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Types of Mutual Funds – Based on Asset Class, Structure, Investment Objectives and Speciality

Types of Mutual Funds
types of mutual funds

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.

Did you know? According to the Association of Mutual Funds in India (AMFI) report dated 30th September 2019, the Average Assets Under Management (AUM) 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 growth 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.

What is Mutual Fund?

Millions of investors pool their money to form a corpus of the fund. They pool money to achieve the common investment goal. In simple terms, this pooled money is called the mutual fund.

The pooled money or the mutual fund is managed by a professional body called the Asset Management Company (AMC).

The investors in a mutual fund are given units to denote their contribution to the pooled funds. Hence, mutual fund investors are called unitholders. The AMC appoints a fund manager to invest and manage the pooled funds.

The fund manager invests the pooled money in various assets as per the defined investment objectives and the returns are distributed to the investors.

The market value of the mutual fund is called Net Asset Value (NAV). The NAV is calculated on a daily basis. NAV is the per-unit market value of the mutual fund.

NAV = [Market value of assets – liabilities & expenses] / Outstanding mutual fund units.

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:

1. 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.

Example: Mirae Asset Large Cap Fund (G)

2. 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.

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

3. 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.

Example: 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

1. Multi-Cap Fund

Mutual fund type name – Equity Mutual Fund

Description
Multi-Cap Fund is an open-ended equity scheme that invests in shares of large-cap, mid-cap, and small-cap companies.

An open-ended scheme means that the mutual fund has no fixed maturity period. The scheme is always available for subscription and redemption.

Features
A multi-cap fund allocates a minimum of 65% of the total assets for equity & equity related instruments.

Benefits
Multi-cap funds are the most diversified equity funds. Hence, you have a lower risk as compared to individual large, mid or small-cap focused funds.

You get the benefit of stability from large-cap and returns from mid and small-cap stocks. Thus, with the multi-cap fund, you have a stable portfolio with considerable returns.

Multi-cap funds can be used to create long-term wealth. These are of great value to create a multipurpose corpus.

2. Large Cap Fund

Mutual fund type name – Equity Mutual Fund

Description
Large-cap mutual funds are an open-ended equity scheme with a majority investment in the stocks of large-cap companies.

Features
Large-cap mutual funds allocate a minimum of 80% of the pool for investment in equity & equity related instruments of large-cap companies.

Benefits
The corpus of the large-cap mutual fund is invested in stable companies with a long track record of robust financial performance with established operations.

They can have the lowest volatility among equity mutual funds because large-cap companies’ stock prices fluctuate less and these companies have years of business experience.

You have the scope for a steady wealth creation opportunity by investing in large-cap funds.

3. Large & Mid Cap Fund

Mutual fund type name – Equity Mutual Fund

Description
A large & mid-cap fund is a mutual fund scheme that brings the benefits of investing in both large-cap and mid-cap companies.

Features
Minimum 35% of the total assets of the large and mid-cap fund consists of equity & equity related instruments of large-cap companies.

Another 35% of the assets are made up of equity & equity related instruments of mid-cap companies.

Benefits
Large and midcap funds capture the stability offered by the large-cap stocks and the growth opportunities of a mid-cap fund.

4. Mid Cap Fund

Mutual fund type name – Equity Mutual Fund

Description
The mid-cap mutual fund schemes are an open-ended equity mutual fund that predominantly invests in shares of mid-cap companies.

Features
Mid-cap mutual funds have a minimum investment of 65% of the total assets in equities & equity related instruments of the mid-cap companies.

The mid-cap companies are in a growing phase and have expansion plans. Hence, the mid-cap mutual funds are more aggressive than large-cap mutual funds.

Benefits
The mid-cap mutual funds offer higher returns but also carry a higher amount of risk due to investment in midcap companies.

5. Small Cap Fund

Mutual fund type name – Equity Mutual Fund

Description
A small-cap fund is an open-ended equity scheme that invests a major portion in small-cap stocks.

Features
A minimum of 65% of the total assets of the small-cap mutual fund is invested in equity & equity related instruments of small-cap companies.

Small-cap companies are future companies with very high growth potential. They have the highest risk but also have the potential to generate the highest returns.

6. Value Fund

Mutual fund type name – Equity Mutual Fund

Description
Value funds are an open-ended equity scheme that follows a value investment strategy.

Features
The portfolio of value funds is constructed on the principles of value investment strategy. he minimum investment in equity & equity related instruments is 65% of the total assets.

Benefits
You benefit from value funds by the long-term wealth creation opportunities.

7. Contra Fund

Mutual fund type name – Equity Mutual Fund

Description
Contra funds are an open-ended equity scheme that follows a contrarian investment strategy. The strategy involves buying and selling in contra (opposite) to the present market sentiments.

Features
Contra fund schemes follow a contrarian investment strategy. The fund has a minimum of 65% of total assets invested in equity & equity related instruments.

Benefits
The contra fund helps investors benefit from the contrarian theory by capitalizing on the changing market conditions.

8. Sectoral/ Thematic Fund

Mutual fund type name – Equity Mutual Fund

Description
A Sectoral fund is an open-ended equity scheme investing in a particular sector like pharma, auto or IT sector.

Thematic funds are open-ended equity schemes following a particular theme across different sectors. For example export & services fund, business cycle fund, infrastructure fund.

Features
Sectoral funds invest a minimum of 80% of total assets in equities & equity related instruments of a particular sector.

A thematic fund invests a minimum of 80% of total assets in equities & equity related instruments of a particular theme.

Benefits
The sector and thematic funds being exposed to high risks of cycles changing or themes dying. Hence, they are high risk and high return investment.

9. Equity Linked Savings Scheme (ELSS)

Mutual fund type name – Equity Mutual Fund

Description
ELSS is an open-ended equity-linked savings scheme with a statutory lock-in of 3 years.

Features
ELSS invests a minimum of 80% of total assets in equity & equity related instruments in accordance with Equity Linked Saving Scheme, 2005 notified by the Ministry of Finance.

Benefits
ELSS investments allow tax deductions of up to Rs. 1.5 Lakhs under the Income Tax Act, 1961. Compared to other tax saving options ELSS have the lowest lock-in period of three years.

ELSS funds have a lock-in period that helps in the reinvestment of returns and ultimately end up generating higher returns.

Thus, ELSS serves the dual purpose of tax saving/ planning and generating higher returns from equity investment.

Apart from that, you benefit from diversification, professional fund management and low-cost investment through SIP when you invest in an ELSS fund.

Example: 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.

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.

Let’s discuss all the different types of funds in detail.

1. Overnight Fund

Mutual fund type name – Debt Mutual Fund

Description
An overnight mutual fund is an open-ended debt scheme that invests in overnight securities. The overnight securities have a residual maturity of a single day. Examples of overnight securities are T-Bills, call money and certificate of deposits having a single day maturity.

Features
The overnight fund invests in overnight securities having a maturity of 1 day. They are highly liquid and offer a highly safe investment avenue.

Benefits
Overnight funds help investors park their funds for a few days. They have returns higher than the savings rate offered by many banks.

2. Liquid Fund

Mutual fund type name – Debt Mutual Fund

Description
Liquid funds are open-ended debt mutual funds that invest in highly liquid securities. The securities are usually money market instruments like T-Bills, call money, collateral borrowings (CBLO), certificate of deposit (CD’s), and commercial papers (CP’s).

Features
A liquid mutual fund invests in debt and money market securities with maturity of up to 91 days only.

They are highly liquid and offer a highly safe investment avenue.

Benefits

A liquid mutual fund helps you park excess money for a few weeks up to 3 months.

Liquid funds are ideal for creating an emergency fund for various life events like temporary financial crises from job loss and medical emergencies.

You can also use liquid funds to manage your monthly expenses and for making provisions.

The best part is that your money is accessible in a day or two of the redemption requests. Thus, the liquid fund helps you earn a higher return than the savings account rate.

3. Ultra Short Duration Fund

Mutual fund type name – Debt Mutual Fund

Description
Ultra-short duration funds are an open-ended scheme that invests in debt instruments with Macaulay duration lying between 3 months and 6 months.

In layman terms, Macaulay’s duration is the time an investor would take to get back all his invested money in the bond by way of periodic interest as well as principal repayments.

The Macaulay duration for a portfolio is calculated as the weighted average time period over which the cash flows on its bond holdings are received.

Features
Ultra-short duration fund invests in debt securities that have a Macaulay duration of 3 months to 6 months.

Benefits
Ultra-short duration funds too are highly liquid and offer a relatively stable investment avenue.

Investors benefit from a longer duration fund that generates a slightly higher income and reinvestment opportunity.

Using ultra-short duration mutual fund you can create a corpus for purchasing a dream bike or retire an existing short-term loan.

4. Money Market Fund

Mutual fund type name – Debt Mutual Fund

Description
Money market fund is an open mutual fund scheme that invests majorly into money market instruments like T-bills, CPs, and CDs.

Features
Money market mutual funds invest in money market instruments having maturity up to 1 year. They are highly liquid and offer a highly safe investment avenue.

Benefits
Money market funds are best for a risk-averse investor that combines a better yield and safe investments.

5. Short Duration Fund

Mutual fund type name – Debt Mutual Fund

Description
Short duration fund is an open-ended short term debt scheme investing in instruments with Macaulay duration between 1 year and 3 years.

Features
They offer a stable investment avenue with good returns. Short duration funds are best in a rising interest rate scenarios.

The short duration invests in debt & money market instruments such that the Macaulay duration of the portfolio is between 1 year to 3 years.

Benefits
Short duration funds invest in 1 to 3-year duration debt instruments. You benefit from additional interest income and a reinvestment opportunity.

The low duration fund is best for conservative investors who want to grow their money without fluctuations.

The short duration fund can be used for life goals of expensive foreign vacations and meeting wedding expenses.

6. Medium Duration Fund

Mutual fund type name – Debt Mutual Fund

Description
Medium duration fund is an open-ended scheme that invests in debt securities that have a Macaulay duration between 3 years and 4 years.

Features
Medium duration funds offer a relatively stable investment avenue with good returns. The fund provides capital protection and higher yields.

The fund consists of debt & money market instruments like Government securities, T-bills, CDs and CPs.

Benefits
Medium duration funds are helpful in creating a corpus of funds for conservative investors who want to build capital without taking a risk like aggressive equity investors

7. Long Duration Fund

Mutual fund type name – Debt Mutual Fund

Description
Long duration mutual fund is an open-ended scheme that invests primarily in debt instruments with Macaulay duration greater than 7 years.

Features
Long duration funds are best in a falling interest rate scenarios. Because the interest rate is inversely proportional to bond prices.

Generally, the long duration funds have the highest yield among all the duration funds. They also carry the highest interest rate risk among the duration funds.

The fund invests in corporate bonds, Govt. securities, T-bills, CDs and CPs such that the Macaulay duration of the portfolio is greater than 7 years

8. Dynamic Bond Fund

Mutual fund type name – Debt Mutual Fund

Description
A dynamic bond fund is an open-ended dynamic debt scheme that invests in debt instruments across the duration.

Features
The fund offers flexibility to manage duration in different market scenarios. In a sense, they increase maturity in falling interest rate scenarios so that you can enjoy higher interest income.

Likewise, they decrease the maturity in a rising interest rate scenario. Hence, you do not need to manage the fund actively.

9. Corporate Bond Fund

Mutual fund type name – Debt Mutual Fund

Description
Corporate bond funds are an open-ended scheme that invests predominantly in the highest-rated corporate bonds. The fund investments are in AAA-rated bonds from established large companies.

Features
Minimum 80% of the total assets of the corporate bond funds are invested in the highest rated (AAA) in corporate bonds.

The instruments include bonds, debentures, commercial papers, and structured obligations.

10. Credit Risk Fund

Mutual fund type name – Debt Mutual Fund

Description
Credit risk fund is an open-ended debt scheme that invests in below highest-rated corporate bonds, i.e in AA or A-rated debt papers of companies.

Features
A minimum of 65% of the total assets is invested in debentures, commercial papers, and bonds of companies having below the highest-rated instruments.

11. Banking and PSU Fund

Mutual fund type name – Debt Mutual Fund

Description
Banking and PSU fund is an open-ended mutual fund scheme predominantly investing in the debt instruments of banks, Public Sector Undertakings (PSUs), and Public Financial Institutions.

Features
A minimum of 80% of the total assets of the fund is invested in debt instruments like Tier I and Tier II bonds of banks and PSUs.
Solution-Oriented Mutual Funds

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:

1. Growth Mutual Funds

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.

2. 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.

3. 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.

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).

4. Tax Saving Mutual Funds

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.

5. 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).

Types of Mutual Funds Based on Specialty

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

1. 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.

Since these funds are passively managed, the expense ratios associated with them 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.

Mutual fund type name – Other Mutual Fund

Description
Index funds are an open-ended scheme replicating/ tracking a particular stock index. For example, the Nifty Index Fund will have a composition similar to the Nifty 50 stock index.

Features
The fund has a minimum of 95% of total assets invested in securities of a particular index which is being replicated/ tracked.

The index funds follow a passive investment style.

Benefits
Index funds investors benefit from diversification, passive fund management, and lower costs.

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

2. 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.

Mutual fund type name – Other Mutual Fund

Description
Fund of funds is an open-ended mutual fund scheme that invests in other mutual fund schemes.

Features
A minimum of 95% of the total assets of the Fund of Funds is invested in the underlying mutual fund scheme. Like, a FoF scheme investing (95% of the corpus) in global funds.

Depending on the scheme objective the Fund of funds can invest in domestic or overseas (global) mutual fund schemes.

The pooled money is used in investing in other mutual fund schemes rather than in assets like equity or bonds.

Benefits
The FoF offers investors a large diversified portfolio, which reduces risk and provides an opportunity to invest, sometimes globally, with a small amount of capital.

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

3. 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

4. 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).

5. Retirement Fund

Mutual fund type name – Solution-Oriented Mutual Fund. The funds are hybrid in nature that invests a major portion of the corpus in equity for the long-term.

Description
The retirement fund’s objective is to build wealth for retirement by providing long-term capital appreciation and income. The funds provide steady income post-retirement using convenient withdrawal options. They are also known as pension funds.

Features
A retirement fund is an open-ended retirement solution-oriented scheme that has a lock-in period of 5 years or till the retirement age (whichever is earlier).

Benefits
The investors have a dedicated mutual fund for building a corpus of the fund to cover the lifestyle expenses after retirement.

6. Children’s Fund

Mutual fund type name – Solution-Oriented Mutual Fund

Description
Children’s fund is an open-ended fund for investment for children having a lock-in for at least 5 years or till the child attains the age of majority (whichever is earlier).

Features
Children’s funds are hybrid funds having exposure to both equity and debt instruments. The fund discourages withdrawal by having a lock-in period so that the funds are not utilized for other purposes.

Benefits
The mutual fund is focused on creating wealth for children that can have various purposes like higher education and marriage expenses.

Conclusion

Mutual fund investment has a lot of benefits in terms of diversification, professional management, low cost, and a dedicated fund manager. But you need to know your investment goals before you make a mutual fund investment.

An equity fund is best for investors having a long-term investment horizon. Debt mutual funds are helpful for investors looking for low volatility short-term investment options.

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.

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.

Published on December 18, 2019