Mutual Funds are one of the best investment products for long-term investors. Here we come with a detailed explanation of the different types of mutual funds in India. As the term “Mutual” mentions, the process is to collect small funds from various investors across the globe, invest in selected shares of companies, and manage by a Fund Manager under an Asset Management Company (AMC).
If you are new to Share, we recommend you go through what SENSEX has produced as returns in 35 years. Shares are not everyone’s cup of tea. It requires a minimum purchase of 1 share, and some share prices like MRF are at Rs. 75000. So, Mutual Funds can be a viable option to invest in multiple shares. As the investment diversifies, the level of risk comes down.
This article elaborates entirely on the different types of mutual funds in India. In 1963, India launched their 1st ever mutual fund the United Trust of India (UTI).
This was an initiative by the Indian government and the Reserve Bank of India to induce personal savings and escalate the funds for public organizations to grow the nation. However, till the time mutual funds were introduced into the financial segment of the country, it was a bit difficult for middle-class people to enter the share market. Yet, as an aspirant investor, you should go through the risk ratios of mutual funds
Different Types of Mutual Funds in India
The mutual funds in India are majorly classified based on,
- Asset Class
- Structure
- Investment Goals
- Risk Calibrations
- Special Categories
Types of Mutual Funds in India Based on Asset Class
Asset classes in mutual funds are broadly classified into Equity, Debt, and Hybrid (both Equity and Debt). Under this classification, the Mutual fund types in India are,
- Equity Mutual Funds
- Debt Mutual Funds
- Money Market Funds
- Hybrid and Balanced Funds
- GILT Funds
Checkout our article on the two best mutual funds to invest in various categories
1. Equity Mutual Funds
When a mutual fund scheme holds complete asset allocation dependency on the Equity or Shares market, it is called Equity Funds. It suits well for investors who either don’t have much time to research or don’t have a considerable amount to invest in the Equity market.
Yet has a craze for investing and building their wealth between 15-20% CAGR for a term of 15 to 20 years. Yet, this is one form of investment where the average return of 20 years is estimated to beat inflation by 2 to 3 times. Therefore, we request that any investor with long-term goals prefer investing in equity mutual funds.
There are multiple schemes mapped under Equity Mutual Funds,
- Large-cap funds
- Mid-cap funds
- Small-cap funds
- Flexi-cap funds
- Multi-cap funds
- ELSS (Equity Linked Savings Scheme, etc)
Every fund has its advantages and disadvantages. These funds are regulated by SEBI
2. Debt Funds
Do you invest for short-term goals holding a tenure of fewer than 5 years? Aren’t you investing in bonds as the minimum value of the investment is 10 lakhs+? If so, here is the option. Yes, it’s a debt mutual fund.
Investing in various government bonds, commercial debentures, public sector bonds, etc., in a small portion with the help of AMC (Asset Management Company) and fund manager is known as Debt mutual fund.
The performance has always been better than fixed or recurring deposits. It is highly dependent on the Repo interest rates. Yet, you can generate a decent return of 7% to 9% CAGR annually. Check out our article on the best debt funds to invest in.
3. Money Market Funds
The mutual funds that park the funds in treasury bills (T-Bills), CP’s (Commercial Papers), Government securities, etc. are highly liquidable assets with maturity periods of fewer than 6 months. The money market is also known as the cash market, and it is one of the fixed-income funds types. We advise people to accumulate emergency funds with the help of Debt funds.
Money Market Funds are not focused on by many individual investors as the results are not similar to equity mutual funds. But, the importance of these funds is known and established by corporate companies. It’s always necessary to understand the pros and cons of every investment and bifurcate the asset allocations. The risk and reward are very low compared to other types of mutual funds in India.
4. Hybrid and Balanced Fund
Hybrid or Balanced Funds hold securities like shares and bonds. It’s a viable option for investors who look for a decent return (9% to 10%) with moderate risk. The ratio of investment can be 60% in equities and 40% in debt or vice versa.
Despite being types of mutual funds in India, we at Fincareplan won’t recommend them as one of the top picks for investors, as many other types could yield better returns with the same risk measurables.
5. GILT Funds
Do you know about G-Sec bonds? It’s government edition bonds that hold very minimum risk like credit risk. So you can rest assured of your principles and returns as you invest in one of the developing governments.
The mutual funds that have a portfolio of minimum funds of 80% in G-Sec bonds and 20% in other fixed-income securities are known as GILT Funds.
The NAV (Net Asset Value) is highly influenced by bond yield, maturity period, interest rates, etc. It has few fluctuations in the short term, but when invested long term, the returns will be 9%-10% annually.
Types of Mutual Funds in India Based on Structure
There are two types of structures on which a maximum of mutual funds are classified in India. Open-Ended Funds, and Closed-Ended Funds
1. Open Ended Funds
Open-ended funds don’t imply conditions for investors on a specific period (lock-in), and minimum units to be traded. This provides the investors freedom of investing and exiting from any fund. So, open-ended funds don’t have any fixed maturity.
2. Closed Ended Funds
Closed-ended funds have a fixed maturity period, and you can’t invest or exit without any constrain or conditions. This fund either comes with a definite period of investment or minimum units of any fund.
An Investor will be provided the privilege of investing in this type of mutual fund only during the NFO (New Fund Offer) period and automatically will exit on the maturity date.
Types of Mutual Funds in India Based on Investment Goals
1. Growth Funds
Growth funds are termed to be highly aggressive funds that yield a huge return. The fund manager who manages these funds tries to buy the shares of growth-oriented sectors (Banks, IT, Infrastructure, etc.)
The maximum of assets is parked only inequities. These growth funds attract millennial Investors (those born after the 1980s). As the performance is high, the risk profile is too high. The only recommendation from the Fincareplan part is, “If you choose growth funds, you should be a long-term investor, preferably SIP”
2. Income Funds
Income funds are managed to provide monthly or yearly income to the investor by SWP (Systematic Withdrawl Plan). The Fund Manager invests in high dividend-yielding shares, bonds, CDs (Certificate of Debentures), government securities, corporate bonds, money markets, etc.
The only goal of this fund is to generate positive returns in both rising and declining interest rate markets. They follow two strategies to maintain a positive return.
- Income through Interest rates by holding Investments till maturity
- Making a profit by selling in the debt market.
3. Liquid Funds
One of the low-risk funds among all mutual funds in India. Liquid funds are generally invested the securities that hold a maturity period of 91 days.
Liquid funds are the only funds where NAV is calculated for 365 days, whereas all other mutual funds are calculated only for the number of business days.
Liquid funds are the most preferred form of saving for emergencies as the maximum holding period is only 7 days. This fund always performs better than fixed deposits or post office saving schemes
4. Tax Saving Funds
ELSS (Equity Linked Saving Scheme) is the only tax-saving fund available in India. You can avail of tax exemption up to 1.5 lakhs in a year under section 80c by ELSS.
There is confusion in the investor’s mind on preferring ELSS vs. PPF. ELSS comes with a minimum lock-in period of 3 years. You can choose ELSS as your tax exemption material if you’re a long-term investment. It holds high risk and same the rewards too.
5. Capital Protection Funds
When people reach the age of 50 or more, the biggest concern over investment would be to save capital. This is not a bad decision as Warren Buffet usually points out in “Preserving the Capital”.
In such cases, capital protection funds would be the right choice. This fund structure is similar to a balanced fund. But, a small portion will be in Equity, and 60%+ will be in debt instruments, G-Sec Bonds, etc.
6. Fixed Maturity Funds
Fixed Maturity funds are similar to closed-ended funds, but the investment is only done in the bond market or money market. The maturity will be fixed while launching the NFO (New Fund Offer), and the maturity of investment can happen on the same or prior to the period fixed in the papers. The maturity period can be between 1 month to 5 years.
You might think, is fixed maturity funds are the same as fixed deposits. No, fixed-maturity funds score better than fixed deposits when it comes to returns
7. Pension Funds
Pension is one of the prime parts of life. Unfortunately, investors tend to invest any amount when they hear the word annuity without understanding the risk and other profiles.
That’s why many private companies have come up with pension funds/schemes. Before investing in any pension funds/scheme, go through all relevant documents and the investment materials they estimate to include in the portfolio.
If you decide to work until retirement, the best pension fund investments can be NPS (National Pension Scheme) and EPF (Employee Provident Fund). If not, invest in index or blue-chip funds to build wealth that can be materialized in your retirement life.
Types of Mutual Funds in India Based on Special Category
1. Index Funds
Index funds are one the best mutual funds for investors who don’t have much awareness or time to learn about the market. The mutual funds that invest in indices like Nifty 50, Nifty Next 50, Nifty 100, SENSEX, etc., are termed index funds.
Even the Gem Warren Buffet suggests investing in an Index fund, as, in the long run, it will outperform all the actively managed mutual funds. The most significant advantage of Index funds is performance will be 12%-14% if invested in SIP for 20-25 years. It is also known as a passive fund and holds a minor expense ratio compared to any type of mutual fund in India.
2. Sectoral Funds
Any mutual fund that invests only in a particular sector of shares (companies) is called a sector fund, also known as a theme-based mutual fund. These funds hold high volatility as the flag can fly as green and drop red at any trading period.
It is not advised for any investor who doesn’t have a risk appetite and deep knowledge of why your fund grows or plunges. A few sectors where you can rely upon consistent performance are IT and Pharma.
3. Funds of Funds
As the name defines, the fund manager will invest in multiple mutual funds and diversify the portfolio. From an investor’s eye, it’s like investing in numerous mutual funds by investing in one. Therefore, funds of funds are also known as multi-manager mutual funds.
4. Emerging Market Funds
This is one of the riskiest investments as the complete portfolio holds only the shares of an emerging company. Unlike other mutual funds, the chance of negative returns is high. In the other case, you can earn an unimaginable hike in investments. These emerging companies are any nation’s future contributors if it become unicorns.
5. Internation/Foreign Funds
One of the assets that every investor loves to hold in their portfolio. International/Foreign funds compromise of securities (bonds/equity) of particular foreign companies. Investing in countries like the USA will provide you with two benefits,
- Share Price Growth
- Appreciation of Dollar (USD) price against Indian Rupee (INR)
6. Global Funds
The significant difference between global and foreign funds is that foreign funds comprise only foreign company shares. In comparison, global funds invest in both domestic and foreign companies. Moreover, global funds account for many disadvantages as they invest in multiple country securities more than an advantage. In addition, national policies of different country’s currency valuations can be a threat.
7. Real Estate Funds
Investing in real estate property needs a huge fund and it occupies 70-90% of the total asset allocation. But, you can invest in Real Estate Investment Trust (REIT) or companies.
8. Commodity-Focused Mutual Fund
This fund comprises commodity securities like gold, silver, copper, etc. Quite often, only a few investors show interest in such funds. This is because commodity funds can be high risk, and the returns won’t match the scale its risk meter stands by.
9. Exchange Traded Fund
ETF generally resembles as same as an Index fund, but there are a few distinctions. When you buy indices directly from the secondary market, it’s known as Exchange Trade. The funds with multiple exchange trades are known as Exchange-traded funds (ETF)
10. Asset Allocation Fund
Have you ever wanted to choose a fund that invests in securities like a bond, equity, and Gold? If so, the fund is known as an asset allocation fund. When the gold price comes down, every investor knows the share price hikes up. When the share price moves forward, the gold price plunges. Returns from bonds will be moderate. It is one of the mixed and crazy types of mutual funds in India
Types of Mutual Funds in India Based on Risk Profile
1. Very Low Risk Funds
Fixed Income securities with less than 180 days of maturity fall under low-risk funds. Liquid funds and Ultra Short Term Funds fall under this category. Investors can earn an annual return of 7% to 8%. These funds help any investor to fulfill very short-term goals.
2. Low Risk Funds
Low-risk funds can be any fixed-income securities that yield better returns of 7 to 9% annually. When the market is in a volatile state, financial advisors and fund managers recommend parking the funds in either short-term funds, arbitrage funds, or balanced funds
3. Moderate Risk Funds
The asset allocation holds equity securities at maximum when it comes to moderate-risk funds. Large Cap Funds, Index Funds, and a few Blue Chip funds come under moderate risk funds. These funds yield a return of 12%-14% annually. The risk profile will be shallow if invested in SIP for an extended period
4. High Risk Funds
High-risk funds are a cup of tea for aggressive investors. These funds need an active and highly experienced fund manager. As it can yield even 20% CAGR, or return a negative. It is like a double-edged sword. Mid Cap funds, Small Cap funds, ELSS, sectoral funds, etc., fall under high-risk profile