The Various Types Of Mutual Funds To Choose The Best For You!


In India, the mutual fund industry is growing exponentially. According to Association of Mutual Funds in India, its average assets under management (AAUM) are at an all-time high and stood at Rs. 26.33 lakh crores (INR 26.33 trillion) for the month October 2019.

The total number of accounts (or folios as per mutual fund parlance) as of October 31, 2019, stood at 8.63 crores, while the number of folios under equity, hybrid and solution-oriented schemes, stood at 7.71 crores.

Are you considering acquiring numerous benefits of mutual funds by investing in it? You must have come across hundreds of schemes which must have left you bewildered.

There are more than 40 asset management registered funds operating in India; offering hundreds of mutual funds across each category. The wide range of options available might astound you and administer no help to arrive at any logical conclusion.

Generally, it is recommended to assess your financial goals and risk-tolerating ability and also look at the asset allocation of each fund before selecting the best among them. To do this, you need to understand the broad range of classification of mutual funds.

Here is a description of each of the categories and subcategories to assist you to make wise decisions.

  1. Types based on Maturity period
  • Open-ended funds

These are the most common types of funds where investors can look at the NAV continuously and invest in them. You can redeem at any time when you need the money and it has no fixed maturity period. The company can issue more units as per its requirement. Thus, the key features of these types of funds are liquidity and flexibility of time.

  • Closed-ended funds

These funds have their unit capital fixed and they sell specific units. These funds have a New Fund Offer (NFO) period and investors cannot buy the units after this period and are asked to invest during the initial launch period only. Neither the new investors enter nor does the existing investors’ exit till the stipulated period get over. However, to provide a way to the investors, to exit before the term, SEBI instructs the investors to either go for repurchasing option or listing their funds on stock exchanges.

  • Interval fundsbest Mutual funds

These funds integrate the characteristics of both open-ended and closed-ended schemes. These funds allow subscription and redemption at pre-determined intervals as decided by the fund houses and are closed rest of the time. They may be traded on the stock exchange or perhaps open for redemption during specific intervals at NAV related rates.

  1. Types based on Asset Class
  • Equity funds

Equity funds are the funds who invest in stocks. These funds invest in share companies listed on the stock exchange (Bombay Stock Exchange or National Stock Exchange). Though they offer high returns, they are often risky. According to the overall positioning of funds, equity funds can be categorized into:

  • Small and mid-cap funds: These funds invest in small and mid-cap companies and there is high risk involved. These companies have the potential to climb up in the market and perform well in the future.
  • Large-cap funds:These funds invest in large and popular companies. They are front runners in the market and have stayed there for quite a long period and are considered stable and the investors tend to ride on their profit and gain capital.
  • Multi cap funds:Multi-cap funds invest in all the three funds i.e. small, mid and large-cap funds.
  • Sector funds: Sector funds are the mutual funds dealing with a particular sector of the economy such as banking, pharmaceutical etc. For investing in these type of funds, you need to have detailed and comprehensive knowledge about the associated companies.
  • Diversified funds: These funds tend to explore different asset classes and not stick to one asset class. Investors who look for diversification across different sectors can choose these types of funds.
  • Debt funds

A bond fund or debt fund invests in bonds, securities, treasury bills and other money market instruments. Debt funds are less risky than equity funds and typically pay periodic dividends and generate steady income. Most common debt funds are:

  • Monthly Income Plans: These plans invest in debt funds and strive to generate your dividend every month.
  • Gilt funds:Gilt funds invest in government securities and are extremely safe.
  • Ultra short-term and short-term debt funds:Debt funds investing in maturities extending from 1 to 3 years. Old-school investors prefer them as they are immune to interest rate fluctuations.
  • Dynamic bond funds:According to the fluctuations in the interest rate, the fund manager keeps on changing the composition of the portfolio.


  • Hybrid/Balanced funds

These funds are a stir of bonds and stocks where the ratio between equity and debt funds can be fixed or fluctuating. They balance the level of risks and investors are provided with growth along with regular steady income.

  • Money market funds Investors also invest in money or capital market where the government issues short term investment products such as the certificate of deposits, commercial papers, T-bills etc. They are less risky and help in generating moderate-income and preserving capital by disbursing dividends.


  1. Types based on Investment Objectivemutual Funds
  • Growth funds

Growth funds are those funds which have the sole objective of capital growth or appreciation. These funds invest a considerable part of the money in equity and equity-related securities. You can select these types of funds if you have a higher risk appetite and want higher returns for medium or long periods.

  • Income funds

Income funds aim to provide a regular and steady income to investorsand they are associated with a family of debt mutual funds. These funds enable investors to invest in money market instruments such as bonds, debentures, government securities. They are resistant to market fluctuations and thus are less risky.

  • Liquid funds

Liquid funds areincome funds that invest in short term instruments such as treasury bills, certificates of deposit, commercial papers, and inter-bank call money and government securities up to a tenure of 91 days. As they have very short term maturity period, they are hardly traded and held till maturity. You can opt for these funds when you have a sudden inflow of cash to earn slightly higher interest than that of savings account.

Know The Subtle Skill To Choose The Best Mutual Funds

  • Tax-saving funds

As the name suggests, these funds allow investors to claim tax deductions from time to time under tax laws. ELSS or equity-linked saving scheme qualifies for a deduction of up to 1, 50,000 rupees per financial year under 80C of Income Tax Act. This fund invests in equities and related products and comes with a lock-in period of 3 years. This is amazing for salaried employees and people who tax as it provides with tax saving along with wealth creation.

  • Capital protection funds

These funds attempt to shield the money of the investors in the case of market fluctuations by splitting the money between fixed income and equity investments. This type of funds is suitable for those who have low-threat appetite where your portfolio is distributed between equity and debt funds. Here, you need at least 3 years to protect your money and not suffer any loss.

  • Fixed maturity funds

Fixed maturity funds have the option of subscription available only during the initial period and money is withdrawn only at the time of maturity and not before that (closed-ended funds). You can invest in fixed income instruments such as the certificate of deposits and bonds and government securities to generate safe and stable returns.  The time durationvaries from 30 days to five years and when invested for more than one year, the investor can take advantage of indexation which results in lower tax on their gains. Credit risk and risk of liquidity are also minimal and since the funds are held until maturity, they are insensitive to interest rate risk.

mutual funds investment

  • Pension funds

Pension Fund Regulatory Authority of India (PFRDA) is a government institution which has authorised six companies to function as fund managers. The money kept in pension funds are invested in both debt and equity products and it depends on the pensioner, whether he wants to withdraw the entire amount at one go or wants to draw regular pension upon retirement depending on his needs.

  • Aggressive growth funds

It is a type of mutual fund that aims at gaining the highest returns in the market. If you are willing to take high risks that provide you with excellent returns, then, you can opt for these types of funds. As the money is invested according to assumptions and hypothetical calculations, the risk metrics such as standard deviation, Sharpe ratio and Beta must be closely observed for a better understanding of the behaviour of the market.


  1. Types based on Risk
  • Low- risk funds

These types of funds take minimum risks and the returns generated are also low but steady. Ultra short-term funds, liquid funds, government bonds are some of the low-risk funds where you can invest. Returns are around 6-8% which makes as an alternative source of income.

  • Medium risk funds

In medium-risk funds such as arbitrage funds and hybrid debt-oriented funds, the risk involved is moderate and is capable of generating returns at minimum risk. The investment portfolio is diversified with some money invested in equity and rest in debt funds which does not expose the investor to higher risks. This is ideal for those investors who want to invest for a period of 1 to 3 years to accomplish their financial goals.  Returns could be as good as 9-12%.

  • High –risk funds

These funds can provide returns varying from 15% to 20% which are great figures. As the risk involved is very high, the investors have to monitor the market situations consistently and evaluate the fund’s performance and review the portfolio simultaneously.

Mutual funds in india

  1. Types based on Speciality
  • Funds of funds (FOF)

FOF is an investment strategy where you buy one fund which invests in different funds rather than investing directly in different products such as stocks, bonds or other securities. These are also called as multi-manager funds. The investor has a diversified portfolio and assets allocated in a variety of fund categories are under one portfolio which helps in minimising risk.

  • Index funds

These types of funds follow the functioning of any of the market index like BSE Sensex or the NSE NIFTY.  Investing in index funds is otherwise described as passive investing as the fund manager is not directly selecting the stocks; instead, he is passively investing in stocks that he is tracking. These are suitable for those who hesitate to take the risk and want predictable returns.

  • International funds

These funds are invested in international companies and not in companies in the investor’s own country. Though it appears risky it helps in portfolio diversification and opens a new horizon. Also, the probability of getting higher returns is more too.

Mutual Fund advices

  • Global funds

In global funds, the investor invests in a foreign country as well as the in-home country. These funds help in mitigating risks and give higher returns against inflation as the investments are diversified.

  • Exchange -Traded Funds (ETFs)

ETFs track an index but trade like shares on stock exchanges by buying and selling units throughout the day. They invest in stocks of companies, currencies, metals etc.

Categorization by SEBI

Securities and exchange board of India (SEBI) which is the capital market regulator has released a circular where it has categorized and rationalized mutual fund schemes. In order to bring uniformity and standardize the scheme categories and group similar types of scheme launched by different mutual funds according to the asset allocation and investment strategy etc., the decision has been taken by Mutual Fund Advisory Committee (MFAC) to classify mutual funds into following 5 groups namely Equity schemes, Debt schemes, Hybrid schemes, Solution-oriented (retirement funds, children’s funds) and other schemes (index funds /ETFs, funds of funds).

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