The main reason behind the popularity of mutual funds is the diverse range of options that they provide. There are more than
29 types of mutual funds in India 29 types of mutual funds in India
Day by day Mutual Fund Investment and Systematic Investment Plan (SIP) are becoming popular in India. So it becomes necessary for retail investors and new investors to understand the types of mutual fund schemes running in India. Read More .
But with so many types of mutual funds, it is very easy to get confused and invest in the wrong type of mutual fund.
To ensure this doesn't happen, let us take a detailed look at the different types of mutual funds in India.
In this article we cover
1) Types of Mutual Funds in India Based on Management Style
2) Types of Mutual Funds in India Based on Asset Class
3) Types of Mutual Funds in India Based on Liquidity
4) Types of Mutual Funds in India Based on Investment Style
5) Types of Mutual Funds in India Based on Investment Speciality
To help simplify this, we have divided the different types of mutual funds Based on the following:
- Management style
- Asset class
- Investment style
Types of Mutual Funds in India Based on Management Style
Management style refers to how actively the fund manager manages your portfolio.
Based on management style, there are two types of mutual fund schemes:
1. Actively managed mutual funds
2. Passively managed mutual funds
Actively managed fund is similar to visiting a five star restaurant for dinner. The chef actively prepares meals for you. He ensures that you have a wonderful dining experience.
Similarly, in an actively managed fund, the fund manager actively manages the portfolio. He decides which stocks to buy and sell. He also decides when is the ideal time to buy and sell stocks. The goal of an active fund manager is to beat the fund’s benchmark and generate superior returns.
The expense ratio of actively managed mutual funds is higher than passively managed mutual funds.
Passively managed mutual funds are similar to ordering a burger from a fast food joint. Everyone ordering a McMaharani gets the exact same burger. The goal here is to ensure that the taste of Mcmaharani does not change from 1st customer to 100th customer.
Similarly, in a passively managed mutual fund, the fund manager takes no active investment decisions. Passively managed mutual funds simply copy a selected benchmark. The goal is not to beat the benchmark. The goal of a passive fund manager is to simply mirror benchmark returns.
Index funds are a type of passively managed mutual fund. Since they do not take active investment decisions, passive mutual funds have a lower expense ratio.
Types of Mutual Funds in India Based on Asset Class
Equity Mutual Funds: Equity mutual funds invest in equities or stocks of companies. They are also referred to as stock funds.
Equity funds provide retail investors indirect access to participate in the stock market.
Equity funds invest in shares. Shares represent proportionate ownership in a company. Investors directly participate in the company’s profits and losses.
Hence, equity mutual funds are highly risky. But they also have a track record of generating superior returns. Equity mutual funds are perfect for long term investors.
Equity Mutual funds are further divided into:
- Large cap funds: These mutual funds invest in stocks of 1st 100 companies as per market capitalisation.
- Mid cap funds: These mutual funds invest in stocks of 101-250 th company as per market capitalisation.
- Small cap funds: These mutual funds invest in stocks of 251st and beyond companies as per market capitalisation
- Multicap funds: These mutual funds have the freedom to invest across large cap, midcap and small cap stocks.
Debt Mutual Funds: Debt mutual funds invest in fixed income securities. Typically, debt mutual funds invest in:
- Treasury bills
- Commercial papers
- Certificates of Deposits
These securities can be issued by private or public companies and the government. Since the maturity value and interest is ‘fixed’ debt funds are much safer than equity funds.
Debt mutual funds can be further subdivided Based on the entity issuing the papers:
- Gilt Funds: Gilt funds invest in only fixed income securities issued by central, state or municipal corporations. They are very safe.
- Money Market Funds: Money market funds include liquid funds,low duration, ultra short term funds etc. These funds invest in short term government securities. Their maturity ranges from 1 day to 91 days.
- Corporate Bonds and Banking & PSU Debt Funds: Corporate bond funds invest in securities having AAA ratings. Banking & PSU Debt funds majorly invest in banking and public sector securities. They are relatively safer.
- Credit Risk Bebt Funds and Dynamic Bond Funds: These funds are riskier debt funds as they invest in debt securities with lower credit ratings. They are suitable for high risk investors.
- Medium-Duration, Floating Rate and Long Term Debt Funds: Floating rate debt fund invests in mutual fund schemes across various tenures. Medium and long-duration debt funds carry higher interest rate risk than short-term or dynamic funds.
- Conservative hybrid funds invest 60% in debt and 40% in stocks.
- Aggressive hybrid funds invest 60% in stocks and 40% in debt.
Conservative hybrid funds carry low-risk. Aggressive hybrid funds carry medium-high risk.
Hybrid mutual funds are further subdivided as:
|Type of Hybrid Fund||Equity Alcomation||Debt Alcomation|
|Conservative Hybrid Fund||10% – 25%||90% – 25%|
|Balanced Hybrid Fund||40% – 60%||60% – 40%|
|Aggressive Hybrid Fund||65% – 80%||35% – 20%|
|Dynamic Asset Alcomation / Balanced Advantage Fund||Invests Dynamically||Invests Dynamically|
|Multi-Asset Alcomation Fund||The scheme will invest in at least three asset classes with a minimum alcomation of at least 10% each in all three asset classes||The scheme will invest in at least three asset classes with a minimum alcomation of at least 10% each in all three asset classes|
|Arbitrage Fund||The scheme will follow an arbitrage strategy and maintain a minimum 65% in Equity.||The scheme will follow an arbitrage strategy and maintain a minimum 65% in Equity.|
|Equity Savings||Minimum 65%||Minimum 10%|
Types of Mutual Funds in India Based on Liquidity
Liquidity is how quickly you can sell an asset and convert to cash. Bank savings account is highly liquid. Your flat is highly illiquid.
Based on liquidity, there are 3 types of mutual funds in India:
- Open ended mutual funds
- Close ended mutual funds
- Interval mutual funds
Open ended mutual fund is like a 24-hour chemist. You can buy and sell your mutual fund units anytime. Open ended funds are highly liquid.
Close ended mutual fund is like your exam papers. They are open for subscription for sometime and then close. They then directly open on a fixed maturity date. Close-ended funds are listed on stock exchange but carry very less liquidity.
Interval mutual funds are a mix between open and close ended funds. After subscription, they are opened during selected ‘intervals’ for redemption. Interval funds also carry low liquidity.
Mutual fund beginners should invest in open ended mutual funds only
Types of Mutual Funds in India Based on Investment Style
Every mutual fund has an investment style. There are 3 types of mutual funds in India Based on investment style:
Types of Mutual Funds in India Based on Investment Speciality
Equity Linked Saving Scheme (ELSS): ELSS funds are a type of close-ended equity mutual funds. They are primarily used to save tax under section 80C.
ELSS mutual funds carry a compulsory comk-in period of 3 years. This means that you cannot sell your units before 3 years under any circumstances. Investment in ELSS funds upto ₹ 1.5 Lakhs can be claimed as a deduction while filing your income tax.
Sectoral Mutual Funds: These funds invest in only one area or sector of the market. Hence they carry very high risk.
For example: Nippon India Pharma Fund invests 97% of its corpus in shares of pharma companies. Similarly, IDFC Infrastructure Fund invests 98.9% in infrastructure companies.
Understanding the cycle of a particular sector is very important while investing in sectoral funds. Hence, sectoral funds are suitable for high-risk investors with a long-term investment horizon.
Thematic Mutual Funds: Thematic funds invest Based on a particular ‘theme’.
For example, if you believe that ‘infrastructure’ theme will do well, then you can invest in an infrastructure thematic fund. The fund will then invest in stocks of cement, steal, power companies.
Since companies following the same theme are interconnected, there is less diversification in thematic funds. Hence they carry very high risk.
Thematic funds are suitable for aggressive investors with a long term investment horizon.
Fund of Funds: As the name suggests, a fund of funds invests in other mutual funds. The idea is to invest in all top funds under just 1 umbrella. But even though a Fund of Funds invests in equity funds, it carries debt taxation. The holding period for fund of funds is 36 months.
For example: Quantum Fund of Funds invest in the following funds:
- Invesco India Growth Opportunities Fund - 14.25% alcomation
- ICICI Prudential Bluechip Fund - 14.17% alcomation
- Mirae Asset Large cap Fund - 14% alcomation
- Kotak Standard Multicap Fund - 13.97% alcomation
- Axis Bluechip Fund - 13.88% alcomation
- L&T Midcap Fund - 13.86% alcomation
- Invesco India Midcap Fund - 13.58% alcomation
- Fixed Maturity Plans (FMP): Fixed maturity plans are close-ended fund schemes. They invest in bonds, debentures and money market instruments. FMPs are highly illiquid as they can be redeemed only on maturity. Investors in FMPs should match their investment horizon with the fund’s maturity.
- Global Funds: These funds majorly invest in foreign markets like the US, Canada, UK, European markets etc. Global funds are not very popular in India. Investors looking to invest in international companies like Amazon, Alphabet etc can invest in global funds.
But real estate funds will invest in real estate projects directly. For example: A real estate fund will invest directly in Godrej Properties’s Thane Emerald project.
- Solution-oriented mutual funds: Solution-oriented funds are custom made mutual funds to suit your financial goals. Retirement funds, pension funds, child education plans etc are types of solution-oriented funds.
- Exchange Traded Funds (ETF): ETF is very similar to an index fund. It tracks a set benchmark. ETF is also passively managed. But an ETF can be bought and sold on the stock exchange like shares.
- Emerging Market Funds: Emerging market funds invest in stocks of companies in developing countries. These countries are in an emerging phase. They have the potential to generate higher returns but are also very risky.
We understand that for a mutual fund beginner, you must be thoroughly confused with all these mutual fund types.
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The author is a Certified Financial Planner (CFP) with 5 years experience in Investment Advisory and Financial Planning. Her strength lies in simplifying complex financial concepts with real life stories and analogies. Her goal is to make common retail investors financially smart and independent., RankMF | Last Update 30 March 2021