Mutual funds have become an increasingly popular investment option among Indian investors over the past few decades. They provide a convenient way to invest in a professionally-managed portfolio of securities across asset classes like equity, debt, and more. Choosing the right mutual fund scheme that aligns with an individual’s financial goals, risk appetite, and investment horizon is crucial for generating optimal returns.
With hundreds of mutual fund schemes available today under different categories and classifications, it can get overwhelming for investors, especially beginners, to navigate through the choices. Therefore, it is important to develop a sound understanding of the different types of mutual fund schemes, their distinct features, risk-return profiles, and suitability.
This comprehensive guide will provide an in-depth overview of the various categories of mutual funds in India. We will start with the fundamentals, then delve into the different classifications, specialized offerings, and popular options to help you make informed investment decisions.
Understanding the Basics
Before diving into the specific types, let’s first get a foundational understanding of mutual funds and the broad classifications based on their structure and asset classes.
Different Types of Mutual Funds in India can be broadly classified based on:
Open-Ended Funds
Open-ended mutual fund schemes are the most common type in India. As the name suggests, these funds do not have a fixed maturity and are open for subscription and redemption on an ongoing basis.
The key advantages of open-ended schemes are high liquidity and flexibility. Investors can enter and exit the fund anytime at the prevailing Net Asset Value (NAV) prices. There are no lock-in periods. The fund size also keeps changing based on market activity.
Open-ended funds are ideal for investors who want the ability to invest lumpsums or via Systematic Investment Plans (SIPs) at their convenience. The high liquidity ensures easy encashment when required.
Closed-Ended Funds
In closed-ended schemes, the fund raises a fixed amount of capital via a New Fund Offer (NFO). After the NFO period, fresh investments or redemptions are not allowed until maturity. Listed closed-ended funds can be bought/sold on exchanges but unlisted ones cannot be redeemed until maturity.
The advantages of closed-ended funds include no fund manager overheads from managing inflows/outflows and the ability to take longer-term investment calls without worrying about redemptions. But the lack of flexibility and liquidity is a major drawback. These are best suited for informed investors with a defined time horizon.
Interval Funds
Interval funds combine features of open-ended and closed-ended schemes. They allow periodic entry/exits at predetermined intervals (monthly, quarterly, etc). The fund does not have to maintain high liquidity like open-ended schemes but offers periodic redemption options unlike typical closed-ended funds.
The Intermittent redemptions make interval funds suitable for illiquid assets like real estate, infrastructure, private equity that require a long-term holding period. The part equity orientation also allows for some upside potential from stock market movements between intervals.
Types of Mutual Fund Schemes based on Asset Classes
Mutual funds invest in portfolios of different asset classes like equity, debt, real estate, etc. Based on the predominant asset class in the portfolio, they can be categorized as:
Equity Funds
Primarily invest in equity stocks of listed companies. Segmented further into large-cap, mid-cap, small-cap, sector, etc. High long-term growth potential accompanied by high volatility.
Debt / Fixed Income Funds
Primarily invest in fixed income securities like corporate bonds, government securities, money market instruments, etc. Lower risk and stable income via interest payouts but limited capital appreciation potential.
Hybrid Funds
Invest in an optimal mix of equity and debt assets. Seek to balance risk-return profile and provide portfolio diversification.
Money Market or Liquid Funds
Invest in very short term debt markets like treasury bills, commercial paper, certificates of deposit. Lowest risk but yields are linked to prevailing interest rates.
Multi Asset Allocation Funds
Invest across equity, debt, gold, real estate, international markets, etc. Wide diversification to optimize risk-adjusted returns.
Now that we have understood the broad classification, let us delve deeper into the various categories of mutual fund schemes available in India.
Deep Dive into Types
Types of Mutual Fund Schemes based on Organisation Structure
Open-Ended Funds
As explained earlier, open-ended funds are the most common mutual fund schemes in India accounting for a dominant share of Assets Under Management (AUM). Here are the key features:
- Can be purchased and redeemed at any time after the NFO at Net Asset Value (NAV) related prices. Provide high liquidity to investors.
- Flexible structure allows fund managers to keep investing the incoming capital and manage huge corpus efficiently.
- No fixed maturity or lock-in means ideal for goal-based investing with flexible horizons.
- Wide range of schemes catering to various asset classes, sectors, themes, risk profiles, etc.
- Actively managed by fund managers who take day-to-day investment calls. Passive index funds also gaining popularity.
- Suitable for retail investors looking for liquidity and SIPs, HNIs with surplus capital and institutional investors managing large dynamic portfolios.
Closed-Ended Funds
Closed-ended mutual funds have the following characteristics:
- Raise fixed amount of capital through a New Fund Offer (NFO) and do not allow continuous purchase/redemption.
- Listed on exchanges so investors can buy/sell units like stocks. But trading prices can vary from NAVs.
- Mature on a pre-specified date when all units are redeemed and proceeds paid to investors.
- Allow fund managers to take long-term investment calls without worrying about redemptions.
- Ideal for informed HNIs and institutional investors with defined horizon for asset classes like private equity.
- Provide opportunity to invest in an IPO-like issuance at NFO stage before stocks are listed.
Interval Funds
Interval funds have hybrid structure with intermittent purchase/redemption windows:
- Combination of open-ended and close-ended features. Limited liquidity but some exit opportunities.
- Allow periodic entry/exits (monthly, quarterly, annually) at NAV prices after initial NFO fundraising.
- Enable investment in illiquid assets like real estate, infrastructure requiring committed holding periods.
- Part equity allocation balances exit load of illiquid assets and allows participation in stock market.
- Suited for informed investors looking for higher yields from alternative assets with some liquidity.
To summarize, open-ended funds offer maximum flexibility while closed-ended and interval schemes are suitable for assets requiring long-term commitment. Choose basis investment horizon, liquidity needs and portfolio objectives.
Types of Mutual Fund Schemes based on Portfolio Management
Actively Managed Funds
Actively managed mutual funds aim to beat market returns via smart stock selection and timely trades based on research and forecasts. Key features:
- Fund managers actively take investment decisions based on analysis and judgement.
- Managers have flexibility to shuffle portfolio, change asset allocation in response to evolving markets.
- Aims to outperform benchmark index returns by identifying undervalued stocks/sectors.
- Relatively higher expense ratios due to intensive research and trading.
- Performance depends greatly on fund manager’s skill and investment acumen.
Passively Managed Funds
Passive funds like Index Funds and ETFs aim to mimic returns generated by a market index:
- Portfolio replication of underlying index with minimal fund manager intervention.
- Low cost due to significantly lower research and trading expenses.
- Returns closely match the performance of the underlying index.
- Ideal for investors seeking broad market-linked yet low-cost options.
Key Differences
Actively managed funds may provide alpha (market outperformance) in the hands of star fund managers but are costlier. Passive funds guarantee beta (market returns) at lowest cost but no outperformance. Choose basis investment approach preference, costs and performance objectives.
Types of Mutual Fund Schemes based on Risk Appetite
Mutual funds can be categorized across the risk-return spectrum:
High Risk-High Return
Suitable for investors with higher risk appetite aiming for higher capital growth despite volatility.
Examples:
- Mid & Small-cap funds
- Thematic sector funds like technology, banking, pharma, etc.
- Aggressive hybrid funds with higher equity allocation
Medium Risk-Medium Return
Balance risk-return profile for investors not willing to stomach high volatility but expect reasonable returns.
Examples:
- Multi-cap funds with mix of large, mid, small-cap stocks
- Moderate hybrid funds with balanced equity and debt allocation
Low Risk-Low Return
Prioritize capital preservation over returns. Ideal for risk-averse investors.
Examples:
- Large-cap and bluechip equity funds
- Corporate bond, banking and PSU debt funds
- Conservative hybrid funds with higher debt portion
Types of Mutual Fund Schemes based on Investment Objective
Mutual funds cater to a variety of investor needs and financial goals. Based on the investment objective, here are some key categories:
Growth Funds
Aim to deliver capital appreciation over long term by investing predominantly in equities across market caps:
- Focus on stocks with strong fundamentals and growth prospects.
- Aim to deliver higher returns than market averages but have higher volatility.
- Ideal for investors with longer horizon seeking wealth creation rather than regular income.
Income Funds
Aim to provide regular income and capital preservation. Mostly invest in fixed income instruments:
- Focus on instruments like bonds, money markets, hybrid debt, etc.
- Offer regular income via interest payouts and stable but limited capital appreciation.
- Suitable for conservative investors looking for regular earning and lower risk.
Liquidity or Money Market Funds
Aim to deliver liquidity and stable income from short term investments:
- Park funds in very short duration securities like T-bills, commercial paper, etc.
- Useful for parking temporary surplus funds or as emergency corpus.
- Provide higher returns than savings accounts but lower than debt funds.
Capital Protection Oriented Funds
Aim to protect capital by following structured payoff options:
- Follow strategies like hedging with derivatives to limit downside.
- Lower returns in favour of limiting capital erosion from market downturns.
- Suitable for risk-averse investors near-term goals.
Balanced Funds
Aim to provide optimal asset allocation across equity and debt:
- Dynamic mix of stocks and debt/money market instruments.
- Aim to balance risk-return profile and reduce volatility.
- Suitable for diversified growth with reasonable risk control.
The objectives span growth, income, liquidity, capital preservation and balanced investing. Choose schemes aligned to your financial priorities.
Specialization and Advanced Options
While the above cover the most essential mutual fund categories, there are many more specialized and advanced scheme options available to cater to specific investment needs:
Types of Mutual Fund Schemes based on Speciality
Thematic or Solution-Oriented Funds
Target specific sectors, themes or goals:
- Tax Saving Funds: Offer tax deduction under 80C by investing in approved securities.
- Children’s Funds: Earmarked for specific children’s needs like education, marriage, etc.
- Retirement Funds: Cater to retirement corpus and provide regular pension-like income.
- Banking Sector Funds: Invest predominantly in banking and financial services stocks.
- Technology Funds: Focus on IT, internet and tech stocks.
- Pharma Funds: Cater to healthcare and pharma stocks.
- FMCG Funds: Target the consumer goods and personal products sector.
Real Estate Mutual Funds
Allow exposure to real estate assets along with liquidity:
- Invest minimum 65% corpus in completed construction projects.
- Remaining in equity and debt assets to facilitate exits.
- Enable smaller ticket size exposure to real estate than directly buying property.
- Sectoral or Industry Specific Funds
Allow focused exposure to equity stocks of specific sectors like:
- Banking Funds
- Infrastructure Funds
- Consumption Funds
- Manufacturing Funds
- Energy Funds
Overseas Funds
Provide exposure to international equities and securities:
- Invest predominantly in overseas stocks, bonds, securities.
- Enable geographic diversification and participation in global growth.
- Types include US Equity, Asia Pacific, Emerging Markets, etc.
- Suitable for informed investors aiming for portfolio diversification.
Other Types of Specialized Funds
There are many more esoteric and exotic mutual fund offerings catering to specific investment strategies and asset classes:
- Commodity Funds: Allow exposure to gold, metals, oil, and other commodities via derivatives like ETFs.
- Fund of Funds (FOF): Invest in units of other mutual funds to achieve allocation across asset classes and funds.
- Exchange Traded Funds (ETF): Track a particular index but are passively managed and listed on exchanges.
- Covered Call Funds: Earn premium income by writing call options on stocks held in portfolio.
- Dividend Yield Funds: Focus on stocks offering high dividend payouts.
- Contra Funds: Follow contrarian investing strategy by investing in out-of-favor stocks.
- Focused Funds: Concentrate investments in up to 30 stocks unlike diversified mutual funds.
While these offer ways to pursue specialized strategies, it is advisable that investors undertake due research or understanding before opting for such advanced funds.
Mutual Funds in India
The mutual fund industry in India has grown exponentially from Rs 1.5 lakh crore Assets Under Management (AUM) in 2001 to over Rs 39 lakh crore in 2022. As per SEBI data, open-ended schemes account for 92% of the industry AUM while ETFs and closed-ended schemes have smaller share.
SEBI regulates the mutual fund sector, stipulating guidelines for fund houses, agents, expenses, transparency, etc. There are over 40 Asset Management Companies offering around 2000+ schemes today. The sector provides stable employment opportunities for fund managers, analysts, sales, marketing and compliance teams.
Some prominent mutual fund houses in India include HDFC AMC, ICICI Prudential AMC, Aditya Birla Sun Life AMC, SBI Mutual Fund, Axis Mutual Fund, Nippon India Mutual Fund, etc.
Mutual fund schemes based on Aggregate AUM split:
- Equity funds: Approx. 50% of industry AUM. Dominated by large-cap and flexi-cap funds investing across market capitalization.
- Debt funds: Around 22% industry AUM. Banking & PSU funds most popular within debt category.
- Liquid funds: Around 6% share driven by investor preference for parking surplus capital in liquid funds.
- ETFs: Fastest growing segment with 10% CAGR in AUM over 5 years owing to lower costs and index investing trend.
- Hybrid funds: Conservative hybrid funds form 3-4% of industry assets catering to balanced investing needs.
Schemes Based on the Maturity Period
While we have covered various mutual fund types classified across multiple parameters, one simple yet important differentiation lies in the maturity profile:
Fixed Maturity Plans
These closed-ended debt schemes come with a pre-defined maturity date:
- Invest in instruments maturing aligned to fund maturity like 3 years, 5 years, etc.
- Ideal for target-based goals with definite horizons like child education, retirement, etc.
- Provide portfolio diversification from market volatility given defined maturity.
Interval Funds
As explained earlier, interval funds offer periodic redemption windows:
- Provide liquidity via quarterly, half-yearly, annual redemption options.
- Enable inclusion of illiquid assets like real estate requiring long term holding.
- Part equity exposure balances exit loads in illiquid times.
Liquid Funds
Most liquid mutual fund option suited for very short term horizons:
- Parking avenue for surplus funds for few days to 3 months horizon.
- Debt assets mature within 91 days, and provide ready liquidity.
- Return comparable or slightly higher than savings accounts.
Conclusion
This comprehensive guide has covered the various types of mutual funds available in India across multiple classifications. Here are some key takeaways:
- Mutual funds offer variety of schemes catering to different asset classes, risk profiles, maturity periods, investor needs, etc.
- Broad categorization includes equity, debt, hybrid funds based on predominant assets.
- Further classifications based on structure (open, closed, interval), portfolio management (active, passive), risk levels, objectives provide tailored solutions for different investors.
- Specialized offerings allow specific sector or thematic exposure while some advanced funds cater to sophisticated strategies.
- Stick to essential categories as a beginner and diversify across types to optimize risk-adjusted returns.
- Evaluate which mutual fund categories align with your specific financial priorities and investment horizon.
While mutual funds offer a low-cost diversified investment avenue, it is advisable to engage a qualified financial advisor to develop a customized long-term plan integrated with your goals rather than directly picking schemes. Research extensively, invest prudently within your risk appetite and time frame. Let your money work hard for you!
Frequently Asked Questions:
Are debt funds free of risk?
No, debt funds are not completely risk-free. While they are less risky than equity funds, they still carry risks like credit risk, interest rate risk, liquidity risk, etc. However, the risks are lower compared to equity funds.
Are investments in mutual funds safe?
Investments in mutual funds are reasonably safe compared to directly investing in stocks. Mutual funds invest in a basket of securities which helps reduce risk through diversification. However, they are not completely risk-free. The level of risk depends on the type of fund chosen.
Are Mutual Funds Better than Fixed Deposits?
Mutual funds can give higher returns than fixed deposits in the long run but they also carry higher risks. Fixed deposits are safer with guaranteed returns but the returns are lower. So mutual funds are better for investors willing to take some risks for higher returns.
Are there any charges when purchasing mutual funds from a distributor?
Yes, there are certain charges like commission and transaction fees when you purchase mutual funds from a distributor. To avoid such charges, you can invest directly through the mutual fund house website or platform.
Are there SIP options available in the close ended/interval scheme?
No, Systematic Investment Plans (SIPs) are not allowed in close-ended or interval schemes as they have limited subscription period. SIPs are only available in open-ended schemes which allow ongoing subscriptions.
Based on the risk factor, what are the types of mutual funds available in the market?
Based on risk levels, mutual funds are categorized as:
1. Equity funds – Higher risk, higher returns
2. Debt funds – Lower risk, moderate returns
3. Hybrid funds – Balance of risk and returns
4. Solution oriented funds – Invest for specific goals
5. Index funds – Lower risk, market-linked returns
Can a nominee be appointed for my mutual fund investments?
Yes, it is advisable to appoint a nominee when investing in mutual funds. The nominee will receive the mutual fund units in case of the investor’s demise. Minor can also be appointed as nominee.
Can I invest in mutual funds in India if I am a non-resident?
Yes, NRIs and PIOs can invest in Indian mutual funds through NRO and NRE accounts. Certain funds have restrictions for US and Canada citizens of Indian origin.
Can I redeem my investment before the maturity date in a close-ended scheme?
No, in close-ended schemes redemption is not allowed before maturity. Units can only be sold on the stock exchange if they are listed. Redemption is allowed on maturity at applicable NAV.
Can I sell my stocks back to the mutual fund if it is a close-ended scheme?
No, you cannot sell the units back to the mutual fund in case of close-ended schemes. The units are listed on the stock exchange so you can sell them to other investors through a broker. Buyback option is not available.
Can investments in mutual funds be made through cash?
No, cash investments are not allowed in mutual funds. Payments have to be made through cheque, demand draft, NEFT, RTGS, IMPS or other approved banking channels. This is required under SEBI regulations.
Can investors make partial withdrawals from open-ended mutual fund schemes?
Yes, investors can make partial withdrawals from open-ended schemes based on available balance. Most funds require minimum amount for redemption. Partial withdrawals allow liquidity without exiting the fund.
Can NRIs Invest in Indian Mutual Funds?
Yes, NRIs can invest in Indian mutual funds through NRE and NRO accounts. They need to complete KYC process. Certain funds have restrictions for US/Canada citizens of Indian origin.
Can the asset allocation strategy of a scheme change over a period of time?
Yes, the fund manager can change the asset allocation of a scheme within the permitted limits based on market conditions and outlook. This is known as active asset allocation to optimize returns. Investors must check recent allocation.
Does an individual need a PAN card to invest in mutual funds?
Yes, having a PAN card is mandatory for investing in mutual funds. It is required for KYC process. Investments can be made without PAN only through systematic plans below Rs 50,000 per year.
How are close-ended schemes different from open-ended schemes?
Close-ended schemes are open for subscription only during NFO period while open-ended schemes allow ongoing subscriptions. Liquidity is lower in closed-ended schemes. Open-ended schemes have higher liquidity.
How are ETF different from mutual funds?
ETFs are passively managed and track an index while mutual funds are actively managed by fund managers. ETFs are listed on exchange and traded like stocks while mutual funds are not listed. ETFs have lower costs compared to active mutual funds.
How are interval funds taxed?
Interval funds are debt oriented hybrid funds. Taxation of interval funds is similar to debt funds. Capital gains less than 3 years are taxed as per investor’s tax slab. Long term capital gains after 3 years have indexation benefit and are taxed at 20% with indexation.
How can I redeem or withdraw money from my mutual fund account?
You can redeem mutual fund units by submitting a redemption request online or physically along with bank details. Redemption amount will be directly credited to your bank account within 10 working days. Part withdrawal is allowed in open-ended funds.
How do I invest in an interval fund?
Interval funds can be invested during New Fund Offer(NFO) period only. Application form along with KYC documents and payment needs to be submitted before NFO closing date. Units will be allotted after NFO closure. Further subscriptions are closed till next specified interval.
How do I start a mutual fund?
To start a mutual fund, you need an Asset Management Company(AMC) license from SEBI, minimum networth requirement, experienced fund management team and infrastructure like custodian, registrar, etc. Setting up a mutual fund requires extensive regulatory compliance and high capital.
How do interval funds work?
Interval funds invest in debt/money market instruments with periodic lock-in of 3-12 months. Liquidity is allowed at predetermined intervals through sale on exchange or buyback offers. NAV is declared daily. Fund performance depends on instruments chosen and interest rate view.
How does an investor buy and sell mutual funds?
An investor can buy mutual funds directly from AMC or through intermediaries like banks, brokers etc. To sell, redemption request is placed with the fund house or units sold on exchange in case of ETFs. Demat account is required for selling on exchange.
How long does it take for a fund house to credit my dividends?
As per regulations, dividend payouts need to be made within 30 days from record date. Fund houses usually aim to process and credit dividend payouts within 10-15 working days from declaration date. The amount is directly credited to investor’s bank account.
How many mutual funds should I invest in?
As a thumb rule, 5-10 mutual funds covering different segments like equity, debt and across market caps can form a good portfolio. Higher number may lead to duplication. Investing in too few funds can increase risk. Strike a balance between adequate diversification and ease of monitoring.
How many types of funds are there?
Main types of mutual funds based on asset class are – Equity funds, Debt funds, Hybrid funds, Solution oriented funds and Index funds. Further there are different categories under each type based on market cap, sector, investment strategy etc. There are over 2000+ schemes across categories.
How much do you need to start investing in large-cap funds?
There is no minimum investment amount for investing in large cap mutual funds. You can start a SIP with as low as Rs. 500 per month. Lumpsum investment can be done with amount as low as Rs. 100-500 in most large cap funds. So you can start with a small amount.
How to choose the best mutual fund?
Analyze past performance across time periods, consistency of returns, fund manager’s expertise, portfolio composition, risk measures like standard deviation, expense ratio and exit load before choosing the best mutual fund. Also align selection to your goals, investment horizon and risk appetite.
If I am looking for regular income after my retirement, which mutual fund will be best suited for me?
Retirement or income funds that invest in debt and money market instruments are best suited to provide regular income after retirement. They come in monthly and quarterly dividend options. Some retirement funds also allocate small portion to equities for inflation beating returns.
If I need some funds in three to six months, can I invest in mutual funds?
For money needed in such short duration, it is best to avoid mutual funds and park funds in fixed deposits or liquid funds. Equity funds require longer investment horizon of atleast 3-5 years. Debt funds like liquid, ultra-short term funds can be considered if exiting closer to 3 year period.
If I want to make a safe investment in mutual funds and want fixed returns, which type of scheme should I invest in?
For safe investment with fixed returns in mutual funds, you can invest in debt funds like short term funds, corporate bond funds, banking.
Also Read: Best Small Cap Mutual Funds to Invest
