Imagine, you decide to start a SIP investment in mutual funds but feel overwhelmed when you see hundreds of types of mutual funds in the market. The situation becomes even more challenging if your knowledge of mutual funds is limited.
In this situation, it is better to take a step back and acquire an adequate understanding of different types of mutual funds in India. This will not only enhance your knowledge but also help you make wise decisions and diversify your portfolio based on your goals.
The Categorization Of Mutual Funds
Understanding the categorization of mutual funds is the key to selecting the right mutual fund that aligns with your investment goals and risk appetite.
Mutual funds in India are broadly categorized into Equity, Debt and Hybrid funds. Within each of these categories, we can further divide them into various subcategories based on:
- Liquidity,
- Objective,
- Asset Class,
- Special characteristics etc.
Sidenote! There can be some overlap between sub categories of mutual funds because some funds may fall under more than one category due to various factors.
1. Based On Liquidity
Liquidity means you can easily buy or sell your investments at your convenience. Investment options that provide this flexibility are more popular among investors.
A. Open-Ended Funds
Everyone wants freedom. Open-ended mutual funds offer investors the freedom to buy or sell the units of the fund anytime. There is no fixed maturity period or target amount, meaning investors can enter or exit the fund at their convenience.
B. Close-Ended Funds
Close-ended mutual funds have a set maturity date or target amount. Thus, they have a fixed number of units for sale. This type of fund is open for subscription only during a specific period at the time of the launch of the scheme.
Most mutual funds in India can be open-ended or close-ended. Open-ended mutual funds are good for investors who want liquidity while close-ended funds are for those who wish to hold their investments until maturity.
2. Based On Objective
No single gun is suitable for all types of hunting. Similarly, no single mutual fund is suitable for the vast variety of Investors. Investors can choose mutual funds based on their objectives.
A. Growth Funds
Growth mutual funds primarily invest in the stocks of companies with higher growth potential. But as the saying goes, with great potential comes great risk. That’s why growth mutual funds are known for their higher risk and volatility.
These funds focus on capital appreciation (the increase in the value of investment) and have the potential for higher returns in the long term.
B. Income Funds
Are you someone who wants to earn a regular income from your investments? If so, income-oriented mutual funds can be a great choice for you.
Income funds invest in debt securities such as bonds, government securities and other fixed-income instruments. These funds focus on generating regular income rather than capital appreciation.
They are less risky than growth funds and offer a more stable return. However, it’s worth noting that they may also offer lower returns than growth funds over the long term.
C. Balanced Funds
As the name suggests, balanced funds aim to strike a balance between growth and income. They typically invest in a mix of stocks and debt instruments. This is why they may offer both; capital appreciation and regular income.
Balanced funds are known for their stability and consistency in returns. This feature makes this fund popular among risk-averse investors.
D. Tax Saving Funds
Tax saving funds also known as Equity Linked Saving Schemes (ELSS) are mutual funds designed to avail certain tax exemptions. They invest in equity and equity-related securities of companies.
ELSS funds come with a lock-in period of three years, which means that investors cannot redeem their investment before the completion of the lock-in period.
E. Sector Funds
Sector funds primarily invest in the stocks of the companies operating in a specific sector or industry such as healthcare, technology, energy etc.
These funds are considered high-risk investments. However, they also have the potential to deliver high returns in a booming sector.
F. Thematic Funds
While sector funds invest in companies within a specific industry, thematic funds invest in companies expected to benefit from a particular theme or trend.
For example, a thematic fund may focus on investing in companies involved in the adoption of emerging technologies such as Artificial Intelligence and Machine learning, even in different sectors.
3. Based On Asset Class
Mutual funds can also be categorized into different asset classes based on the types of securities they invest in. Some examples are:
A. Equity Funds
Equity funds also known as growth funds invest mainly in stocks or shares of companies listed on the stock market. They aim to provide long-term capital appreciation to investors.
These funds are considered high-risk investments and have higher return potential. These funds are further categorized into:
- Large-Cap Funds
- Mid-Cap Funds
- Small-Cap Funds
- Multi-Cap Funds
- Flexi-Cap Funds
- Sectoral/Thematic Funds
- Dividend Yield Funds
B. Debt Funds
Debt funds also known as income funds primarily invest in fixed-income securities such as government bonds, corporate bonds, debentures or other debt instruments.
They provide a regular income to investors and are less risky than equity funds. Some Subcategories of debt mutual funds are:
- Money Market or Liquid Funds
- Fixed Maturity Plan Funds (FMPs)
- Corporate Bond Funds
- Government Bond Funds
- Credit Risk Funds
- Dynamic Bond Funds
C. Gold Funds
Gold mutual funds invest in physical gold and companies engaged in the business related to gold such as mining, processing, marketing etc.
They are a good choice for investors to diversify their portfolios. Gold mutual funds may provide higher returns as compared to traditional fixed-income investments.
D. Real Estate Funds
Real estate funds also known as REITs (Real Estate Investment Trusts) funds, mainly invest in real estate properties such as residential buildings, shopping malls, hotels etc.
It allows investors to invest in the real estate market without actually owning or managing the properties.
E. International Funds
International mutual funds invest in stocks or bonds of companies based outside of the investor’s home country. They provide exposure to international markets and help in diversifying an investor’s portfolio.
F. Commodity Funds
As the name suggests, commodity funds invest in different types of commodities such as gold, silver, crude oil etc. These funds are also good for diversifying an investor’s portfolio. It is to be noted that these funds may involve higher volatility and risks.
4. Based On Special characteristics
Mutual funds with special characteristics offer a range of special features that set them apart from traditional mutual funds and can provide investors with a variety of benefits.
A. Index Funds
Index funds are like the superheroes of the investment world, tracking the performance of a specific market index such as the Nifty 50 Index (Top 50 companies of Nifty), Nifty Next 50 Index, and more!
Index funds invest in all or a representative sample of the securities in the underlying index. These funds have a track record of outperforming the majority of actively managed funds over the long term.
B. Exchange-Traded Funds (ETFs)
Mutual funds that are traded on stock exchanges just like any individual stock are called exchange-traded funds (ETFs). They offer exposure to a wide range of assets, sectors, and markets, allowing investors to build a diversified portfolio with a single investment.
Another Cool thing about ETFs is they are more accessible and easier to buy and sell than mutual funds, which can only be bought or sold at the end of the trading day at the fund’s net asset value (NAV).
C. Dividend Yield Funds
Dividend yield funds aim to invest in companies with a solid dividend policy and a history of paying consistent and high dividends. Investing in these funds can provide several benefits including exposure to well-established and financially stable companies.
These companies may pay dividends even during challenging economic times. This is why Dividend Yield Funds are popular among investors who seek a regular source of income out of their investments.
D. Fixed Maturity Plan Funds (FMPs)
Fixed Maturity Plan (FMP) funds invest in fixed-income securities such as corporate bonds, commercial papers, certificates of deposit etc. These funds have a fixed maturity date ranging from one month to five years.
The fund manager invests in securities that have similar or close maturity dates of FMP.
E. Money Market or Liquid Funds
These schemes invest exclusively in safer short-term instruments like certificates of deposit, treasury bills, commercial paper, Inter-bank call money and government securities. These funds are appropriate for investors who wish to park their surplus funds for short periods.
F. Gilt Funds
Gilt funds invest in government securities that have no default risk. The NAVs of these funds fluctuate because of changes in interest rates and other economic factors as in the case of income and debt-oriented schemes.
G. Fund of Funds
A fund of funds (FoF) is a type of mutual fund that invests in other mutual funds rather than investing directly in stocks, bonds or other securities. The primary objective of this fund is to minimize the risk associated with investing in individual mutual funds.
Conclusion
The mutual fund industry in India offers a diverse range of investment options to investors. The list of “different types of mutual funds in India” is not exhaustive due to overlaps and other factors but this comprehensive guide is enough for most mutual fund investors.
Further Reads:
- Step By Step Guide to Start SIP (Mutual Fund) Investment
- How to Open A SIP Account In India
- How to Choose the Best Mutual Fund
FAQs
What are the risks associated with investing in mutual funds?
The risks associated with investing in mutual funds are market risk, interest rate risk, credit risk, liquidity risk, inflation risk etc.
What should I consider before investing in a mutual fund?
Before investing in a mutual fund you should consider about your investment objectives, risk tolerance, fund performance history, fund manager experience and fees & expenses.
What are the fees and expenses associated with mutual funds?
Some fees and expenses related to mutual funds are management fees, operating expenses, sales charges or loads, redemption fees and account fees.
Can I redeem my mutual fund investment anytime?
Generally, yes, but there may be some restrictions depending on the mutual fund’s terms and conditions.
