be among the safest types of mutual funds and can be suitable for short-term as well as long-term investments. Like equity funds, debt funds also come in different types – their variations are based on the maturity period of the debt and money market instruments they invest in.

     Read more about: What are Debt Funds?

  • Hybrid funds are investment funds that allocate their assets among multiple asset classes based on their investment objectives and other factors. There are different types of hybrid funds, including equity-oriented hybrid funds, debt-oriented funds, and arbitrage funds.

    Read more about: What are Hybrid Funds?

  • Equity-oriented hybrid funds invest a minimum of 65% of their assets in equity and equity-related instruments and the rest in debt. For tax purposes, these funds are treated as equity funds.
  • Debt-oriented hybrid funds invest at least 60% of their assets in debt securities, and they are considered debt funds for tax purposes.
  • Arbitrage funds primarily invest in futures and options to generate returns, and they always have an equity exposure of over 65%. Despite this equity exposure, they are treated as equity funds for tax purposes.

Types of Mutual Funds in India Based on Investment Objectives

Mutual funds have various investment objectives, with some focusing on capital growth, fixed income, tax savings, and more. Additionally, there are different types of equity funds, including growth funds, liquid funds, income funds, and tax-saving funds.

  1. Growth funds

    These funds aim to grow an investor’s capital in the long run. They are typically equity funds that offer higher returns potential (but little dividends) but come with higher risks. They involve stocks of companies that focus on reinvesting profits into operations and R&D. These funds are not recommended for risk-averse investors, especially those looking to invest for a shorter period.

  2. Liquid funds

    These funds invest in instruments with short to very short maturities (typically not exceeding 91 days) to ensure liquidity. They are low-risk and ideal for short-term investments. However, lower risk also means lower return potential.

  3. Income funds

    If an investor’s goal is regular income from their mutual fund investment, income funds can be an excellent option. These funds invest mainly in debentures and bonds with fixed maturities, providing fixed income or dividends.

  4. Tax-Saving funds

    Also known as Equity Linked Savings Scheme (ELSS), these funds are eligible for a tax deduction of up to Rs. 1.5 lakhs in a financial year. Tax-saving funds are equity-oriented diversified funds, with more than 65% of the portfolio invested in equity.

Different Types of Mutual Funds Based on Structure

Mutual funds can be classified based on their structure, and there are three types of funds: open-ended, close-ended, and interval funds.

  • Open-ended funds are available for purchase and sale throughout the year. The fund managers aim to invest in instruments with high return potential. The buying and selling of open-ended funds are based on the current Net Asset Value (NAV) of the fund.
  • Close-ended funds, on the other hand, can only be bought during the New Fund Offer (NFO) period and redeemed after a fixed maturity period. These funds are also listed on stock exchanges, but their liquidity is usually low.
  • Interval funds combine the features of both open-ended and close-ended funds. The fund house opens the fund for buying and selling at intervals. During the interval period, the fund houses generally repurchase the units from investors who want to exit.

Types of Mutual Funds Based on Risk

  1. Low-Risk Funds: These funds act as a safety net for your investments. They predominantly invest in low-risk assets, like government bonds, which make them a preferred choice for safeguarding your investments. Think of them as the financial equivalent of a life preserver. For instance, the ITI Arbitrage Fund is designed to provide stability and modest returns, making it a suitable option for low-risk investors without subjecting them to excessive market fluctuations. They invest in equity shares and derivatives and earn their returns by comparing the price of stocks with their futures.
  2. Moderately Low-Risk Funds: These funds are between low and moderate risk. They involve investments in somewhat riskier assets without going overboard. Ultra-short duration funds fall into this category, offering a balanced experience like a moderately adventurous ride at an amusement park. For instance, consider the SBI Liquid Fund, which primarily deals in low to moderate-risk, short-term debt instruments. You can invest your money for a short duration without exposing yourself to significant risk.
  3. Moderate Risk Funds: These funds are geared towards investors looking to diversify their portfolios while accepting a reasonable level of risk. Dynamic bond funds, for example, strike a balance between safety and the potential for higher returns. They resemble a diversified menu, offering a mix of investment choices. One such fund is the Aditya Birla Sun Life Dynamic Bond Fund, which adapts its investments to market conditions, providing an element of risk for potentially superior returns.
  4. Moderately High-Risk Funds: These funds take risks up a notch and are suitable for investors with a slightly higher risk appetite. They may experience more market volatility but, in return, offer the potential for greater growth. It’s akin to a roller coaster ride with a few exciting twists. Consider the Mirae Asset Midcap Fund, which primarily invests in mid-cap stocks. 
  5. High-Risk Funds: If you’re an adventure enthusiast, high-risk funds cater to your appetite for risk and growth. These funds predominantly invest in equities, offering the potential for significant returns while accepting the likelihood of substantial market fluctuations. An example would be the ICICI Prudential Commodities Fund, which invests in smaller, riskier companies. It offers the chance for substantial returns but is accompanied by a fair amount of ups and downs.
  6. Very High-Risk Funds: These are the most daring funds, ideally suited for investors who thrive on high-risk, high-reward investment opportunities. They often venture into volatile stocks or overseas assets, providing the potential for extraordinary returns. For instance, the DSP BlackRock World Gold FOF invests in international gold mining companies. The funds have the potential for extraordinary gains but carry the risk of high returns.

Specialised Mutual Funds

Specialised Mutual Funds offer unique investment opportunities tailored to specific market niches within the dynamic Indian mutual funds industry. These funds cater to investors seeking targeted exposure and potential returns in various sectors and asset classes. Let’s delve into the specifics of these specialised funds:

Sector Funds

Sector Funds focus on specific sectors such as banking, information technology (IT), and pharmaceuticals. While they offer the potential for high returns when those sectors perform well, they come with higher risk due to concentrated investments. For instance, an IT sector fund primarily invests in IT companies like Infosys and TCS. Investors should monitor sector-related trends for informed decisions.

Index Funds

Index Funds are designed for passive investors and aim to replicate the performance of a market index like the Nifty 50. These funds don’t rely on active fund management and mirror the index’s composition. For example, an NSE Nifty Index Fund will invest in the same stocks as the Nifty 50. While they may not outperform the market, they provide a stable, cost-effective way to match market performance.

Funds of Funds

Funds of Funds (FoFs) achieve diversification by investing in a mix of other mutual funds across different categories. By holding a single FoF, investors gain exposure to various asset classes and strategies while minimising costs. This approach is like a one-stop-shop for diversification, allowing investors to benefit from the expertise of multiple fund managers.

Emerging Market Funds

Emerging Market Funds focus on investing in fast-growing economies, like India. These funds offer the potential for high returns, but they also come with increased volatility. India’s dynamic market presents opportunities for growth, but investors should be prepared for market fluctuations.

International/Foreign Funds

International Funds enable diversification beyond India’s borders. Investors can allocate a portion of their portfolio to overseas markets, reducing the risk associated with domestic market fluctuations. These funds can be hybrid, feeder, or theme-based, allowing investors to customize their exposure to international markets.

Global Funds

Global Funds differ from International Funds as they include investments in both domestic and foreign markets. They offer broad diversification but come with higher risk due to exposure to various policies, market conditions, and currency fluctuations.

Real Estate Funds

Real Estate Funds invest indirectly in established real estate companies or trusts. They provide a way to benefit from the real estate sector’s potential without the hassle of purchasing property directly. These funds offer long-term investment opportunities and some liquidity, making them an alternative to physical property investment.

Commodity-focused Stock Funds

Commodity-focused stock funds are suitable for risk-tolerant investors looking to diversify their portfolios. These funds invest in stocks related to commodities like gold. Returns are influenced by the performance of the underlying commodities or companies involved in the commodity sector.

Market Neutral Funds

Market Neutral Funds aim to provide protection from market downturns while still delivering good returns. They employ strategies similar to hedge funds, offering risk-adjusted returns. Even small investors can potentially outperform the market with these funds.

Inverse/Leveraged Funds

Inverse Funds move in the opposite direction of their benchmark index, allowing investors to profit from market declines. For example, an inverse Nifty 50 ETF would rise when the Nifty 50 falls, providing a hedge against market downturns.

Asset Allocation Funds

Asset Allocation Funds combine different asset classes like debt, equity, and gold in optimal ratios. Fund managers make allocation decisions based on market trends or preset formulas. These funds offer flexibility and diversification, similar to hybrid funds, but require expertise in choosing the right mix of assets.

Gift Funds

Investors can gift mutual funds or SIPs to loved ones, securing their financial future. This thoughtful gesture can help beneficiaries achieve their financial goals and build wealth over time.

Exchange-traded Funds (ETFs)

These belong to the index funds category but can be bought and sold on stock exchanges in real time. They provide extensive exposure to both Indian and foreign stock markets and specialised sectors. ETFs offer flexibility, enabling investors to trade throughout the day at market prices, making them a popular choice for active traders and long-term investors alike.

The Right Mutual Fund For Your Investment Goals

With so many mutual funds available in India, selecting the right one for your investment goals can be overwhelming. Here are some tips to help you choose the right mutual fund for yourself that align with your goals, horizon and risk tolerance:

Determine your investment goals

Before investing in a mutual fund, you should determine your investment goals. Do you want to invest in short-term or long-term? Are you looking for capital appreciation or regular income? Your investment goals will help you select the right mutual fund.

Understand the different types of mutual funds

You should understand the structure, fees, portfolio, risk and return profile of each type of mutual fund before making an investment decision.

Assess the fund’s past performance

While past performance is not a guarantee of future returns, it can give you an idea of how the fund has performed in the past. Look for funds that have consistently outperformed their benchmark over a long period of time.

Check the fund manager’s track record

The fund manager plays a crucial role in the performance of the mutual fund. Look for a fund manager who has a track record of generating good returns for investors.

Look at the expense ratio

Mutual funds charge a fee for managing your money, which is known as the expense ratio. Look for funds with a lower expense ratio, as it will reduce the impact of fees on your returns.

Consider the risk factor

Every mutual fund comes with a certain level of risk. Consider the risk associated with the mutual fund and see if it matches your risk profile.

Read the scheme document

The scheme document contains all the essential information about the mutual fund, including the investment objective, risk factors, fees, and expenses. Read the scheme document carefully before making an investment decision.

By doing your due diligence and selecting the right mutual fund, you can grow your wealth over time and achieve your investment goals.

Related Mutual Fund Articles


What are mutual funds?

Mutual funds are a type of investment vehicle that pools money from multiple investors and invests the money in stocks, bonds, or other securities, according to a pre-determined investment objective.

What are the different types of mutual funds in India?

The different types of mutual funds in India include: Equity funds, Debt funds, Hybrid funds and Tax-saving funds (ELSS).

What are equity funds?

Equity funds are mutual funds that primarily invest in stocks of companies listed on the stock exchanges. These funds are suitable for investors who are willing to take higher risks and have a long-term investment horizon.

What are debt funds?

Debt funds are mutual funds that primarily invest in fixed-income securities such as bonds, debentures, and government securities. These funds are suitable for investors who are looking for a steady income with low risk.

What are hybrid funds?

Hybrid funds are mutual funds that invest in both equity and debt instruments. These funds are suitable for investors who are looking for a balanced investment option with moderate risk.

What are tax-saving funds (ELSS)?

Tax-saving funds, also known as Equity Linked Savings Schemes (ELSS), are mutual funds that invest in equities and offer tax benefits under Section 80C of the Income Tax Act. These funds have a lock-in period of three years.