Types of Mutual Fund Schemes in India: Learn their Differences, Risks,& Classification
Mutual funds are a type of investment that allows investors to pool their money together and invest in a variety of assets, such as stocks, bonds, and money market instruments. Mutual funds offer several advantages over other types of investments, such as diversification, professional management, and low costs. In this blog post, we will discuss the different categorisations of mutual funds based on risk, fund structure, investment goals, and other criteria.
Features of Mutual Fund
- Diversification: Essential in reducing investment risk, diversification is a hallmark of mutual funds. These funds pool investor capital to allocate across a broad spectrum of assets — from stocks to bonds and more, mitigating reliance on any single investment’s performance.
- Professional Management: The cornerstone of mutual funds is the expert fund management overseeing portfolio selections. These managers apply their market insight to choose securities, embodying the benefits of investing in mutual funds by removing the burden of direct portfolio oversight from investors.
- Liquidity: Mutual funds excel in providing liquidity, allowing investors to redeem shares at the prevailing net asset value (NAV) swiftly, a feature invaluable for those requiring immediate fund access.
- Affordability: With mutual funds, entering diversified investment landscapes becomes attainable, emphasising mutual fund options for individuals with limited capital. This makes mutual funds an ideal starting point for learning mutual funds.
- Variety of Investment Options: Offering a wide array of choices, from equity funds and debt funds to sector funds and beyond, mutual funds cater to various investor goals, risk tolerances, and timelines, highlighting the different types of mutual fund schemes available.
- Transparency: Subject to regulatory mandates, mutual funds must disclose extensive details on their objectives, holdings, and performance metrics, enhancing investor knowledge and decision-making.
- Systematic Plans: Features like Systematic Investment Plans (SIPs) and Systematic Withdrawal Plans (SWPs) underscore mutual funds’ adaptability, promoting regular saving or providing income, respectively, and showcasing the various types of mutual fund schemes.
- Tax Benefits: Certain mutual funds, such as Equity Linked Savings Schemes (ELSS), offer tax advantages, enhancing returns for investors by leveraging mutual fund schemes in India.
- Automatic Reinvestment: The option for automatic reinvestment of dividends and gains in many mutual funds simplifies the growth of investments over time, a testament to the features of mutual fund investments.
- Accessibility: The rise of digital platforms has democratised access to mutual funds, making it easier than ever for investors to invest in equity funds, debt funds, and sector funds, among other types of funds.
What are the Types of Mutual Funds?
There are many different types of mutual fund types available, and they can be categorised in a number of ways. Let’s have a look at them now.
Classification Mutual Funds India
The different types of mutual funds in India are:
- Based on asset classes
- Based on the organisation structure
- Based on investment objectives
- Based on portfolio management
- Based on speciality
- Based on risk appetite
Types of Mutual Funds Based on Asset Class
Here is the list of different types of mutual funds based on asset classes:
- Equity Funds: Investing in equity (stocks) and related instruments characterises equity funds. They may carry the potential for good returns but also come with a degree of risk. Thus, these funds can be suitable for investors who wish to invest for at least 3-5 years. Equity funds come in various types and can be further categorised based on their market capitalisation.
- Debt Funds: Debt funds invest in debt instruments, such as government bonds, company debentures, and other securities delivering fixed income. One can consider it a reliable classification of mutual funds in India. Similar to equity funds, debt funds come in various types. It depends on the maturity period of the debt and money market instruments.
- Balance/Hybrid Funds: Balance or hybrid funds are investment vehicles that combine both equity and debt components within a single fund. Typically, they maintain a mix of stocks and fixed-income securities This may offer a middle-ground approach that balances good returns with a moderated risk.
- Money Market Funds: Money market funds are a type of mutual fund that primarily invests in short-term, low-risk securities like Treasury bills and commercial paper. Money markets are also referred to as cash markets.
Type of Mutual Fund Scheme Based on Structure
Here is the list of different types of mutual fund structures:
- Open-End Mutual Fund: Open-end mutual funds are the most common type of mutual funds. These funds continuously issue new shares and redeem existing shares at their net asset value (NAV) based on the current market value of the fund’s underlying securities. Open-end funds may allow investors to buy and sell shares at the end of each trading day. Thus, professional portfolio managers make investment decisions on behalf of the fund.
- Closed-End Mutual Funds: Closed-end mutual funds have a fixed number of shares issued through an initial public offering (IPO). After the IPO, these funds trade on stock exchanges like regular stocks. Unlike open-end funds, closed-end funds may not continuously issue new shares or redeem existing shares. Therefore, the supply and demand factors in the market can determine the price of closed-end funds.
- Interval Funds: Interval funds combine the features of both open-ended and closed-ended funds. They are available for purchase or redemption only at specific intervals, determined by the fund house and remain closed the rest of the time. Additionally, no transactions are allowed for a minimum of two years. Investors aiming to accumulate a lump sum for a short-term financial goal, typically within the range of 3 to 12 months, can find these funds well-suited.
Type of Mutual Fund Scheme Based on Investment Goal
Here is the list of various types of mutual funds in India based on investment objectives:
- Growth Funds: Growth funds are mutual funds that focus on capital appreciation by investing in stocks or other growth-oriented securities. The primary objective of growth funds is to generate long-term growth by investing in companies with high growth potential. They may focus on different market capitalisations, such as large-cap, mid-cap, or small-cap stocks, depending on their investment strategy. Growth funds tend to have higher risk and volatility compared to other types of mutual funds.
- Income Funds: Income funds, also known as bond funds or fixed-income funds. This classification of mutual funds primarily invests in fixed-income securities such as government bonds, corporate bonds, and municipal bonds. The primary objective of income funds is to provide a steady stream of income to investors. Income funds tend to have lower risk and volatility compared to equity funds.
- Liquid Funds: This type of mutual fund scheme primarily invests funds in short-term or very short-term instruments. This may include T-Bills and CPs, aiming to ensure liquidity. With low risk and moderate returns, these investments suit individuals with short-term investment horizons.
- Tax Saving Funds (ELSS): These funds primarily focus on investing in equity shares, making investments in them eligible for deductions under the Income Tax Act. While they may carry risks, they also present the potential for substantial returns if the fund performs.
- Pension Funds: Asset management companies introduce pension funds, also known as retirement funds, as a solution for retirement planning. These funds typically have a lock-in period of a minimum of five years or until retirement, whichever occurs earlier. Thus, they can be managed as equity, debt, or hybrid funds, leading to the presence of multiple plans within this category.
- Fund of Funds: Also known as multi-manager funds, fund of funds invest in a portfolio of other mutual funds rather than directly in individual securities or assets. Through diversified investments in multiple funds, these funds aim to mitigate investment risk and potentially enhance returns.
- Gold Funds: Gold funds are invested in gold exchange traded funds (ETFs). Their objective is to mimic the performance of gold prices in India. It may offer investors the chance to invest in gold without possessing the physical metal.
Types of Mutual Fund in India Based on Portfolio Management
Let’s have a look at the 2 types of mutual fund schemes in India based on the portfolio management of mutual funds in India.
- Active Fund: In active funds, the fund managers actively manage the portfolio by making sound decisions by deciding which securities to buy and sell. These funds can be structured to surpass a designated benchmark index or attain superior returns by employing active management strategies, showcasing one of the benefits of investing in mutual fund schemes.
- Passive Funds: Passive funds are designed to replicate the performance of a particular market index. They are called ‘passive’ because they do not engage in active stock selection or market timing strategies, making them a distinct type of equity fund among the types of funds available in the market.
Types of Mutual Fund in India Based on Risks
Based on the risk appetite, there are 4 kinds of mutual funds or 4 types of mutual funds, as mentioned below.
- Very Low Risk Mutual Funds: These funds, representing low risk mutual funds India, typically refer to investment options that offer minimal risk, aligning with mutual fund categories India for conservative investors who aim to prioritise capital protection over the potential for high returns.
- Low-Risk Mutual Funds: Low-risk mutual funds can be ideal for investors who prioritise capital preservation over growth. Also, who might be willing to accept lower returns in exchange for minimal risk. These low risk category mutual funds, a part of the broader kinds of mutual funds in India, may invest in low-risk securities such as cash, short-term debt, and government bonds. Money market funds and short-term bond funds can be popular examples of low-risk mutual funds.
- Moderate Risk Mutual Funds: Moderate risk mutual funds, a category within the basic types of mutual funds, can be suitable for investors who seek a balance between capital preservation and growth. These funds invest in a mix of equities and fixed-income securities to provide a moderate level of risk and return. Balanced funds and index funds are popular examples of moderate-risk mutual funds.
- High-Risk Mutual Funds: High-risk mutual funds can be suitable for investors who seek high growth potential and might be willing to accept risks and volatility in exchange for good returns. These funds may invest in high-risk securities such as small-cap stocks, emerging market equities, and sector-specific funds. Aggressive growth funds and sector-specific funds can be popular examples of high-risk mutual funds.
Type of Mutual Fund Schemes Based on Speciality
Speciality funds are also known as sector-specific or thematic funds. Now, let’s have a look at a few mutual fund examples of thematic funds below:
- Sector-Specific Funds: Sector-specific funds, also known as speciality funds, are mutual funds that focus on investing in a specific sector or industry, such as technology, healthcare, energy, or consumer goods. Sector-specific funds tend to have higher risk and volatility compared to diversified funds due to their concentrated exposure.
- Index Funds: Index funds are mutual funds that aim to replicate the performance of a specific market index, such as the S&P 500 or the Dow Jones Industrial Average. These types of mutual fund schemes invest in the same securities in the same proportion as the index they track. These types of mutual funds may have lower portfolio turnover and lower expense ratios compared to actively managed funds. Index funds can be suitable for investors who prefer a low-cost, diversified investment approach.
- Global Funds: International funds, commonly referred to as global funds, enable Indian investors to participate in foreign securities and markets. Investing in international markets offers investors the opportunity to diversify their portfolios.
- Commodity-Focused Stock Funds: Commodity-focused stock funds concentrate their investments in companies related to the production, exploration, or distribution of commodities. These funds provide investors with exposure to the performance of commodity markets through equities.
- Asset Allocation Funds: Also known as balanced funds, dynamically distribute investments across a mix of asset classes, such as stocks, bonds, and cash equivalents.
- Gift Funds: Yes, you have the option to gift a mutual fund or a SIP to your dear ones, ensuring their financial well-being in the future.
- ETFs: Belongs to the index funds category, Exchange-Traded Funds (ETFs) are traded on exchanges. ETFs have opened up new avenues for investment, allowing investors to access global stock markets and specialised sectors. Similar to a mutual fund, an ETF allows traders to engage in real-time trading, experiencing fluctuating prices throughout the day.
To Wrap It Up…
Mutual funds offer an investment solution to investors who do not have the expertise to manage their portfolios directly. Start investing in mutual funds, and understanding the different types of mutual funds is essential for successful investing. By categorising mutual funds based on asset class, structure, investment goals, portfolio management, risks and other criteria, investors can align their investment needs and preferences with suitable options. Whether you are a conservative investor seeking stability or an aggressive investor chasing higher returns, there is a mutual fund category to match your risk tolerance and investment objectives.
As always, investors must do their own research and/or consult their financial advisor before investing.
FAQs
Mutual funds are an investment vehicle where investors pool their money to create a professionally managed portfolio of stocks, bonds, or other securities, providing diversification and expert fund management.
Mutual funds pool money from multiple investors to invest in a diversified portfolio of stocks, bonds, or other securities. Professional fund managers make investment decisions, and profits or losses are shared among investors.
The exact number of mutual fund types in India varies as schemes evolve, but falls broadly into four main categories based on asset class: Equity, Debt, Money Market, and Hybrid. Each category then branches into sub-categories like growth or income, offering investors diverse options.
The three main types of mutual funds in India are Equity Funds, Debt Funds, and Money Market Funds.
There are mainly seven types of mutual funds in India. Such as gilt funds, income funds, short-term funds, credit opportunities funds, fixed maturity plans (FMPs, liquid funds, and monthly income plans.
Some mutual funds may allow investors to switch between different funds within the same fund family. This process involves selling units of one fund and using the proceeds to buy units of another fund within the same family. The terms and availability of switching vary based on the mutual fund company.
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