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.

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.

Which type of mutual fund is safest?

Overnight funds and arbitrage funds are considered among the safest mutual funds as they focus on capital preservation, high liquidity, and very low volatility, making them suitable for conservative and short-term investors.

Which type of mutual fund is best for long-term growth?

Equity mutual funds, especially large-cap, flexi-cap, and index funds, are best for long term growth. They offer higher return potential through compounding when held for seven years or more.

What are sectoral mutual funds?

Sectoral mutual funds invest primarily in a specific industry such as banking, IT, or pharma. They offer high return potential but carry higher risk due to lack of diversification.

Different Types Of Mutual Funds In India

Mutual funds are among the most popular investment options in India, allowing investors to pool their money and invest in a diversified portfolio of assets such as stocks and bonds. With various types of mutual funds available, investors can choose options based on their financial goals, risk appetite, and investment horizon. Understanding the different categories of mutual funds helps in making informed investment decisions and building a balanced portfolio.

Key Takeaways

SEBI recognises 40 mutual fund categories across equity, debt, hybrid, solution-oriented, and other asset classes.

Passive investing is growing rapidly through index funds and ETFs, driven by lower costs and increasing retail participation.

Specialised and sector funds provide targeted exposure but carry higher risk.

Equity mutual funds must invest at least 65%–80% of assets in equities, depending on the category.

Types of Mutual Funds Based on Asset Class

Mutual funds are commonly classified based on the type of assets they invest in. Each category has a different risk and return profile.

Equity Schemes

Scheme Type	Minimum Investment Requirement	Description
Multi Cap Fund	Minimum 75% in equity (25% allocate to large, mid and small cap each)	Invests across large-cap, mid-cap, and small-cap stocks
Flexi Cap Fund	Minimum 65% in equity	Invests across market caps (large, mid, small) with full flexibility in allocation
Large Cap Fund	Minimum 80% in large-cap equities	Invests in the top 100 companies by market capitalisation
Large & Mid Cap Fund	Minimum 35% each in large and mid-cap	Balanced exposure to large and mid-sized companies
Mid Cap Fund	Minimum 65% in mid-cap equities	Invests in companies ranked 101–250 by market capitalisation
Small Cap Fund	Minimum 65% in small-cap equities	Invests in companies ranked beyond 250
Dividend Yield Fund	Minimum 65% in equity	Focuses on companies offering regular dividends
Value Fund	Minimum 65% in equity	Invests in undervalued stocks with growth potential
Contra Fund	Minimum 65% in equity	Follows a contrarian investment strategy
Focused Fund	Minimum 65% in equity	Invests in a limited number of stocks (up to 30)
Sectoral/Thematic Fund	Minimum 80% in a sector/theme	Focuses on specific industries or themes
ELSS Fund	Minimum 80% in equity	Tax-saving fund with 3-year lock-in under Section 80C

Debt Schemes

Scheme Type	Description
Liquid Funds	Invest in very short term instruments with high liquidity
Short Duration Funds	Invest in debt with short maturity periods
Corporate Bond Funds	Invest primarily in high rated corporate bonds
Gilt Funds	Invest in government securities with low credit risk
Overnight Fund	Invests in overnight securities and aims to preserve capital and maintain high liquidity.
Money Market Funds	Invest in short-term money market instruments

Hybrid Schemes

Scheme Type	Description
Aggressive Hybrid Fund	Higher allocation to equity with some debt exposure
Conservative Hybrid Fund	Higher allocation to debt with limited equity exposure
Arbitrage Fund	Uses price differences in markets to generate returns
Multi Asset Fund	Minimum 10% each in at least three asset classes (equity, debt, gold, etc.)

This classification helps investors choose funds based on their risk appetite, investment horizon, and financial goals.

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.

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.

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.

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.

Tax-Saving Funds:

Also known as Equity Linked Savings Scheme (ELSS), these funds are eligible for a tax deduction of up to ₹1.5 lakhs in a financial year. Tax-saving funds are equity-oriented diversified funds, with more than 80% 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

Mutual funds can also be classified based on risk levels and specific investment objectives. This helps investors choose funds that match their financial goals and risk appetite.

Very Low Risk Funds: These funds invest in highly secure instruments such as money market securities. They aim to preserve capital with minimal fluctuations and are suitable for conservative investors.

Low Risk Funds: These funds focus on stable income generation by investing in government bonds and high quality debt instruments. They carry slightly higher risk than very low risk funds.

Medium Risk Funds: These include balanced or hybrid funds that invest in both equity and debt. They aim to provide moderate growth with controlled risk.

High Risk Funds: These funds primarily invest in equities, including sector specific funds. They focus on capital appreciation and suit investors comfortable with market volatility.

Solution Oriented Schemes

Solution-oriented schemes are designed to help investors meet specific long-term life goals, such as planning for retirement or funding a child’s education. Unlike diversified equity or debt funds, these schemes come with a mandatory lock-in period to ensure the investment stays on track to meet its intended objective. The minimum investment requirement for majority of the funds is specific to the objective. Some examples include:

Retirement Fund

These funds are focused on building a corpus for post-retirement; carries a lock-in period of 5 years or until retirement (whichever is earlier).

Children’s Fund

These are designed to fund education or marriage; carries a lock-in period of 5 years or until the child reaches adulthood (whichever is earlier).

Note: As of April 2026, SEBI has discontinued the Solution-Oriented category. Existing schemes will be merged with similar categories and will not accept fresh subscriptions.

Other Schemes

Index funds, exchange-traded funds (ETFs), and funds of funds (FoFs) are other types of mutual funds. Index funds and exchange-traded funds (ETFs) provide low-cost passive investing by allocating at least 95% of their assets to securities that replicate a market index. For diversified market exposure, Fund of Funds allocates at least 95% to other mutual funds (domestic or foreign).

Specialised Mutual Funds: These funds are designed for specific investment strategies or goals and offer diversification beyond traditional categories.

Sector Funds: These funds invest in specific industries such as banking, IT, or pharmaceuticals, allowing targeted exposure.

Index Funds: These funds replicate the performance of a market index, offering low cost and broad market exposure.

Funds of Funds: These funds invest in other mutual funds, providing diversification through a single investment.

Emerging Market Funds: These funds invest in developing economies, offering higher growth potential along with higher risk.

International or Foreign Funds: These funds invest in global markets outside India, helping diversify geographic risk.

Global Funds: These funds invest in both domestic and international markets for wider diversification.

Real Estate Funds: These funds invest in real estate assets or related companies, offering exposure without direct property ownership.

Commodity-focused Funds: These funds invest in companies linked to commodities, providing indirect exposure to commodity markets.

Market Neutral Funds: These funds aim to reduce market risk by balancing long and short positions.

Inverse or Leveraged Funds: These funds aim to deliver returns opposite to market movements or amplify returns, and carry high risk.

Asset Allocation Funds: These funds automatically adjust investments across asset classes to maintain a specific risk-return balance.

Exchange-Traded Funds (ETFs): These funds trade on stock exchanges and combine features of mutual funds and stocks, offering liquidity and diversification.

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 intend to invest for the short term or the 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.

Conclusion

Understanding the different types of mutual funds is essential for making informed investment decisions. Each category serves a specific purpose, from capital growth to income generation and risk management. By aligning your investment choices with your financial goals, risk appetite, and time horizon, you can build a well-diversified portfolio. Careful selection and regular review of your investments can help you maximise returns while managing risk effectively over time.

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