Types of Mutual Funds : Based on Asset Class, Investment Goals and Structure       

September 14, 2022


With the world bearing consequences of increasing inflation, for many, spending a luxurious life with just an active income is quite challenging. Passive income has become a necessity. Hence, investing in the right kind of instrument is crucial.

While the market is flooded with different types of investment options, many novice investors hop on the stock market bandwagon without any prior knowledge or experience. As a result, they end up losing money. Therefore, beginners must always start with something associated with fewer risk factors, such as mutual funds. But the existence of different types of mutual funds lead you to a confusing situation.

A mutual fund (MF) is an investment tool that gathers funds from various investors and invests them in securities like bonds, stocks, and short-term debt. Furthermore, your fund is managed by experienced fund managers. Since there are different types of mutual funds, you have to research and find out which mutual fund is best for long-term. Keep reading the blog, to find which MF could be an ideal investment choice for you!

Types of Mutual Funds

There are six types of mutual funds. They are as follows:

  • Equity or Growth Schemes
  • Money Market Funds or Liquid Funds
  • Fixed Income or Debt Mutual Funds
  • Balanced Funds
  • Hybrid/Monthly Income Plans (MIP)
  • Gilt Funds

Some of these funds are further divided into different categories.

Based on Asset Class

Mutual funds based on asset classes pertain to grouping investment. Such MFs are hinged on similar or common features. They may also be subject to analogous laws and regulations. The following are the mutual funds based on asset classes:

  • Equity Mutual Funds, and
  • Debt Mutual Funds

Equity Mutual Funds

Such a mutual fund scheme typically invests its assets in stocks of different companies. These stocks usually have investment goals of the underlying scheme. Equity mutual funds are further classified into different categories, such as:

  • Large Cap Fund: Similar to multi-cap, large-cap funds are also an open-ended equity scheme, but they invest in the stocks of large-cap companies. Such MFs allocate a minimum of 80% of the gathered funds towards equity investment and equity-related instruments of organisations with large capitalisation.
  • Multi-Cap Fund: It’s an open-ended equity scheme with no fixed maturity period. True to its name, such funds invest in shares of small-cap, mid-cap, and large-cap companies. Multi-cap fund allocates a minimum of 65% of the overall assets for equity and instruments associated with equity.
  • Small Cap Fund: A small-cap fund is an open-ended equity scheme that invests a major portion in small-cap stocks. 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.
  • Mid Cap Fund: The mid-cap mutual fund schemes are open-ended equity mutual funds that predominantly invests in shares of mid-cap companies. Mid-cap mutual funds have a minimum investment of 65% of the total assets in equities & equity-related instruments of the mid-cap companies.
  • Large & Mid Cap Fund: Such a scheme offers the benefits of investing in both mid-cap and large-cap companies. At least 35% of the entire assets of the large and mid-cap fund comprise equity and equity-related instruments of large-cap companies.
  • Contra Fund: These kinds of mutual funds follow a contrarian investment tactic and belong to an open-ended equity scheme. Contra Fund uses strategies that include selling and buying in contrast to the current market sentiments.
  • Value Fund: It pursues a value investment technique and the value funds’ portfolio uses the same principal. The value fund is an open-ended equity scheme with a minimum investment in equity and equity-related tools containing 65% of total assets. Moreover, value funds offer long-term wealth creation opportunities to investors.
  • Equity Linked Savings Scheme (ELSS): Similar to the aforementioned MF schemes, it’s also open-ended. It is an equity-linked savings scheme with a statutory lock-in of 3 years. As notified by the Ministry of Finance, ELSS invests at least 80% of its entire assets in equity and equity-related tools. Under the Income Tax Act, 1961, the depositors with a deposit of ₹ 1.5 lakhs under ELSS investments, are allowed to get tax deductions.
  • Sectoral/Thematic Fund: Sectoral Fund, as the name suggests, invests in specific sectors, such as IT, auto, and pharmaceutical. Alike others, a thematic fund is also an open-ended equity scheme that pursues a specific theme across various sectors. At least 80% of the total assets of sectoral funds go towards the equity and equity-linked tools of a certain sector.

Debt Mutual Funds

A debt mutual fund is an MF scheme that invests in fixed-income securities like corporate debt securities, corporate bonds and government bonds, money market instruments, etc. offering capital appreciation. Debt mutual funds are further classified into the following types:

  • Liquid Funds: Such mutual funds are open-ended and usually invest in highly liquid securities. Such securities are majorly money market instruments, such as call money, T-Bills, certificate of deposits (CDs), collateral borrowings (CBLO), and commercial papers (CPs).
  • Overnight Funds: These are also open-ended debt mutual funds but overnight funds invest capital in overnight securities. These securities consist of residual maturity of a single day.
  • Long-Duration Mutual Fund: As evident from its name, such mutual funds scheme usually offers a longer Macaulay duration of more than seven years. You can consider investing in long-duration mutual funds in falling interest rate conditions as the interest rate is inversely proportional to bond prices. Compared to other duration mutual funds, these MFs yield higher returns.
  • Short Duration Fund: Similar to the above mentioned MFs, short duration funds are open-ended too. These funds invest in instruments having a Macaulay duration of 1 year to 3 years. The best time to invest in these funds is during increasing interest rate situations. They render a stable investment avenue with better returns.
  • Medium Duration Fund: Such funds usually have a Macaulay duration ranging from 3 years to 4 years. Medium-duration fund is an open-ended scheme that delivers a relatively stable investment space with impressive returns. The mutual fund offers capital protection and higher yields.
  • Dynamic Bond Fund: It’s an open-ended debt mutual fund that invests in debt instruments for various durations. The fund provides you with the flexibility of controlling investment tenure in different market conditions.
  • Money Market Fund: It is an open mutual fund scheme that parks capital primarily in money market instruments, including CDs, CPs, and T-bills. Money market MFs invest in money market securities with a maturity period of up to 1 year. Such funds provide a highly safe investment space and have high liquidity.
  • Ultra Short Duration Funds: These are open-ended mutual funds that invest funds in debt securities with Macaulay’s duration ranging from 3 months to 6 months.
  • Credit Risk Fund: It’s an open-ended debt mutual fund that deposits in below highest-rated corporate bonds, such as in A or AA-rated debt papers of companies. Credit Risk Fund invests at least 65% of the complete assets in bonds of companies, commercial papers, and debentures that are below the highest-rated instruments.
  • Corporate Bond Funds: These are known as open-ended schemes that invest majorly in the highest-rated corporate bonds. These bonds are further known as AAA-rated bonds from established bigger organisations. Corporate funds invest at least 80% of the entire assets in AAA-rated corporate bonds. The instruments comprise structured obligations, debentures, bonds, and commercial papers.
  • Balanced Funds: Such funds are a mix of assets, consisting of stocks and bonds. Balanced funds are also known as hybrid funds and the ratio of fixed income to equity may be either variable or fixed. Balanced funds usually invest in equities and debt in the 40:60 proportion, with either of the two outranking the other.

Based on Investment Goals

Before you dive into investing, you must first define your investment objective. If you aim to increase wealth, save taxes, and make short-term gains, then you must choose mutual funds based on investment goals. Based on the ultimate investment goals, mutual funds are categorised as:

Pension Funds

Such mutual funds are long-term investments that offer constant returns after the investor retires. Pension funds divide the investment between debt and equity instruments. The investment division ensures that the debt instruments balance the risk while offering low but steady returns and the equity component renders higher returns.

Investors can either draw their return in a combination of a fixed pension or a lump sum amount or as either of them.

Income Mutual Funds

Fixed-income MFs are a sub-category of debt mutual funds. These funds focus on distributing the fund in a combination of income assets, including security, bonds, certificates of deposits, and debentures. Skilled fund managers are initially accountable for providing a regular income to the investors while also maintaining capital protection and managing income mutual funds. Risk-averse investors pin their hopes in income mutual funds to keep their wealth for a minimum of 2 to 3 years.

Growth Mutual Funds

Such mutual funds invest the capital specifically in growth-sector equity stocks. True to its name, the main aim of Growth Mutual Funds is capital appreciation. These kinds of funds are not suitable for long-term investment options. Moreover, they carry a high-risk factor.

Tax Saving Mutual Funds

As the name suggests, Tax Saving Mutual Funds are types of funds that offer tax benefits to investors. These are also known as Equity-Linked Saving Scheme (ELSS) and funds invested in such schemes qualify for tax deductions under Section 80C of the Income Tax Act. While Tax Saving funds may have high risk, they can provide you with impressive returns if the scheme does well. So, it is a win-win investment deal.

Liquid Mutual Funds

The prime objective of liquid mutual funds includes offering liquidity. They are a sub-class of debt mutual funds, wherein the money is mainly invested in ultra-short-term and short-term instruments like treasury bills, bank certificates of deposits, commercial papers, and more. Such mutual funds provide moderate returns and are low on risk. Investors seeking short-term investments can consider parking their money in the best liquid mutual funds.

Based on Structure

The structure of mutual funds defines the ease and flexibility of the sale and purchase of funds. Based on the structure, the mutual funds are categorised into three different types that are as follows:

Close-Ended Mutual Funds

In close-ended mutual funds, investors get the opportunity to buy stock units only at the time of the initial offer period. Once these units have attained the maturity period, depositors can redeem them. Since close-ended mutual funds have less liquidity, they are listed on the stock exchange for trade to compensate for the same.

Open-Ended Mutual Funds

You can sell or purchase open-ended mutual funds all through the year. The redemption or purchase of such funds is carried out at the prevailing Net Asset Values (NAVs). In turn, investors can carry on investing if they want to. Moreover, this open-ended scheme doesn’t set any limit on how much the investor can invest.

Interval Funds

The sole purpose of this fund is to bridge the gap between close-ended and open-ended mutual funds. Quite similar to close-ended MFs, interval funds are also available as an initial offering. Later, the fund management company opens these funds for the repurchase of shares at various intervals during the fund tenure. Initial unit holders can sell their shares to the mutual fund house and unload their shares.

Based On Risk

Every investment is associated with some kind of risk, and mutual funds schemes are no different. Given below are classification of mutual funds based on risks:

High-Risk Funds

While the name may scare you off, with a better strategy and research, high-risk mutual funds can offer you higher returns compared to other funds. Moreover, these mutual funds are highly volatile, and the returns are not certain. Since high-risk mutual funds invest in volatile securities, their returns are mostly unpredictable.

Medium Risk Funds

Such types of mutual funds have moderate risk and invest in both debt and equity securities. Because of the hybrid portfolio, Medium Risk funds yield returns that transcend inflation over the medium tenure.

Furthermore, they are also less volatile than pure equity MFs but slightly riskier than pure debt funds that are low-risk funds. Moderate risk funds have an ideal investment term of three to five years.

Low-Risk Mutual Funds

The returns offered by low-risk mutual funds are relatively stable. However, this doesn’t mean that these schemes don’t involve any risk. These schemes offer higher returns. Compared to conventional assets like fixed deposits, low-risk mutual funds are more tax-efficient. Hence, it’s highly suitable for investors who prefer to stay away from risks.

In a Nutshell

Over the last two to three decades, the investment market has changed drastically and mutual funds have come a long way in the country. Investors have become more aware of financial markets. Retail investors find mutual funds to be the most preferred investment option for the benefits they offer. Therefore, if you are willing to level up your finances and still play safe,  pin your hopes on the different types of mutual funds we discussed in the blog above.

Related Resource
Tax Saving Mutual Funds
Best Mutual Funds in India 2022

Frequently Asked Questions (FAQs)

Which type of MF is best?

Tata Digital India Fund Direct-Growth, Aditya Birla Sun Life Digital India Fund Direct-Growth, ICICI Prudential Technology Direct Plan-Growth, Quant Tax Plan Direct-Growth, SBI Technology Opportunities Fund Direct-Growth, etc. are some top performing mutual funds to invest in.

What are the different types of mutual funds?

There are six distinct types of mutual funds, including equity or growth schemes, balanced funds, money market or liquid funds, fixed income or debt mutual funds, hybrid /monthly income plans, and gilt funds.

Which mutual fund invests in other mutual fund schemes?

Fund of Funds mutual fund invests in other mutual funds schemes.

Which mutual funds offer tax benefits along with high returns?

Quant Tax Plan Direct-Growth, Canara Robeco Equity Tax Saver Direct-Growth, Kotak Tax Saver Fund, Mirae Asset Tax Saver Fund Direct-Growth, and others are some high-interest returning mutual funds offering tax benefits.

Is there any type of mutual fund that will allow me to earn a profit when the market is down?

Yes, if you plan investment strategically, investing in mutual funds like SIPs in equity mutual funds could be a safe investment and have some merit too.

Tushar Gautam is a content writer inclined to enlighten his readers about the world of finance through Urban Money.

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