Types of Mutual Funds in India

Schemes are categorised into different types of mutual funds based on their investment instrument, objectives, management and maturity. Investors can explore a diverse range of schemes to select the most suitable types. These categories are designed in such a way that they suit different classes and aspirations of investors. Understanding what types of mutual funds can help investors plan allocation for their portfolios.

How Many Types of Mutual Funds are there in India?

There are broadly 4 types of mutual funds, further classified into more types for specification. Another crucial feature of mutual funds is that they can have more than one type of asset in one scheme. However, the majority allocation decides the classification for the scheme.

Categorisation Based on the Maturity

The period of investment and conditions of liquidity decide the maturity of a scheme. Based on such maturity period there are three different types of mutual funds in India:

• Open-ended: These are regular schemes, which investors can purchase or sell anytime in the market. The only condition for their transaction is the business day.
• Close-ended: These schemes have a pre-decided maturity period, which does not allow investors to transact their units. However, these schemes are listed on the exchange to ease liquidity.
• Interval: A period decided for transacting mutual funds units is known as an interval. Some schemes allow this interval. A minimum 15-day gap should be there between two interval periods.

Categorisation Based on Investment Asset

It is a crucial and wide classification of schemes into 4 types of mutual funds, based on their investment instrument. For specification, the Securities Exchange Board of India (SEBI) has classified them as follows:

1. Equity funds

These schemes have major investments in the equity markets. Moreover, a minimum 65% of investments is prescribed for the classification of every type. Investors with long-term vision and higher potential risk appetite are comfortable investing in these funds. Some types of these funds are multi-cap funds, dividend yield funds, value funds, sectoral funds, etc.

2. Debt funds

Mutual fund schemes investing majorly in bonds, debentures, government securities and money market funds are categorised as debt funds. Among the different types of mutual funds in India, these funds are a unique avenue to get investment exposure in the debt market at such a low cost. The schemes in this category are grouped according to their tenure, risk level and specific instruments. Gilt funds, credit risk funds, liquid funds, etc., are some of its types.

3. Hybrid funds

As its name suggests, these funds are a mixture of debt and equity. However, the weightage of equity determines the risk levels and intensity of these funds. Some hybrid fund types are arbitrage, balanced, aggressive, etc.

4. Other funds

The scope of investments is wide enough, and different types of mutual funds seek to cover it. Some unique funds like gold funds, funds of funds and international funds.

Categorisation Based on Management

In mutual funds, the added advantage of professional fund management usually attracts investors. Therefore, types of mutual funds in India can also be categorised based on the efforts of funds managers for its management as follows:

1. Active Funds

These funds are specifically for investors willing to earn higher returns than regular markets. Fund managers select the strategies that outperform the market. However, due to these additional efforts, the expense ratio for managing this type can be higher.

2. Passive Funds

Funds which do not require extensive management and seek to match the market performance are known as passive funds. Exchange-Traded Funds (ETFs) are a classic example for this. Moreover, investors may incur less cost in their management.

Categorisation Based on Investment Objectives

Diverse experiences and opinions give rise to different investment objectives among investors. Different types of mutual funds are categorised among some of these common objectives as follows:

• Growth

Usually, these schemes seek investment for a long time for capital appreciation through compounding effects. Equity schemes are categorised under this group. The main concern in these funds is short-term volatility. Investors should be able to manage without making hasty decisions.

• Income

Along with moderate capital growth, investors mainly benefit from potential income earning opportunities in the short term under this scheme. Usually, fixed-income asset schemes or debt schemes are considered under the income group.

• Liquid

Investors focusing highly on short-term incomes can invest in liquid or overnight funds. These invest in money market instruments with short validity. 

Selecting the Suitable Types of Mutual Funds

The wide acceptance of mutual funds in India can motivate investors. However, one type may not suit every investor. Understanding how many types of mutual funds are available for investment and their suitability is crucial. Investors can determine these aspects while selecting:

• Investment aspirations
• Time or maturity for investment 
• Risk levels
• Investment capacity
• Desired asset

After this, investors can select the proper scheme based on different factors such as fund house, manager, expense ratio, etc.

Conclusion

Investing in mutual funds should be an informed decision rather than following the trend. Schemes are categorised based on asset, maturity, management and objectives. Investors can explore what are different types of mutual funds in India and invest according to their suitability.Starting your investment journey? Log in to PowerUp Money or download the financial management app today!