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Types of Mutual Funds You Need to Know

Did you know that the Indian Mutual Fund market can be categorized into various types on the basis of its structure, asset class, investment objectives, speciality, and other such factors? It is important to know the classification of mutual funds as it will help you make wiser decisions in creating a portfolio that meets your financial goals. To help you in your quest, here is a complete guide on the different types of mutual funds.

Types of mutual Funds

Did you know? According to the Association of Mutual Funds in India’s (AMFI) report dated 30th September 2019, the Average Assets Under Management (AAUM) of the Indian Mutual Fund Industry is valued at a whopping 25.60-trillion Rupees!!!

This figure, by itself, indicates that the Mutual Fund sector is registering a slow but steady stronghold in the Indian economy. The same report states that the industry has expanded by 2.5 times within a period of 5 years!

This growth of mutual funds in India can be attributed to the increase in disposable income and exposure to alternative investment channels.

As a smart investor, you may want to know everything about mutual funds before you put your hard-earned money on it. To help you in your quest for knowledge, here is a comprehensive list of the various types of mutual funds that you must know.

Types of Mutual Funds in India

You may have heard of words like Debt funds, Equity funds, ELSS funds, being used often.

But what are they?

What purpose do they serve?

Let us gain an understanding of the types of mutual funds with examples:

Types of Mutual Funds Based on Structure

The structure of a mutual fund defines the flexibility and the ease of sale/purchase of the fund. Based on the structure, the types of mutual funds in India are:

Open-Ended Mutual Funds

Open-Ended Mutual Funds are available for sale or purchase all through the year. The purchase or redemption of these funds is carried out at the prevailing NAVs (Net Asset Values). As a result, investors can continue investing according to their wishes. Further, there is no limit on how much they can invest in open-ended schemes.

Investors are actively involved in fund management, which indicates that such investments involve a fund manager, who picks the funds where the investment should be made. Thus, open-ended mutual funds are subject to expense ratio due to the fund management charge involved. These funds are highly liquid as the funds are not bound to any maturity period.

Examples: HDFC Top 100 Fund (G) and Mirae Asset Large Cap Fund (G)

types of mutual funds in india

Close-Ended Mutual Funds

In close-ended mutual funds, investors can purchase units only during the initial offer period. These units can then be redeemed after the completion of a specified maturity period. Since they lack the liquidity offered by open-ended mutual funds, close-ended mutual funds are listed for trade on the stock exchange to compensate for the same.

One of the most prominent differentiating factors between open-ended and close-ended mutual funds is that the close-ended funds cannot be sold back to the mutual fund house. Rather, they are to be sold on the stock market at the prevailing rates for the share.

Examples: DSP 3Y Close Ended Equity Fund (G)

Interval Funds

Interval Funds bridge the gap between open-ended and close-ended mutual funds. Much like close-ended mutual funds, they are available as an initial offering and are then opened for the repurchase of shares by the fund management company at different intervals during the tenure of the fund. Initial unitholders can offload their shares by selling it to the mutual fund house.

Examples: Reliance Yearly Interval Fund - 1 (G)

Classification of Mutual Funds on the Basis of Asset Class

Asset class relates to grouping investments on the basis of common or similar characteristics. They may also be subject to similar laws and regulations.
Hence, the classification of Mutual Funds on the basis of its asset class is as follows:

Equity Mutual Funds

equity mutual funds

As the name suggests, these funds invest the money in the equity stocks or shares of a company. Hence, they are also known as Stock Mutual Funds. While they may be high-risk investments, they compensate for it with attractive returns. The performance of the stock determines the kind of return that the investor gets.

Equity Mutual Funds also include speciality funds that are specific to an industry, such as infrastructure, banking, or fast-moving consumer items.

Examples: Parag Parikh Long Term Equity Fund (G) and Motilal Oswal Long Term Equity Fund (G)

Debt Mutual Funds

Debt Mutual Funds park your money in fixed income securities such as treasury bills, bonds, and securities. The debt instruments include Fixed Maturity Plans (FMP), Short Term Plan, Liquid Funds, Monthly Income Plans, Gilt Fund, Long Term Bonds, and more. All the fixed income securities offer a fixed rate of interest and are bound by a predetermined maturity date.

Debt Mutual Funds

These investments are considered to be safe as they possess low risk. However, the returns are rarely inflation-beating. Further, in the case of debt funds, TDS (tax deducted at source) is not deducted, so those earning more than Rs. 10,000 on their investment should pay the tax on their own.

Examples: Tata Liquid Fund (G) and Kotak Savings Fund (G)

Money Market Mutual Funds

The money market mutual funds invest in liquid assets. Owing to a high degree of liquidity, they are also known as the cash market or capital market. Government or financial institutions such as banks or corporations form the backbone of money market mutual funds through securities such as bonds, dated securities, and certificates of deposits, T-bills, etc. Normally, it is ideal for those who wish to park their excess money for the short term.

Examples: JM Money Market Fund (G) and ICICI Pru Money Market Fund (G)

Balanced Funds

Also known as hybrid funds, balanced mutual funds in India are a mix of assets, such as bonds and stocks. The ratio of fixed income to equity could be fixed or variable. Normally, these funds invest in equities and debt in the 40:60 proportion, with either of the two outweighing the other. Accordingly, the risk and returns associated with this mutual fund balance each other out. Due to their characteristics, balanced mutual funds can be thought of as an intermediary of debt and equity funds.

Examples: Tata Balanced Adv Fund (G) [with 22.459% allocation in Debt and 66.7508% allocation in Equity] and Kotak Balanced Advantage Fund (G) [with 15.7588% allocation in Debt and 69.6299% allocation in Equity]

Types of Mutual Fund Schemes Based on Investment Objectives

What is the end-goal of your investment? Is it to increase wealth? Is it to save taxes? Is it to make short-term gains? Depending on the ultimate investment objective, the mutual funds can be classified as:

Growth Mutual Funds

types of mutual funds with examples

Growth mutual funds invest the money primarily in growth-sector equity stocks. As their name suggests, the main objective of Growth Mutual funds is capital appreciation. They are not considered suitable for long-term investments and also occupy a high-risk grade.

Examples: Kotak Standard Multicap Fund (Growth) and ICICI Prudential Savings Fund (Growth).

Income Mutual Funds

Fixed-income mutual funds are a sub-class of debt mutual funds. These funds distribute the money in a mix of income assets such as debentures, bonds, securities, and certificates of deposits. Income mutual funds are managed by skilled fund managers, who are responsible for maintaining capital protection while also offering a regular income to the investors. Such an investment is ideal for risk-averse investors, who wish to park their money for at least 2 to 3 years.
Examples: SBI Regular Savings Fund and Aditya Birla Sun Life Treasury Optimizer Fund.

Liquid Mutual Funds

Liquid mutual funds are also a sub-class of debt mutual funds, wherein the money is primarily invested in short-term and ultra-short-term instruments like commercial papers, bank certificate of deposits, treasury bills, and more

Liquid Mutual Funds

The main purpose of liquid mutual funds is to provide liquidity. These investments are low on risk and offer moderate returns. Investors looking for short-term investment opportunities should park their money in liquid mutual funds.

Examples: Axis Liquid Fund (Growth) and Tata Liquid Fund (Growth).

Tax Saving Mutual Funds

Tax Saving Mutual Funds ELSS

Tax Saving Mutual Funds, or Equity-Linked Saving Scheme (ELSS), are funds that invest the money in equity. The money invested in these schemes is eligible for deductions under Section 80C of the Income Tax Act. While they are high on risk, they can offer a handsome return if the fund performs well.

Examples: DSP BlackRock Tax Saver Fund and Motilal Oswal Long-Term Equity Fund.

Pension Funds

Pension mutual funds are really long-term investments that are availed to gain regular returns after the investor retires. Pension funds split the investment between equity and debt instruments so that the equity component offers higher returns while the debt component balances the risk while providing low but steady returns.
Investors can draw their returns as a lump sum amount or as a fixed pension, or in a combination of the two.

Examples: Franklin India Pension Plan (G) and UTI Retirement Benefit Pension (Growth).

Mutual Funds Types Based on Specialty

SEBI has also categorized certain funds as speciality funds, these are:

Index Mutual Funds

Index Mutual Funds, also known as Exchange Traded Funds (ETFs), is a class of mutual fund schemes that not only track but also replicate the asset allocation of a certain index. Normally, index mutual funds are required to have an investment portfolio that is at least 95% similar to the index that it is tracking.

Index Mutual Funds

Since these funds are passively managed, the expense ratio associated with it are also low. The key difference between ETFs and Index Funds is that ETFs can be traded on the stock market, while Index Funds cannot.

Examples: DSP NIFTY 50 Index Fund (Growth) and SBI Nifty Index Fund (Growth).

Fund of Funds

As the name indicates, Fund of Funds (FoF) invests in other mutual funds (which could be Domestic or International) and the resultant returns on the investment vary on the basis of the performance of the target fund. Such investments are considered to be safer as the Fund of Funds holds a diversity of funds, which adjusts the portfolio and balances the risk. These funds are also known as Multi-Manager Funds.

Examples: Quantum Equity FoF Fund (G) and Franklin India Life Stage FoFs-20 (G).

Sector Mutual Funds

Sector Mutual Funds put your investments in stocks of companies of a specific sector of the industry. The returns of this investment are tied to the overall performance of the chosen sector. Similarly, the risks associated with these investments also depend on the nature of the sector.

Examples: Funds that invest in sectors such as Infrastructure, Information Technology (IT), Healthcare, etc.

Commodity Mutual Funds

Commodity Mutual Funds

Much like sector mutual funds, commodity mutual funds invest in companies that are functioning in the commodity market. The returns of these funds depend on the performance of the commodity or the stock of the company that produces the commodity.

Further, the returns are not periodic in nature. Such investments can be high-risk and for those wishing to diversify their portfolio.

Examples: Investors in India can directly invest in Gold, which is a commodity, or put their money in Gold Funds (commodity-linked mutual funds such as Kotak Gold Fund). Other commodities include Oil, Silver, etc.

Does Investing In Gold Make Economic Sense

Asset Allocation Funds

Asset Allocation Mutual Funds combine debt, equity, and sometimes even gold, in an optimum ratio. Due to the diversity in the asset portfolio, these funds are highly flexible. The ratio of investment could depend on the prevailing market trends, preset formula, or based on a fund manager’s skill or experience.

While they sound like Hybrid Funds, Asset Allocation Funds require greater expertise of the fund manager in choosing and allocating the bonds and stocks.

Examples: DSP Dynamic Asset Allocation Fund (G) and SBI Multi-Asset Allocation Fund (G).

Final Thoughts

Now that you have gained some understanding of the various types of mutual funds, you will be in a better position to compartmentalize your investments. Once you have an understanding of what you expect out of your investments, you will be in a better position to pick the funds that suit your requirements and your goal. Do remember to factor in the risk involved against all the different types of mutual funds. At the same time, do bear in mind that high-risk mutual funds offer higher returns and vice versa.

Normally, all types of mutual fund schemes carry some amount of risk, no matter how small. Thus, it is important that as an investor, you should go through their policy documents before investing. This one small act can grant you knowledge about the various facilities offered by the fund house and where your money gets invested.

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