Types Of Mutual Funds
In the last decade, mutual funds have emerged as one of the most
preferred and profitable investment avenues. The availability of
different types and categories of mutual funds in the market
make it a viable investment option for different types of
investors with varied risk appetite.
Since investing in the market has its share of risks,
individuals must select a mutual fund that matches their intent.
To do so, they need to find out more about the different types
of fund options available. Subsequently, they should weigh the
accompanying pros and cons to make an informed decision.
Categories Of Mutual Funds – In A Nutshell
Before finding out about the different types of mutual funds,
one should check out the categories they belong to. In a broader
sense, there are 5 categories of mutual funds, and they include
- Mutual funds based on assets class
- Mutual funds based on the structure
- Specialised mutual funds
- Mutual funds based on risk
Mutual funds based on investment goals
To gain a better idea about them and their effectiveness as an
investment option, individuals need to become familiar with each
type of fund under these categories.
Type Of Mutual Fund – Based On The Asset Class
Based on the asset class, they can be divided into 4 types.
These pointers below offer a fair idea about them –
This type of fund invests primarily in stocks of different
companies. The performance of the underlying shares decides
whether the fund will generate profit or accrue a loss.
These funds invest mostly in debt instruments like bonds,
treasury bills, and securities. Usually, debt funds generate a
fixed rate of return and come with a maturity date.
Collectively, this makes the funds suitable for conservative
investors or individuals who are averse to risks.
They are also known as balanced funds, and they serve as a
bridge between debt funds and equity funds. The ratio of
allocating resources between stocks and debt funds depends on
the fund manager’s discretion and investor’s
investment goal. Generally, they are considered suitable for
individuals with a high-risk appetite.
Primarily these are debt funds that are made available to
companies for a term of 1 year. These funds invest in multiple
market securities and are highly liquid. Money market funds
include treasury bills, certificate of deposit or CD, repurchase
agreements, commercial paper, etc., among others.
Type Of Mutual Fund – Based On The Structure
On the basis of structure, mutual funds are categorised as
close-ended and open-ended ones. This table below walks us
through the primary differences between the two –
Open-ended mutual funds
Close-ended mutual funds
They are not listed on any stock exchange.
They are listed on recognised stock exchanges.
Being a perpetual fund, they do not come with a fixed
Their investment period usually ranges from 3 years to
The price is determined by dividing NAV with
The price is determined based on the demand and supply
Issued number of shares
Ideally, there is no limit on the issuance of shares.
There is a limit on the number of shares that can be
Entry and exit
Individuals can enter, redeem, and exit at any given
point of time.
Individuals can enter or invest in these shares during
the New Fund Offer.
Type Of Mutual Fund – Based On Risks
They can be divided into these three types based on risks
High-Risk Funds – These funds offer
investors high returns in the form of dividend and interest.
However, as the name suggests, they expose investors to high
Medium-Risk Funds – They comprise a
mixture of both debt and equities, and therefore, the
accompanying risk-reward factor is also low.
Low-Risk Funds – They expose investors
to low risks. They are most suited for individuals who are
unsure about taking risks related to investments.
Type Of Mutual Fund – Based On Financial Goals
By factoring one’s financial goal, individuals can invest
in any of these mutual funds in India –
They are mostly directed towards growth sectors, rapidly
expanding companies and shares that come with high risk-reward
prospects. The primary objective of these funds is capital
appreciation. Ideally, these investment options are popular
among investors who wish to grow their investment profile.
They invest money into a variety of government securities,
corporate bonds, high dividend-generating stocks, and
certificate of deposits. The primary objective of income funds
is to generate a steady flow of income for investors.
As the name suggests, the underlying goal of these funds is to
facilitate tax savings. Equity Linked Saving Scheme or ELSS is
among the most popular tax-saving mutual funds in India, among
investors. While they enable wealth generation, they come with a
stringent lock-in period. Tax-saving funds are ideal for
salaried individuals or those who plan on building a retirement
corpus over the years.
Essentially, these are debt funds that park money into assets
and securities, with a tenure of 91 days. They invest in
financial instruments like – treasury bills, fixed
maturity funds, and other debt securities.
Other than these, pension funds, aggressive growth funds,
capital protection funds, and fixed maturity funds are the other
popular types in this category.
Besides these, there is one more category of mutual funds that
is a one of a kind investment option – Specialised mutual
fund. The most popular funds under this category include - fund
of funds, index funds, sector funds, exchange-traded funds, and
global market funds.
Nevertheless, while selecting the most suitable mutual funds in
India, individuals should develop a well-rounded plan, and align
their investments accordingly. Once they have chosen a mutual
fund to invest in, they should make it a point to balance and
rebalance their portfolio regularly to fine-tune the risk-reward
ratio as per the market conditions.