Mutual funds come in many varieties to satisfy dynamic needs of diverse investors. Based on your investment goals, you can choose the right type of fund for investment. Here are different types of mutual funds in India based on asset class, structure, risk tolerance and investment goals.
When it comes to investing in mutual funds, resident as well as NRIs can invest in mutual funds in India.
Mutual Funds Types based on Asset Class
Depending on asset class, mutual funds can be classified as:
Equity funds are mutual funds that invest primarily in stocks of companies listed on the Indian stock exchanges. These funds are managed by professional fund managers who aim to generate capital appreciation for the investors by investing money pooled from various investors into shares of different companies. Equity funds tend to deliver significant returns over a period of time. As a result, risk associated with these funds is also relatively higher.
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Equity funds can be further classified into various categories based on their investment objective, market capitalization of the companies they invest in, investment style, etc. Some of the equity funds are described below:
Large Cap Fund
An open-ended equity scheme called large-cap mutual funds invest mostly in the equities of large-cap firms. A minimum of 80% of the pool is set aside by large-cap mutual funds for investments in stock and equity-related securities of large-cap businesses. The large-cap mutual fund’s corpus is invested in dependable businesses with established operations and a history of strong financial success. Due to the less erratic stock values of large-cap firms and their long histories of operation, they may have the lowest volatility among equity mutual funds. By investing in large-cap funds, you have the potential for a steady wealth-creation opportunity.
Mid Cap Fund
An open-ended equity mutual fund that primarily invests in shares of mid-cap businesses is a mid-cap mutual fund scheme. Mid-cap mutual funds must invest a minimum of 65% of their total assets in mid-cap firms’ stocks and securities. The mid-cap corporations are expanding and are in a growth phase. So, compared to large-cap mutual funds, mid-cap mutual funds are more aggressive. Since they invest in mid-cap companies, mid-cap mutual funds have better returns but also higher levels of risk.
Small Cap Fund
An open-ended equity plan known as a small-cap fund invests mostly in small-cap stocks. The equity and equity-related instruments of small-cap businesses account for at least 65% of the assets under the management of small-cap mutual funds. Small-cap enterprises have a very high potential for future growth. They carry the greatest risk, but they also have the greatest potential for profit.
Large and Mid Cap Fund
A mutual fund strategy called large & mid-cap fund offers the advantages of investing in both large-cap and mid-cap companies. At least 35% of the big and mid-cap fund’s total assets must be made up of equities and equity-related securities from large-cap businesses. Mid-cap company shares and equity-related instruments make up another 35% of the assets. The stability provided by large-cap stocks and the growth prospects of a mid-cap fund is combined in large and midcap funds.
Multi Cap Fund
An open-ended equity fund called Multi-Cap Fund makes investments in the stock of large-, mid-, and small-cap companies. Since there is no set maturity date, the mutual fund is an open-ended strategy. The subscription and redemption options for the program are always open. A multi-cap fund devotes at least 65% of its total assets to equities and securities that are related to equity. The most diversified equity funds are multi-cap funds. Consequently, your risk is lower than that of a single large, mid, or small-cap focused fund. Large-cap stocks offer stability, while mid- and small-cap equities offer returns. As a result, the multi-cap fund gives you a secure portfolio with high returns. Multi-cap funds can be utilized to build wealth over the long term.
Other Types of Equity Mutual Funds
- Value Fund
- Contra Fund
- Sectoral/Thematic Fund
- Equity Linked Savings Scheme (ELSS)
Your funds are parked in fixed income instruments including bonds, treasury bills, and securities by debt mutual funds. Fixed Maturity Plans (FMP), Short Term Plans, Liquid Funds, Monthly Income Plans, Gilt Fund, Long Term Bonds, and others are among the debt instruments. All fixed income instruments have a fixed interest rate and are subject to a set maturity date.
These investments are regarded as secure since they carry little risk. The returns, however, hardly ever outpace inflation. Additionally, TDS (tax deducted at source) is not deducted in the case of debt funds, therefore investors who earn more than Rs. 10,000 on their investment are responsible for paying the tax themselves.
Here are some of the popular debt mutual funds:
An open-ended debt plan that invests in overnight securities is known as an overnight mutual fund. The residual maturity of the overnight securities is one day. T-Bills, call money, and certificates of deposits with a single day’s maturity are a few examples of overnight securities. The overnight fund makes investments in short-term securities with a one-day maturity. They provide a very safe investment option and are quite liquid. Investors can lodge their money for a few days with the aid of overnight funds. They offer returns that are higher than the savings rates that many banks give.
Open-ended debt mutual funds called liquid funds invest in very liquid securities. The securities are often T-bills, call money, collateral borrowings (CBLO), certificate of deposits (CDs), and commercial papers (CPs), which are money market products. A liquid mutual fund invests exclusively in debt and money market instruments with a maximum maturity of 91 days. They provide a very safe investment option and are quite liquid. You can keep extra cash in a liquid mutual fund for a few weeks to three months. To build an emergency fund for a variety of life situations, such as short-term financial difficulties brought on by a job loss and unexpected medical expenses, liquid funds are appropriate. Additionally, you can control your monthly costs and make arrangements using liquid funds. The best aspect is that after you request a redemption, your money is usually available within a day or two. As a result, the liquid fund enables you to outperform the rate on a savings account.
Ultra Short Duration Fund
An open-ended investment vehicle called ultra short duration funds makes investments in debt instruments having Macaulay durations between three and six months. In plain English, Macaulay’s duration is the amount of time it would take for a bondholder to recoup all of his initial investment through periodic principal and interest payments. The weighted average time period during which the cash flows on a portfolio’s bond holdings are received is used to determine the Macaulay duration. A fund with an ultra-short duration invests in debt instruments with a Macaulay duration of three to six months. Additionally very liquid and providing a rather stable investment option are ultra-short duration funds. A longer-duration fund is advantageous to investors since it offers reinvestment opportunities and somewhat higher yield. You can build a corpus to pay off an existing short-term loan or pay for a vacation.
Money Market Fund
An open mutual fund program called Money Market Fund invests primarily in money market assets like T-bills, CPs, and CDs. Mutual funds for the money market make investments in financial securities with a maximum maturity of one year. They provide a very safe investment option and are quite liquid. For a risk-averse investor who wants a higher yield and safe investments, money market funds are the best option.
Short Duration Fund
An open-ended short-term debt strategy known as a short duration fund invests in securities having a Macaulay duration of between one and three years. They provide a safe and profitable investment option. In situations where interest rates are rising, short-term investments are optimal. The Macaulay duration of the portfolio is between one year and three years thanks to the short duration’s investments in debt and money market instruments. Short-term debt instruments have a duration of one to three years. You gain from a potential for reinvestment as well as additional interest income. For conservative investors who want their money to grow without fluctuations, the low term fund is best. The short-term fund can be utilised to achieve life goals like paying for pricey international vacations and wedding costs.
Other Debt Mutual Funds
- Medium Duration Fund
- Long Duration Fund
- Dynamic Bond Fund
- Corporate Bond Fund
- Credit Risk Fund
- Banking and PSU Fund
- Money Market Mutual Funds
- Balanced Funds
Hybrid funds are mutual funds that invest in a combination of equity and debt securities. The ratio of investment can either be variable or fixed – the fund house can allocate 60% of assets in stocks and the rest in debt or vice versa. These funds are also known as balanced funds and aim to provide investors with a balanced portfolio by diversifying across asset classes.
Hybrid funds can be further classified into various categories based on the equity-debt allocation and the investment objective. Some of the popular categories of hybrid funds in India include:
- Conservative Hybrid Funds
- Balanced hybrid funds
- Aggressive hybrid funds
- Multi-asset allocation funds
Types of Mutual Funds based on Investment Goals
Different types of mutual funds based on investment goals include:
Growth funds in India are mutual funds that primarily invest in equities of companies that have the potential to grow at a faster rate than the broader market or the economy. These funds are managed by professional fund managers who aim to generate capital appreciation for investors by investing in a diversified portfolio of high-growth stocks.
Income funds in India are mutual funds that primarily invest in fixed-income securities such as bonds, debentures, government securities, money market instruments, and other debt securities. The objective of these funds is to generate regular income for investors through interest payments and coupon payments.
Tax-saving funds, also known as ELSS funds or Equity Linked Saving Schemes, have become popular among investors over the years. ELSS funds offer dual benefits of wealth creation and tax deduction under Section 80C of the Income Tax Act.
Investments made in ELSS funds are eligible for a tax deduction of up to Rs. 1.5 lakh under Section 80C of the Income Tax Act. However, the tax benefits are subject to a lock-in period of three years, which means investors cannot withdraw their money before three years from the date of investment.
Pension mutual funds are a type of mutual fund that are designed to provide retirement benefits to investors. These funds invest primarily in debt securities or government securities, which provide a steady stream of income to investors in the form of regular dividends or interest payments.
Types of Mutual Funds based on Structure
An investor may contribute to, redeem from, or leave an open-ended mutual fund at any time. It has no set maturity time frame.
Mutual funds with a closed-end have a set maturity date. Only during the initial time, also referred to as the New Fund Offer or NFO period, may an investor invest in or participate in these types of schemes. On the date of maturity, his or her investment will be immediately redeemed.
The difference between open-ended and closed-ended mutual funds is filled by interval funds. They are offered as an initial offering and then opened for repurchases by the fund management company at various points throughout the fund’s tenure, similar to close-ended mutual funds. Initial unit owners have the option of selling their units to the mutual fund company.
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Investing in securities such as stocks, bonds, money market instruments, and other assets is done through a mutual fund.
An investor may contribute to, redeem from, or leave an open-ended mutual fund at any time. It has no set maturity time frame.
Open-Ended Funds, Close-Ended Funds and Interval Funds
These mutual fund schemes, as their name suggests, invest equally in equities and debt. Based on market risks, the allocation may continue to change.
Medium Duration Fund, Long Duration Fund and Dynamic Bond Fund
Value Fund, Contra Fund and Sectoral/Thematic Fund