Types of Mutual Funds you should know about

Mutual Funds Sahi Hai! You’ve probably come across this popular campaign by the Indian Association of Mutual Funds, but what does it really mean for you as an investor?

Mutual funds are important investment tools when investors want to diversify their portfolios for long-term returns with risk distribution. Millions of investors in the financial ecosystem have faith in the mutual fund sector.

Investors consider three kinds of mutual funds: Equity, Debt, and Hybrid. However, other categories based on nature, risk, and specifications are also available, discussed below. Many people wonder what the best kind of mutual funds are.

You must assess how much risk you can take and how much you want to invest before putting your hard-earned money in mutual funds.

In this overview, let’s learn more about the various types of mutual funds so you can invest more smartly!

Types of Mutual Funds According to Asset Class

“Asset Class” means mutual funds based on the specific types of assets or securities they invest in. An asset class is a group of financial instruments with similar characteristics, risk profiles, and performance behaviors in the market.

Here are the main types of mutual funds according to asset class:

1. Equity Mutual Funds

Investors can invest in different companies through equity funds. These are considered high-risk and high-return investments, depending on market performance. Sub-categories include:

Large-cap Fund: Invested in top companies in terms of capitalisation
Mid-cap Fund: Investments in firms with medium market capitalisations, i.e., those ranked between 101 and 250 by SEBI.
Smaller Market Capitalisation: Investing in small-cap funds, those ranked below 250 by SEBI
Multi-cap Fund: Invest in all three categories above.
Sectoral Funds: Investments are diversified across sectors such as education or technology.

2. Debt Mutual Funds

Debt funds allow investors to invest their money in fixed-income securities. For example, government and corporate bonds are used for income through interest payments and capital gains. These funds are for lower risks, more stability, and capital preservation. Sub-categories include:

Liquid Funds: Investments in which investors put their money for up to 91 days
Dynamic Bond Funds: Short- and long-term bond investments. Fund managers manage interest rate movements in this category to optimise the returns these funds earn.
Short-Term Debt Funds: Range between 1 and 3 years
Fixed Maturity Plan Funds: Investments that mature after certain periods
Gilt Funds: Investments made in high-rated government securities
Credit Risk Funds: Investments made in lower-rated instruments.

3. Hybrid Mutual Funds

Hybrid funds are investments in both debt and equity instruments. Investors have diverse portfolios and allocate assets to target long-term returns and maintain stability. Sub-categories are:

Monthly Income Plans: Investments in debt securities with a small equity portion give regular income to the investor
Conservative Hybrid Funds: Invest up to 65% of their assets in bonds, with the rest allocated to shares.
Aggressive Hybrid Funds: Invest 65% of their assets in equities while the remaining focuses on debt instruments
Arbitrage Funds: Based on price differences, investors purchase securities in one market and sell them at a higher price in another

Types of Mutual Funds According to Investment Objectives

“Investment Objectives” refers to categorising mutual funds based on specific financial goals and risk profiles. Such goals include tax savings, capital appreciation, income generation, and preservation.

There are different types of mutual funds to help you achieve different financial objectives:

Equity-Oriented Mutual Funds

Here are some mutual funds that are categorized according to different objectives under equity funds:

1. ELSS Funds

ELSS funds are for those who prefer tax benefits under Section 80C. These funds come with a lock-in period of 3 years and allow you to claim deductions up to ₹1.5 lakh. The minimum investment is made in equity & equity-related instruments with 80% of total assets.

2. Growth Funds

Growth funds invest in firms with immense growth potential, generally in equities. They are best for investors with good knowledge of the market and a higher risk appetite.

Debt-Oriented Mutual Funds

Here are some mutual funds that are categorized according to different objectives under debt funds:

1. Liquid Funds

Liquid funds are part of debt funds. As discussed above, they have maturities of up to 90 days. Investments can be made in debt and money market securities.

2. Fixed Maturity Plans

These mutual funds have a lock-in period and are low-risk investments. They can be classified as ‘Medium to Long Duration Fund’ or ‘Long Duration Fund’.

These are investments made in Debt and Money Market Instruments, with Macaulay durations between 4 and 7 years in the former category and greater than seven years in the latter category.

3. Income Funds

Income funds are investments in debt securities specifically for investors who want to maximise wealth by taking minimal risk.

4. Money Market Funds

Money market funds are low-risk investments that are made in short-term debt securities. This is for investors who want to save their money quickly. These investments generally come with a one-year lock-in period.

Hybrid-Oriented Mutual Funds

Here are some mutual funds that are categorized according to different objectives under hybrid funds:

1. Capital Protection Funds

Capital protection funds keep your principal amount safe. They are similar to hybrid funds, which invest a large portion in debt instruments and a smaller portion in equities.

2. Balanced Advantage Funds

These funds are balanced between stocks and debt mutual funds according to market conditions. The objective of investing in such funds is to balance risk and return.

Others

Fund of Funds: FoF schemes don’t invest in stocks or bonds but in other mutual fund schemes across various asset classes and categories.
Gold Funds: These investments are made in Gold ETFs, which are based on the price of gold.

Types of Mutual Funds According to Portfolio Management

“Types of Mutual Funds According to Portfolio Management” refers to mutual fund investments based on how the fund’s portfolio is managed, the investment strategy used, and the fund manager’s role.

Here are the different types of mutual funds:

Active Mutual Funds: Fund managers manage active funds and try to maximise returns by buying and selling securities.
Passive Mutual Funds: Passive funds don’t require much management, as they stay in the same securities and proportions as the index.

Types of Mutual Funds According to Specialty

“Types of Mutual Funds According to Specialty” means mutual funds based on their focus on specific investment themes, sectors, or strategies designed to meet particular investment preferences.

Common types are:

1. Real Estate Funds

These investments are made in organisations that deal with real estate development. Like sectoral funds, which invest in a particular sector, real estate funds invest in development and management.

2. International Funds

This means investing in foreign stock exchanges. Such funds offer diversification beyond domestic markets. A similar category is global funds, which refer to investing in global companies.

3. Exchange-traded Funds

ETFs are funds that can be traded on stock exchanges. They follow an index, sector, or commodity that has real-time pricing.

Types of Mutual Funds According to Risk Appetite

“Types of Mutual Funds According to Risk Appetite” means mutual funds based on the level of risk they involve and the type of investor they are suited for. These include:

Low-Risk Funds: High-quality bonds and fixed-income securities
Medium-Risk Funds: Investments in hybrid schemes like equities and bonds
High-risk Funds: Offer the advantage of higher returns, but these are purely equity funds

Investing in Different Types of Mutual Funds

Mutual funds come with risks and high returns. Investors must maintain balance in their portfolios. Here are some of these types of mutual funds:

1. For Novices

They should consider Index funds, or ETFs, which are cheaper, more diversified, and have lower-risk plans. Additionally, there are balanced funds that combine debt exposure and ownership interest.

2. For Experienced Investors

They should consider owning equity funds from a long-term perspective and investing in tax-saving funds to reduce their tax burden.

3. For Conservative Investors

Debt funds would be their choice, providing secure investments at low risk. Furthermore, they should look into Conservative Hybrid Funds, which balance equity and debt.

4. For Global Exposure Seekers

Such investors can invest in global or international funds that are not dependent on domestic market performance.

5. For Income-Oriented Investors

They can trust income or corporate funds to help them generate income through investments in fixed-income securities.

Conclusion

Invest smartly in different types of mutual funds and build your wealth over time. These mutual funds help you diversify your portfolio and create a robust portfolio by the end of the investment period.

You must consult professional financial advisors if you’re still unsure which type of mutual fund is best for you. They can help you create a diversified portfolio and choose the best mutual fund schemes.

FAQs

1. What is India’s best mutual fund type?

Financial goals and risk tolerance play a major role in assessing which fund is the right option. For instance, ETFs are the best choice for diversification, and ELSS funds offer the best tax advantages.

2. Should I invest in MFs or FDs?

Mutual funds are an option if you’re searching for high returns, but you should also be aware of the risk involved. FDs are an intelligent investment because they are not dependent on the market and offer a guaranteed return.

Mutual funds provide larger returns, but these are contingent on market volatility.

3. What kind of mutual fund offers the best returns?

Equity fund investments carry the highest risks but also the highest returns. Therefore, you should assess your risk tolerance and diversify your assets across various accounts.

4. What is the required amount to invest in large-cap funds?

Start with ₹500 to ₹1000 if you want to invest in a lump-sum large-cap fund. You only need ₹100 to begin a systematic investment plan (SIP).

5. Is there an upper limit on investments made in mutual funds?

Mutual fund investments have no upper limit; you can make one or more investments in schemes similar to each other or different mutual fund houses.