Different Types of Mutual Funds in India

In recent years, many people have become interested in mutual funds. They are an investment vehicle where money is pooled from different investors to invest it in various other financial assets like stocks, bonds, etc. There are different types of mutual funds. The main advantage of mutual funds is that they are managed by professionals, known as fund managers. To manage the fund, they charge you a fee, called an expense ratio. The best thing about mutual funds is that they give all types of investors access to investment opportunities.

Types of Mutual Funds

In India, the Securities and Exchange Board of India (SEBI) oversees the mutual fund business. Mutual funds can be categorized in several different ways, though.

For instance, mutual funds can be categorized according to their structure, asset class, etc.

Different Types of Mutual Funds Based on Various Parameters:

A. Based on Asset Class

According to asset classes, mutual funds are categorized as follows:

1. Equity Funds

As the name suggests, equity mutual fund schemes majorly invest in equities/stocks. It indicates that these funds are high-risk and have the potential to produce amazing returns in the long run. Equity funds can be further classified into different categories:

  • Large Cap:

These funds invest at least 80% of their equity holdings in large-cap stocks. i.e., they invest in companies that are between 1 to 100 as per market capitalization.

  • Mid Cap:

They invest at least 65% of total assets in mid-cap companies, i.e., the companies that are ranked between 101 to 250 as per market capitalization.

Small Cap: They invest at least 65% of total assets in small-cap companies, i.e., these are the companies that are ranked above 250 in terms of market capitalization.

  • Multi Cap:

These schemes invest in stocks across all market cap: large-cap, mid-cap, and small-cap. So, the proportion between these market caps is decided by the fund manager according to the market and economic conditions.

  • Large and Mid-Cap funds:

These schemes usually invest 35% in large-cap and 35% in mid-cap companies of the total asset value with the aim of generating better returns and experiencing less volatility.

Difference Between Large, Mid, and Small-Cap Funds

Aspect Large Cap Funds Mid Cap Funds Small Cap Funds
Market Capitalization Invest primarily in large, well-established companies with a large market capitalization. Invest in medium-sized companies with a moderate market capitalization. Invest in small, emerging companies with a relatively small market capitalization.
Risk Level Generally lower risk due to the stability and size of the companies in the portfolio. Moderate risk, with potential for higher returns than large-cap funds but also higher volatility. Generally higher risk due to the smaller size and higher growth potential of the companies in the portfolio.
Return Potential Typically offer moderate returns with lower volatility compared to mid and small-cap funds. Offer potential for higher returns compared to large-cap funds, but with higher volatility. Offer the potential for the highest returns among the three categories but come with the highest volatility and risk.
Investment Horizon Suited for investors with a longer investment horizon seeking stable returns and capital appreciation. Suited for investors with a moderate risk tolerance and a medium to long-term investment horizon. Suited for investors with a high risk tolerance and a long-term investment horizon, seeking aggressive growth.
Liquidity Generally more liquid than mid and small-cap funds, with higher trading volumes and narrower bid-ask spreads. Moderately liquid, with somewhat lower trading volumes and wider bid-ask spreads compared to large-cap funds. Less liquid compared to large and mid-cap funds, with lower trading volumes and wider bid-ask spreads.
Market Volatility Less susceptible to market volatility compared to mid and small-cap funds, providing more stability during market downturns. More susceptible to market volatility compared to large cap funds, with the potential for larger price swings. Highly susceptible to market volatility, with the potential for significant price fluctuations during market downturns.

2. Debt Funds

Debt funds are an excellent investment option for investors who need consistent income. These funds concentrate on debt securities to produce recurring returns on investments until maturity. They invest mainly in fixed-income securities like bonds, treasury bills, etc. These schemes are best for risk-averse passive investors searching for consistent income (interest and capital growth).

Debt funds are further classified as:

Overnight Fund:

They invest in securities that have a maturity of 1 day.

Ultra-Short Duration Fund: They invest in debt instruments with a Macaulay Duration of three to six months. They also typically offer greater returns than FDs.

Low Duration Fund:

They invest in debt instruments with a Macaulay Duration of six to twelve months.

Short Duration Fund:

They invest in debt and money market instruments with a Macaulay Duration of 1 year to 3 years.

Medium Duration Fund:

They invest in debt and money market instruments with a Macaulay Duration between 3 to 4 years.

Medium to Long Duration Fund:

They invest in debt and money market instruments with a Macaulay Duration between 4 to 7 years.

Long Duration Fund: These funds invest in debt and money market instruments with a Macaulay Duration of more than 7 years.

Others: Various other categories come under debt funds like money market funds, dynamic bond funds, corporate bond funds, gilt funds, etc.

Difference Between Debt Funds and Equity Funds

Aspect Equity Funds Debt Funds
Investment Focus Invest primarily in stocks or equities. Invest primarily in fixed-income securities such as bonds, treasury bills, and corporate bonds.
Risk Level Generally higher risk due to market fluctuations and volatility. Lower risk compared to equity funds.
Return Potential Potentially higher returns over the long term. Moderate returns compared to equity funds, but with lower volatility and consistent income generation.
Investor Profile Suited for investors with a higher risk tolerance and a long-term goal. Suited for investors seeking stable returns, capital preservation, or income generation, and those with lower risk tolerance.
Tax Treatment Taxed as per equity investments, subject to capital gains tax rules. Taxed as per debt investments, with tax treatment varying based on the holding period and nature of income (interest or capital gains).

3. Hybrid Fund

As the name suggests, they invest in two or more asset classes like stocks, bonds, etc. These funds’ main goal is to lower risk by utilizing the effective strategy of diversification. Various categories under hybrid funds are:

Aggressive Hybrid Fund:

They invest 65% to 80% of their assets in equity and equity-related instruments and the rest in debt and money market instruments. As they have high equity exposure, these funds have the potential to generate higher returns.

Conservative Hybrid Fund:

They invest primarily in debt instruments. These funds place between 75% and 90% of their assets in income-producing fixed-income securities such as corporate bonds, T-bills, etc. And the remaining money is invested in equity-related investments.

Dynamic Asset Allocation Fund:

As the name suggests, these funds are highly dynamic and invest in both equity and debt depending on the market conditions.

Multi-Asset Allocation Fund: These funds invest in a minimum of three asset classes, with a minimum of 10% in each of those asset classes, and it can change this percentage based on the market condition. These are preferred for their steady and regular profits.

Arbitrage Fund:

Arbitrage funds make money by taking advantage of price differences between two markets, typically the cash market and the futures market. These funds buy stocks on the open market and then sell them on the futures market. These schemes invest 0 to 35% of their capital in debt asset classes and 65 to 100% of their capital in equity assets.

Equity Savings Fund: By investing in equities, derivatives, and debt, these funds seek to strike a balance between risk and return. This fund can contribute to long-term wealth creation by investing in arbitrage possibilities with significant equity exposure.

B. Based on Structure

Mutual funds are categorized as follows, based on their structure:

1. Open-Ended Funds:

These funds have units available for purchase or redemption throughout the entire year. They trade in accordance with the current NAV. There are no limits on the amount to be invested and it also doesn’t have a set maturity date.

2. Closed-Ended Funds:

These funds can only be purchased during its first launch period, known as the New Fund Offer (NFO). Once the offer is closed, you cannot purchase any new units and can be redeemed once they reach maturity.

3. Interval Funds:

So, these schemes are a combination of open-ended and closed-ended funds. These funds are closed the rest of the time and only available for purchase or redemption during predetermined intervals (determined by the fund house).

C. Based on Investment Goals

Mutual funds are categorized as follows, based on the investment goals:

1. Growth Funds:

These funds invest a considerable portion in growth sectors with the primary purpose of capital appreciation. The investor’s wealth is increased by reinvesting earnings/profits from prior investments. This is suitable for investors who have idle money and can take high-risk.

2. Income Funds:

They invest in fixed-income instruments like bonds, and debentures with the main objective to deliver consistent income to investors in the form of dividends or coupons.

3. Liquid Funds:

Invests in money market instruments with a maximum maturity of 91 days Short-term investments can be made with liquid funds, which often provide better returns than savings accounts.

4. Tax-Saving Funds:

They are popularly known as Equity Linked Saving Schemes (ELSS). These are equity-oriented funds that assist in creating a tax-efficient portfolio. They have a lock-in of 3 years and are eligible for a tax deduction of up to 1.5 lakhs under Section 80 C of the IT Act.

5. Capital Protection Funds:

These are funds that invest a portion of their assets in both the equities and fixed-income markets. The goal of doing this is to protect the invested capital.

6. Fixed Maturity Funds:

These funds invest capital in debt market securities that mature at the same time as the fund itself or at a time that is reasonably close to it. A three-year FMF, for example, will invest in assets with a three-year maturity or less.

7. Pension Funds:

These funds aim to provide regular income after a long period of investment. They are usually hybrid funds with equities acting as the riskier portion of the investment and offering larger returns, and debt markets balancing the risk by offering lower but stable returns. The returns on these investments can be received as a pension, lump payments, or a combination of the two.

D. Based on Management Style

According to management style, mutual funds are categorized as follows:

1. Active fund management:

To produce returns that are higher than the benchmark, such as the Nifty, Sensex, etc. fund managers actively rebalance the portfolio. They are skilled at timing market fluctuations and have more involvement in the decision-making and do buying and selling of the underlying based on various factors.

2. Passive fund management:

The results of this style resemble benchmark indices and it uses a buy-and-hold strategy. Fund managers don’t involve much in decision-making and mimic the specific index. They just replicate a specific index and provide returns limited to the tracking index. Exchange-traded funds and index funds follow passive investing.

E. Based on Risk

Mutual funds are categorized as follows, based on their risk:

1. Low-risk funds:

This is suitable for investors who are conservative in nature and cannot take any risk with their invested money. In such cases, investment is mostly made in debt securities because they are safe and provide stable returns. The investment is done in securities like gilt funds, liquid funds, ultra-short duration funds, etc. The expected average return could range from 6-8%.

2. Medium-risk funds:

These investments present a medium level of risk since the fund manager invests in both equity and debt. The typical returns range from 9 to 12%. These funds may be invested to generate wealth over a longer period.

3. High-risk funds:

These types of funds are suitable for an aggressive type of investor who is willing to take high risks and looking to create a long-term portfolio to build wealth. You can expect 15%, or sometimes even 20% returns in such funds.

Modes of Investment in Mutual Funds:

Mutual funds are the most versatile investment vehicle since investments can be made via lump sum or Systematic Investment Plan (SIP) methods.

1. Lump Sum:

It is another method where you invest the entire amount in just one go like, say Rs. 50,000. This method of investing is advantageous when a fund’s net asset value, or NAV, is low. In this case, a lower NAV enables individuals to purchase more units. A higher NAV, on the other hand, decreases the number of units available to an investor. In order to benefit from a lump sum investment, you must have deep experience and knowledge of the market.

2. Systematic Investment Plan (SIP):

It is the most convenient option to invest in mutual funds. The SIP investment method allows you to invest a set amount on a regular basis. Installments can be made weekly, monthly, or even quarterly, depending upon the investor’s choice. SIPs are open-ended, which means they can be started or terminated at any time. By investing through a SIP, the investor invests on time without having to worry about market dynamics. The fixed sum of money that you can invest can be as little as Rs. 500. You can also skip or pause the SIP, whenever you face any shortage of funds.

Difference between SIP and Lumpsum

Parameters SIP Lump sum
Flexibility SIPs are more flexible as compared to lumpsum because the investor has the choice to invest as per their financial situation. Lumpsum investments lack flexibility.
Cash Flows You need regular cash flows to invest regularly. Cash flow is required for one time.
Monitoring of market Investors should keep a close eye on market performance because they may be exposed to different market cycles while participating in SIPs. Investors do not need to regularly monitor the market because lump sum investments are typically made for the long term.
Financial Discipline This investment option can help investors develop financial discipline by getting them into the habit of investing systematically. It does not instill such discipline because the investment is made all at once.
Risk appetite SIP risk ranges from low to medium. Lumpsum risk ranges from medium to high as the investment amount is large.
Dependency on market volatility SIPs are not solely dependent on market volatility. The Lumpsum strategy is highly market-responsive.
Investment Horizon SIPs are better for the short term. Better for the long term.
Investment amount It requires a lower investment amount. It requires a large amount of investment as the payment is made in bulk.
Other Advantages Power of compounding, rupee cost averaging, automated payments, and convenience. Capital appreciation in the long run, lowers maintenance and transaction costs.


When to choose the SIP method?

A person with a steady income can choose to invest in SIP. This alleviates the burden of investing a large sum of money all at once. The main advantage of investing in SIP is rupee-cost averaging. A SIP allows you to spread your money over time in both rising and falling markets. It allows you to lower the average cost of your investment while also lowering the risk. During tough market times, it does not make you panic because of the lower investment amount. SIPs are ideal for new investors and young professionals and an investor does not have to monitor the market regularly because it is a periodic investment.

SIP is highly recommended for investors who want to invest in an equity fund and in addition, SIP investing works well in a downfall market.

When should you choose Lumpsum?

Lumpsum is suitable for those who have a substantial amount of available money and a high-risk tolerance level. Investors can expect good returns in the long term in a time horizon of five to seven years. It can frequently assist in achieving specific financial goals, such as investing in a child’s education fund or a retirement fund. A poorly timed investment, however, could lead to losses and lost confidence. This is because a lump sum investor who is losing money could be hesitant to invest more money.

For example, an investor had invested Rs. 5,00,000 in an equity fund and if the market falls, their investment would also go down drastically, which can be quite unsettling. As a result, investors may be hesitant to put money in again.

It is suggested to invest in debt funds when it comes to a lump sum. The recommended horizon for debt funds is less than three years, so investing in debt mutual funds should be done as a lump sum.

SIP Vs Lump Sum: Which is Better?

As we have learned about both the sip and lump sum methods of investing in mutual funds, the decision between the two becomes critical. Before making any investment decision, consider the following factors:

  1.   Risk appetite: The primary distinction between Lumpsum investments and SIPs is the degree of risk involved. SIPs provide greater capital protection because you only invest a small portion of your total corpus in the plan.

For example, if you want to invest Rs. 5,00,000 into mutual funds, you have an option:

  •         You have the option to invest Rs. 41,667 monthly through the SIP route. This will not put a strain on the investor’s finances.
  •         Or through the lumpsum method, you can invest the full amount of Rs 5,00,000 in one go.
  1.   Returns: The return on both investments depends on the market conditions. SIPs typically outperform in volatile markets, whereas lump sum investments in ELSS generate higher returns when the market is stable or steady. 
  2.   Lock-in Period: ELSS mutual funds have a lock-in period of 3 years. Lumpsum deposits will mature in 3 years, while SIP bonds will mature one by one after the 3-year threshold is reached (depending on how many months you invested). 

Bottom Line

Long-term wealth creation can be achieved through systematic investment plans (SIPs) and lumpsum investments. The method of investing in mutual funds, whether through SIPs or lump sums, is completely up to the investor’s risk tolerance. Investing lump sum can yield better results than investing in SIPs for those who understand the pulse of the market. Those without a lump sum amount or a lot of market knowledge should consider SIPs, which will instill discipline as well. Some of the most important factors to consider before choosing any method are- monthly earnings, investment objectives, financial stability, and risk appetite.


Frequently Asked Questions

Q1. What is an Equity Mutual Fund?

Ans- Equity mutual funds invest primarily in stocks. They offer the potential for high returns but come with higher risk.

Q2. How do Large Cap, Mid Cap, and Small Cap Funds Differ?

Ans- Explain the distinctions between large-cap, mid-cap, and small-cap funds in terms of the size and risk associated with the companies they invest in.

Q3. What are Debt Mutual Funds?

Ans- Define debt mutual funds and explain how they primarily invest in fixed-income securities like bonds and treasury bills.

Q4. How do Liquid and Ultra Short-Term Funds Differ?

Ans- Differentiate between liquid and ultra short-term funds, emphasizing their investment horizon and liquidity features.

Q5. How does the Risk-Return Profile vary in Equity Funds?

Ans- Discuss the relationship between risk and return in equity mutual funds, highlighting the potential for higher returns and increased risk.

Q6. What is the Role of Gilt Funds in Debt Investing?

Ans- Explain the purpose of gilt funds, which invest in government securities, and their risk-return characteristics.

Q7. What are Hybrid Mutual Funds?

Ans- Describe hybrid funds and their investment strategy, which involves a mix of equities and debt instruments.

Q8. How do Balanced and Aggressive Hybrid Funds Differ?

Ans- Contrast balanced and aggressive hybrid funds in terms of their asset allocation and risk-return profiles.

Q9. What is an Index Mutual Fund?

Ans- Explain the concept of index funds, which aim to replicate the performance of a specific market index.

Q10. How do Index Funds Differ from ETFs?

Ans- Highlight the differences between index funds and exchange-traded funds (ETFs) in terms of trading and investment methods.

Q11. What is an ELSS (Equity Linked Savings Scheme)?

Ans- Provide an overview of ELSS and its role as a tax-saving instrument with a three-year lock-in period.

Q12. How Does the Lock-in Period Work in ELSS?

Ans- Explain the lock-in period associated with ELSS funds and its implications for investors.

Q13. What Factors Should I Consider Before Choosing a Mutual Fund?

Ans- Discuss the key considerations, such as investment goals, risk tolerance, and time horizon, before selecting a mutual fund.

Q14. How are Mutual Fund Returns Taxed?

Ans- Provide an overview of the taxation of mutual fund returns, including capital gains and dividend distribution tax.

Q15. What is the Expense Ratio in Mutual Funds?

Ans- Define the expense ratio and explain its significance in evaluating the cost of investing in mutual funds.

Q16. How Can I Redeem Mutual Fund Units?

Ans- Describe the process of redeeming mutual fund units and the factors to consider when deciding to sell.

Q17. What is the Difference Between Direct and Regular Mutual Fund Plans?

Ans- Explain the distinctions between direct and regular plans in mutual funds, focusing on expense ratios and distributor commissions.

Q18. Can I Switch Between Different Mutual Fund Schemes?

Ans- Discuss the concept of mutual fund switching and the considerations involved when transitioning between different schemes.

Q19. How Should I Monitor and Review my Mutual Fund Portfolio?

Ans- Provide guidance on monitoring and reviewing a mutual fund portfolio, including the importance of periodic assessments and adjustments.

Q20. What are the Different Modes of Investing in Mutual Funds?

Ans- Mutual funds can be invested through lump-sum investments and systematic investment plans (SIPs).

Q21. What is a Lump Sum Investment?

Ans- A lumpsum investment involves investing a single, large amount in a mutual fund at once.

Q22. How Does a Systematic Investment Plan (SIP) Work?

Ans- SIP is a mode of investing where an investor regularly invests a fixed amount at predefined intervals, usually monthly.

Q23. What are the Advantages of SIP over Lump Sum Investments?

Ans- SIPs help in rupee-cost averaging, reduce market timing risk, and make it easier to start investing with smaller amounts.

Q24. Can I Change the SIP Amount or Frequency?

Ans- Yes, most mutual funds allow investors to modify SIP amounts or frequencies based on their financial goals.

Q25. Is There a Minimum Investment Requirement for SIPs?

Ans- Mutual funds usually have a minimum investment amount for SIPs, which can vary among different funds.

by Instockbroker Team | February 19, 2024

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