Mutual funds are market linked investment avenues which pool the money of different small and big investors into a corpus. This pooled corpus is then invested in different stocks and securities of the financial market depending on the investment objective of the fund and its nature. Mutual funds are categorized into different types of schemes. Each variant differs with respect to the portfolio of the scheme, risk profile, returns, tax treatment, investment objective and other parameters.
For a better understanding of mutual funds, it is imperative to know the different types of mutual fund schemes in India. So, let’s understand –
Mutual fund classification based on the subscription period
There are three types of mutual fund schemes based on the subscription period. These schemes are as follows –
- Open ended mutual funds
These mutual funds are those which do not have any limit on the subscription or redemption date. You can buy or redeem open ended mutual fund schemes whenever you want to.
- Close ended mutual funds
Close ended mutual funds are those which have a time limit on investments into the fund as well as on maturity of the scheme. Investment into these funds is allowed during the period of New Fund Offer (NFO) when the fund is first launched in the market. Moreover, redemption is also allowed after a specified period.
- Interval funds
Interval mutual funds are combinations of open ended and close ended schemes. Buying and selling of mutual fund units are allowed only during predefined intervals.
Mutual fund classification based on the investment portfolio
Based on the investment portfolio of the scheme, mutual funds can be broadly classified into three categories –
- Equity mutual funds – which invest at least 65% of their portfolio in equity oriented securities and stocks. Equity mutual funds are prone to high market risks and the return generating potential is also high
- Debt mutual funds – which invest a majority of their portfolio in debt instruments and securities. Debt funds have low risk and provide low but steady best mutual fund for best returns.
- Hybrid mutual funds – which invest both in equity and debt to provide moderate returns at moderate risks.
Each of these mutual fund categories are further divided into sub-categories depending on the stocks and securities which the funds choose. Let’s, therefore, understand the different sub-categories of each of the above-mentioned funds –
Equity funds:
| Sub-category | Meaning |
| Large cap funds | Invest primarily in large cap stocks belonging to companies having the highest market capitalization |
| Mid cap funds | Invest primarily in mid cap stocks |
| Small cap funds | Invest primarily in small cap stocks |
| Dividend yield funds | Invest primarily in stocks which yield regular dividends |
| Sectoral funds | Invest primarily in stocks of companies engaged in a particular sector. For example, infrastructure funds would invest primarily in infrastructure companies. |
| Value funds | Invest primarily in stocks of companies which are undervalued and have a potential for growth |
| ELSS schemes | Equity Linked Saving Schemes are those which help in tax saving. Investment into these schemes is allowed as a deduction under Section 80C up to INR 1.5 lakhs which helps you reduce your tax liability |
Debt funds:
| Sub-category | Meaning |
| Overnight funds | Invest in instruments having a maturity period of one day |
| Liquid funds | Invest in instruments having a low maturity period which goes up to 91 days |
| Ultra-short term funds | Invest in instruments having a maturity period ranging between 3 months and 6 months |
| Short term debt funds | Invest in instruments having a maturity period ranging from 6 months to a year |
| Money market funds | Invest in money market instruments having a maturity period of up to a year |
| Dynamic bond funds | Invest in instruments having different maturity periods |
| Corporate bond funds | Invest primarily in high rated corporate bonds |
| Gilt Fund | Invest primarily in Government securities |
Hybrid Funds
| Sub-category | Meaning |
| Conservative funds | Invests primarily in debt and then in equity |
| Balanced funds | Invest in a balanced manner in debt and equity |
| Aggressive funds | Invest primarily in equity and then in debt |
| Dynamic asset allocation fund | Invests according to market sentiments. Allocation to equity and debt changes based on market movements |
| Arbitrage funds | Invest following an arbitrage strategy |
Other types of mutual fund classification
Besides the above-mentioned funds, there are other types of mutual fund schemes as well which are as follows –
| Type of mutual fund | Meaning |
| Index funds | Invest according to a benchmark index to try and track the index |
| Fund of funds | Invest in other funds |
| Solution oriented funds | Mutual funds which invest according to a particular financial goal, like retirement planning or child planning. These funds have a lock-in period before which redemption is not allowed |
Before selecting the best mutual fund for best returns, assess your investment strategy, risk profile, investment horizon and financial needs. Then select the most suitable type of mutual fund scheme which would fulfil your requirements.