Investing in mutual funds has become an increasingly popular choice for Indian investors, including residents, Non-Resident Indians (NRIs), and Overseas Citizens of India (OCIs) due to the diverse options they offer and the professional management they provide. Mutual funds pool money from various investors to invest in stocks, bonds, and other securities, allowing individuals to participate in a diversified portfolio. Here are different types of mutual funds in India based on asset class, structure, risk tolerance, and investment goals.
Types of Mutual Funds Based on Asset Class
Depending on asset class, mutual funds can be classified as:
Also read: Best SIP to Invest in 2024 – Top 10 SIP Mutual Fund Plans for NRIs/OCIs
Equity Funds
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 some time. As a result, the risk associated with these funds is also relatively higher.
Also read: Best Equity Mutual Funds for NRIs to Invest in 2024
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:
1. 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.
2. 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.
3. 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.
4. 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 are combined in large and midcap funds.
5. Multi Cap Fund
An open-ended equity fund called Multi-Cap Fund makes investments in the stock of large-cap, mid-cap, 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.
Also read: What are Multi Cap Funds: Meaning, Features, Benefits, How to Invest, Top Multi Cap Funds for NRIs
6. Flexi-Cap Fund
Flexi cap funds as the name suggests are flexible in terms of investment. They invest in companies of all sizes, including large-cap, mid-cap, and small-cap stocks. They have the flexibility to invest across the entire market capitalization spectrum, providing diversification across various types of companies. A flex-cap fund offers investors the chance to spread their investments across companies of varying market capitalizations, reducing risk and unpredictability.
Also read: What is Flexi Cap Funds: Meaning, Features, Benefits, How to Invest, Top Flexicap Funds for NRIs
7. ESG Mutual Fund
ESG mutual fund is a type of thematic mutual fund based on sustainable and socially responsible mutual funds that meets the specific ESG criteria that we aforementioned. The ESG mutual funds focus on investing in companies that perform well in their business abiding by the ESG principles. This helps promote the social and environmental impacts whilst generating financial returns for the investors.
Also read: Investing in ESG Mutual Funds? Read this before you make a move
8. Sectoral Fund
Sector funds or sectoral funds as it is also known is a type of equity mutual fund that invests in the stocks of the companies operating in a specific segment or industry. A thing to note is that sectoral mutual funds can invest in large-cap mid-cap to small-cap companies as long as they belong to the same sector. Sector funds are different from diversified funds as it does not spread the investment across various sectors but rather concentrate all the investments in one single sector.
Also read: What are Sector Funds? Best Sector Funds List for NRIs
Other Types of Equity Mutual Funds:
- Value Fund
- Contra Fund
- Equity Linked Savings Scheme (ELSS)
Also read: Flexi Cap Funds vs Multi Cap Funds: Which One to Choose?
Debt Funds
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.
Also read: Best Debt Mutual Funds in India 2024 for Residents and NRIs/OCIs
Here are some of the popular debt mutual funds:
1. Overnight Fund
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.
Also read: Overnight Mutual Funds- What Are They and How Do They Work?
2. Liquid Fund
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.
Also read: List of Top Performing Liquid Funds for NRIs in 2024
3. 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.
4. 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.
5. 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.
Also Read: How NRI invest in India: Mutual Funds
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
Also read: What are Balanced Funds, Benefits and How to Invest?
Hybrid 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
Also read: Aggressive Hybrid Funds for NRI: Meaning, Benefits, Taxation & How to Invest
Types of Mutual Funds Based on Investment Goals
Different types of mutual funds based on investment goals include:
1. Growth Funds
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.
2. Income Funds
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.
3. Tax-Saving Funds
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.
4. Pension Funds
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
Here are the types of mutual funds based on the structure:
1. Open-Ended Funds
An investor may contribute to, redeem from, or leave an open-ended mutual fund at any time. It has no set maturity time frame.
2. Close-Ended Funds
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.
Also read: What is the Difference Between Open-Ended and Close-Ended Mutual Funds?
3. Interval Funds
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.
Also read: NRI Mutual Fund Taxation in India 2024 Explained
Invest in Indian Mutual Funds as NRI/OCI with SBNRI
SBNRI is an authorized Mutual Fund Distributor platform & registered with the Association of Mutual Funds in India (AMFI). ARN No. 246671. NRIs willing to invest in mutual funds in India can download the SBNRI App to choose from 2,000+ mutual fund schemes or can connect with the SBNRI wealth team to better understand Mutual Fund investments.
NRIs can now download the SBNRI App and choose to invest in different NRI mutual fund schemes in India with ease. You can also get detailed investment advice from experts at SBNRI. Also, visit our blog and YouTube channel for more details.
Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions. SBNRI does not intend to predict future returns, please read all related documents before investing.
FAQs
What is a mutual fund used for?
Investing in securities such as stocks, bonds, money market instruments, and other assets is done through a mutual fund.
What are mutual fund types according to structure?
The three mutual funds based on structure are Open-Ended Funds, Close-Ended Funds and Interval Funds.
What are some types of debt mutual funds?
Medium Duration Fund, Long Duration Fund and Dynamic Bond Fund
What are some types of equity mutual funds?
The different types of equity mutual funds are large cap funds, mid-cap funds, small-cap funds, multi-cap funds, flexi-cap funds, value fund, contra fund and sectoral/thematic fund and more.
What is a debt fund?
Debt funds are mutual funds that predominantly lend money to the government and private companies to generate returns. For example, banking and PSU funds lend money to banks and public sector companies only.
Is there any risk on debt funds?
There are debt funds with zero or negligible risk, for example, overnight and liquid funds. However, there are debt fund categories that involve some amount of risk. Hence, you must check your funds before investing.
Which debt fund is the best?
The best debt fund depends on your investment goal. You can invest in overnight or liquid funds if you want to invest for a very short period ranging from 1 day to 1 month. Money market funds will be suitable for investors whose investment horizon is between 6 months and 1 year. You can opt for corporate bond funds, banking, and PSU bond funds if your investment horizon is between 1 year and 3 years.
Which is an equity fund?
Equity mutual fund is a type of mutual fund that invests its money in stocks/shares of the company.
Can NRI invest in equity funds?
Yes, NRI investors can invest in equity funds after getting their Mutual Fund KYC done and linked to their NRE/NRO bank account.
What is the taxation for equity funds for NRI?
If equity investments are sold within one year of holding by NRIS, then the returns will be treated as short-term capital gain and will be taxed at 15% plus cess. However, if the funds are sold after one year of holding, it accounts as long long-term capital gain and the returns up to Rs 1 lakh will be tax-free. Any returns above Rs 1 lakh will be treated to a taxation of 10% plus cess without any indexation benefit.
