Types of Mutual Funds in India: Based on Risk, Asset Class, Goals

In India, mutual funds can be broadly classified based on their structure, asset class, and investment objectives. Additionally, these mutual funds can be segmented further based on investors’ risk appetite. Let’s take a closer look at the various types of mutual funds.

Mutual Fund Types Based on Structure

Mutual funds can be classified as open-ended, close-ended, or interval schemes depending on their maturity period. Let’s understand each type:

Open-ended Mutual Funds

In open-ended mutual fund schemes, you can invest and redeem your investments whenever you want. There is no maturity tenure or specific investment time. Open-ended mutual funds are liquid in nature. Most mutual fund schemes are open-ended. However, ELSS schemes and sometimes solution-oriented schemes have lock-in periods. For example, ELSS schemes have a 3-year lock-in, and solution-oriented funds can have lock-in periods of up to 5 years.

Close-ended Mutual Funds

Close-ended mutual fund schemes have a set investment and maturity period, available during their New Fund Offer (NFO) launch. Investments can only be made during this period, and there’s a fixed maturity date for redemptions. Some close-ended schemes get listed on stock exchanges post-NFO, allowing investors to trade them. SEBI mandates that mutual fund companies must offer an exit route, either through stock exchange sales or repurchasing options.

Interval Mutual Funds

As the name suggests, interval mutual funds allow you to invest or redeem at intervals. These are essentially close-ended funds with windows in between where you can enter or exit the fund.

Mutual Fund Types Based on Asset Class

Depending on the asset class in which they invest, mutual fund schemes can be classified as:

Equity Mutual Funds

Equity mutual funds invest in the stocks of different companies. The return of these funds is influenced by the performance of the invested stocks in the market. These funds carry high risk but also have the potential to generate high returns. According to SEBI guidelines, equity funds should invest at least 65% of their portfolio in equities. Examples include large-cap funds, mid-cap funds, sectoral funds, and flexi-cap funds.

Debt Funds

Debt funds primarily invest in fixed-income instruments like corporate and government bonds. They generate income through capital appreciation and interest income. These funds are suitable for risk-averse investors seeking capital preservation with minimal fluctuations. Debt funds offer more stable returns than equity funds but still carry credit and interest risks.

Hybrid Mutual Funds

Hybrid funds invest in a combination of debt and equity, offering the benefit of asset allocation and diversification. They aim to provide long-term capital appreciation through equities while ensuring short-term stability through debt holdings. Examples include multi-asset allocation funds, aggressive hybrid funds, and balanced advantage funds.

Based on Investment Objectives

Mutual funds are also categorized based on their investment objectives such as:

ELSS (Equity Linked Saving Scheme) Funds

ELSS funds offer equity market returns and tax savings. They have a 3-year lock-in period and are eligible for tax deduction under Section 80C up to Rs 1.5 lakh.

Liquid Funds

Liquid funds are debt funds focused on providing the safety of principal and steady returns. They invest in short-term debt securities with a maturity of up to 90 days. These funds are suitable for short-term investors seeking flexibility and better returns than bank deposits.

Capital Protection Funds

These funds focus on protecting the principal amount invested. They invest mostly in debt and a small portion in equities, providing protection against market downturns while allowing for capital appreciation.

Fixed-Maturity Plans

Fixed Maturity Plans (FMPs) come with a fixed lock-in period and invest in debt securities that mature with the scheme’s tenure. They are closed-ended funds suitable for short-term investors seeking lower risk.

Pension Funds

Pension funds, or retirement funds, come with a lock-in period of at least five years or until retirement. They aim to build a substantial corpus for retirement by investing in stocks and debt instruments.

Income Funds

Income funds primarily invest in debt securities like corporate and government bonds. They aim to maximize wealth through capital appreciation and regular dividend payments.

Growth Funds

Growth funds invest in companies with high growth potential, aiming for maximum capital appreciation. They carry high risk and are suited for aggressive investors.

Money Market Funds

Money market funds invest in short-term debt securities and are considered low-risk. They are ideal for investors looking to park surplus funds for a short duration with higher returns than traditional FDs.

Fund of Funds (FoF)

FoF invests in other mutual fund schemes rather than directly in equities or debts. They offer diversification across different categories by investing in one scheme.

Gold Funds

Gold funds invest in gold ETFs, replicating the performance of gold prices in India. They provide a hedge against inflation and are a good addition to a diversified portfolio.

Based on Portfolio Management

  • Active Mutual Funds

Actively managed funds are where the fund manager continuously seeks better returns through buying and selling stocks.

  • Passive Mutual Funds

Passively managed funds track a specific index, reflecting the index composition in their portfolio.

Based on Specialty

  • Sectoral Funds

These funds invest at least 80% of their corpus in a particular sector of the economy, like pharma or technology.

  • Index Funds

Index funds replicate the performance of an underlying index, holding the same shares in the same proportion.

  • Real Estate Funds

Real estate funds invest in companies from the real estate sector, focusing on equities of real estate developers.

  • Asset Allocation Funds

Also known as Balanced Advantage Funds, these invest in a mix of stocks and debt instruments, dynamically managed based on market conditions.

  • International Funds

These funds invest in companies listed on foreign stock exchanges, offering geographical diversification.

  • Global Funds

Global funds invest in companies from all over the world, unlike international funds which exclude the investor’s home country.

  • Exchange-traded funds (ETFs)

ETFs can be traded on the stock exchange in real time like stocks. They typically track an index or a commodity like gold.

Based on Risk Appetite

  • Low-Risk Funds

Low-risk funds invest in high-quality bonds and are suitable for gradual growth with minimal risk, such as liquid funds and ultra-short duration funds.

  • Medium-Risk Funds

These funds strike a balance between risk and return, often including hybrid schemes with multiple asset classes.

  • High-Risk Funds

High-risk funds can be extremely volatile, and suitable for investors willing to take higher risks, like pure equity funds.

Conclusion

Given the various types of mutual funds in India, choose the types that suit your investment preference and risk appetite. When selecting the right mutual fund scheme, assess your financial goals and their horizon. Building a diversified portfolio with different types of mutual fund schemes can help you diversify risks and maximize returns.

In India, mutual funds can be broadly classified based on their structure, asset class, and investment objectives. Additionally, these mutual funds can be segmented further based on investors’ risk appetite. Let’s take a closer look at the various types of mutual funds.

Mutual Fund Types Based on Structure

Mutual funds can be classified as open-ended, close-ended, or interval schemes depending on their maturity period. Let’s understand each type:

Open-ended Mutual Funds

In open-ended mutual fund schemes, you can invest and redeem your investments whenever you want. There is no maturity tenure or specific investment time. Open-ended mutual funds are liquid in nature. Most mutual fund schemes are open-ended. However, ELSS schemes and sometimes solution-oriented schemes have lock-in periods. For example, ELSS schemes have a 3-year lock-in, and solution-oriented funds can have lock-in periods of up to 5 years.

Close-ended Mutual Funds

Close-ended mutual fund schemes have a set investment and maturity period, available during their New Fund Offer (NFO) launch. Investments can only be made during this period, and there’s a fixed maturity date for redemptions. Some close-ended schemes get listed on stock exchanges post-NFO, allowing investors to trade them. SEBI mandates that mutual fund companies must offer an exit route, either through stock exchange sales or repurchasing options.

Interval Mutual Funds

As the name suggests, interval mutual funds allow you to invest or redeem at intervals. These are essentially close-ended funds with windows in between where you can enter or exit the fund.

Mutual Fund Types Based on Asset Class

Depending on the asset class in which they invest, mutual fund schemes can be classified as:

Equity Mutual Funds

Equity mutual funds invest in the stocks of different companies. The return of these funds is influenced by the performance of the invested stocks in the market. These funds carry high risk but also have the potential to generate high returns. According to SEBI guidelines, equity funds should invest at least 65% of their portfolio in equities. Examples include large-cap funds, mid-cap funds, sectoral funds, and flexi-cap funds.

Debt Funds

Debt funds primarily invest in fixed-income instruments like corporate and government bonds. They generate income through capital appreciation and interest income. These funds are suitable for risk-averse investors seeking capital preservation with minimal fluctuations. Debt funds offer more stable returns than equity funds but still carry credit and interest risks.

Hybrid Mutual Funds

Hybrid funds invest in a combination of debt and equity, offering the benefit of asset allocation and diversification. They aim to provide long-term capital appreciation through equities while ensuring short-term stability through debt holdings. Examples include multi-asset allocation funds, aggressive hybrid funds, and balanced advantage funds.

Based on Investment Objectives

Mutual funds are also categorized based on their investment objectives such as:

ELSS (Equity Linked Saving Scheme) Funds

ELSS funds offer equity market returns and tax savings. They have a 3-year lock-in period and are eligible for tax deduction under Section 80C up to Rs 1.5 lakh.

Liquid Funds

Liquid funds are debt funds focused on providing the safety of principal and steady returns. They invest in short-term debt securities with a maturity of up to 90 days. These funds are suitable for short-term investors seeking flexibility and better returns than bank deposits.

Capital Protection Funds

These funds focus on protecting the principal amount invested. They invest mostly in debt and a small portion in equities, providing protection against market downturns while allowing for capital appreciation.

Fixed-Maturity Plans

Fixed Maturity Plans (FMPs) come with a fixed lock-in period and invest in debt securities that mature with the scheme’s tenure. They are closed-ended funds suitable for short-term investors seeking lower risk.

Pension Funds

Pension funds, or retirement funds, come with a lock-in period of at least five years or until retirement. They aim to build a substantial corpus for retirement by investing in stocks and debt instruments.

Income Funds

Income funds primarily invest in debt securities like corporate and government bonds. They aim to maximize wealth through capital appreciation and regular dividend payments.

Growth Funds

Growth funds invest in companies with high growth potential, aiming for maximum capital appreciation. They carry high risk and are suited for aggressive investors.

Money Market Funds

Money market funds invest in short-term debt securities and are considered low-risk. They are ideal for investors looking to park surplus funds for a short duration with higher returns than traditional FDs.

Fund of Funds (FoF)

FoF invests in other mutual fund schemes rather than directly in equities or debts. They offer diversification across different categories by investing in one scheme.

Gold Funds

Gold funds invest in gold ETFs, replicating the performance of gold prices in India. They provide a hedge against inflation and are a good addition to a diversified portfolio.

Based on Portfolio Management

  • Active Mutual Funds

Actively managed funds are where the fund manager continuously seeks better returns through buying and selling stocks.

  • Passive Mutual Funds

Passively managed funds track a specific index, reflecting the index composition in their portfolio.

Based on Specialty

  • Sectoral Funds

These funds invest at least 80% of their corpus in a particular sector of the economy, like pharma or technology.

  • Index Funds

Index funds replicate the performance of an underlying index, holding the same shares in the same proportion.

  • Real Estate Funds

Real estate funds invest in companies from the real estate sector, focusing on equities of real estate developers.

  • Asset Allocation Funds

Also known as Balanced Advantage Funds, these invest in a mix of stocks and debt instruments, dynamically managed based on market conditions.

  • International Funds

These funds invest in companies listed on foreign stock exchanges, offering geographical diversification.

  • Global Funds

Global funds invest in companies from all over the world, unlike international funds which exclude the investor’s home country.

  • Exchange-traded funds (ETFs)

ETFs can be traded on the stock exchange in real time like stocks. They typically track an index or a commodity like gold.

Based on Risk Appetite

  • Low-Risk Funds

Low-risk funds invest in high-quality bonds and are suitable for gradual growth with minimal risk, such as liquid funds and ultra-short duration funds.

  • Medium-Risk Funds

These funds strike a balance between risk and return, often including hybrid schemes with multiple asset classes.

  • High-Risk Funds

High-risk funds can be extremely volatile, and suitable for investors willing to take higher risks, like pure equity funds.

Conclusion

Given the various types of mutual funds in India, choose the types that suit your investment preference and risk appetite. When selecting the right mutual fund scheme, assess your financial goals and their horizon. Building a diversified portfolio with different types of mutual fund schemes can help you diversify risks and maximize returns.

In India, mutual funds can be broadly classified based on their structure, asset class, and investment objectives. Additionally, these mutual funds can be segmented further based on investors’ risk appetite. Let’s take a closer look at the various types of mutual funds.

Mutual Fund Types Based on Structure

Mutual funds can be classified as open-ended, close-ended, or interval schemes depending on their maturity period. Let’s understand each type:

Open-ended Mutual Funds

In open-ended mutual fund schemes, you can invest and redeem your investments whenever you want. There is no maturity tenure or specific investment time. Open-ended mutual funds are liquid in nature. Most mutual fund schemes are open-ended. However, ELSS schemes and sometimes solution-oriented schemes have lock-in periods. For example, ELSS schemes have a 3-year lock-in, and solution-oriented funds can have lock-in periods of up to 5 years.

Close-ended Mutual Funds

Close-ended mutual fund schemes have a set investment and maturity period, available during their New Fund Offer (NFO) launch. Investments can only be made during this period, and there’s a fixed maturity date for redemptions. Some close-ended schemes get listed on stock exchanges post-NFO, allowing investors to trade them. SEBI mandates that mutual fund companies must offer an exit route, either through stock exchange sales or repurchasing options.

Interval Mutual Funds

As the name suggests, interval mutual funds allow you to invest or redeem at intervals. These are essentially close-ended funds with windows in between where you can enter or exit the fund.

Mutual Fund Types Based on Asset Class

Depending on the asset class in which they invest, mutual fund schemes can be classified as:

Equity Mutual Funds

Equity mutual funds invest in the stocks of different companies. The return of these funds is influenced by the performance of the invested stocks in the market. These funds carry high risk but also have the potential to generate high returns. According to SEBI guidelines, equity funds should invest at least 65% of their portfolio in equities. Examples include large-cap funds, mid-cap funds, sectoral funds, and flexi-cap funds.

Debt Funds

Debt funds primarily invest in fixed-income instruments like corporate and government bonds. They generate income through capital appreciation and interest income. These funds are suitable for risk-averse investors seeking capital preservation with minimal fluctuations. Debt funds offer more stable returns than equity funds but still carry credit and interest risks.

Hybrid Mutual Funds

Hybrid funds invest in a combination of debt and equity, offering the benefit of asset allocation and diversification. They aim to provide long-term capital appreciation through equities while ensuring short-term stability through debt holdings. Examples include multi-asset allocation funds, aggressive hybrid funds, and balanced advantage funds.

Based on Investment Objectives

Mutual funds are also categorized based on their investment objectives such as:

ELSS (Equity Linked Saving Scheme) Funds

ELSS funds offer equity market returns and tax savings. They have a 3-year lock-in period and are eligible for tax deduction under Section 80C up to Rs 1.5 lakh.

Liquid Funds

Liquid funds are debt funds focused on providing the safety of principal and steady returns. They invest in short-term debt securities with a maturity of up to 90 days. These funds are suitable for short-term investors seeking flexibility and better returns than bank deposits.

Capital Protection Funds

These funds focus on protecting the principal amount invested. They invest mostly in debt and a small portion in equities, providing protection against market downturns while allowing for capital appreciation.

Fixed-Maturity Plans

Fixed Maturity Plans (FMPs) come with a fixed lock-in period and invest in debt securities that mature with the scheme’s tenure. They are closed-ended funds suitable for short-term investors seeking lower risk.

Pension Funds

Pension funds, or retirement funds, come with a lock-in period of at least five years or until retirement. They aim to build a substantial corpus for retirement by investing in stocks and debt instruments.

Income Funds

Income funds primarily invest in debt securities like corporate and government bonds. They aim to maximize wealth through capital appreciation and regular dividend payments.

Growth Funds

Growth funds invest in companies with high growth potential, aiming for maximum capital appreciation. They carry high risk and are suited for aggressive investors.

Money Market Funds

Money market funds invest in short-term debt securities and are considered low-risk. They are ideal for investors looking to park surplus funds for a short duration with higher returns than traditional FDs.

Fund of Funds (FoF)

FoF invests in other mutual fund schemes rather than directly in equities or debts. They offer diversification across different categories by investing in one scheme.

Gold Funds

Gold funds invest in gold ETFs, replicating the performance of gold prices in India. They provide a hedge against inflation and are a good addition to a diversified portfolio.

Based on Portfolio Management

  • Active Mutual Funds

Actively managed funds are where the fund manager continuously seeks better returns through buying and selling stocks.

  • Passive Mutual Funds

Passively managed funds track a specific index, reflecting the index composition in their portfolio.

Based on Specialty

  • Sectoral Funds

These funds invest at least 80% of their corpus in a particular sector of the economy, like pharma or technology.

  • Index Funds

Index funds replicate the performance of an underlying index, holding the same shares in the same proportion.

  • Real Estate Funds

Real estate funds invest in companies from the real estate sector, focusing on equities of real estate developers.

  • Asset Allocation Funds

Also known as Balanced Advantage Funds, these invest in a mix of stocks and debt instruments, dynamically managed based on market conditions.

  • International Funds

These funds invest in companies listed on foreign stock exchanges, offering geographical diversification.

  • Global Funds

Global funds invest in companies from all over the world, unlike international funds which exclude the investor’s home country.

  • Exchange-traded funds (ETFs)

ETFs can be traded on the stock exchange in real time like stocks. They typically track an index or a commodity like gold.

Based on Risk Appetite

  • Low-Risk Funds

Low-risk funds invest in high-quality bonds and are suitable for gradual growth with minimal risk, such as liquid funds and ultra-short duration funds.

  • Medium-Risk Funds

These funds strike a balance between risk and return, often including hybrid schemes with multiple asset classes.

  • High-Risk Funds

High-risk funds can be extremely volatile, and suitable for investors willing to take higher risks, like pure equity funds.

Conclusion

Given the various types of mutual funds in India, choose the types that suit your investment preference and risk appetite. When selecting the right mutual fund scheme, assess your financial goals and their horizon. Building a diversified portfolio with different types of mutual fund schemes can help you diversify risks and maximize returns.

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