Different Types of Mutual Funds In India

The mutual funds industry in India has witnessed a 6 fold increase in the past decade. The total AUM is Rs 61 lakh crores plus as of 30th June 24. Investors consider mutual funds a safe and organised medium to invest in capital markets. 

If you are a new investor considering mutual funds to park your money, here is a list of types of mutual funds available in the market. Apart from popular categories, there are many asset classes mutual funds invest in. Let’s have a look.

In India, mutual funds are categorised on different parameters such as asset class, investment objectives, and structure. Here’s a list of different types of mutual funds in India:

1. Equity Mutual Funds 

Equity mutual funds, one of the mutual fund types, invest in listed securities in the stock market. Equity funds are suitable for investors looking for long-term growth in their portfolio by participating in the growth story of a business as a part-owner of the companies they invest in, thereby benefiting from the potential appreciation in stock prices and dividend income over time. Now let’s understand the equity mutual funds types.

Large Cap Funds

As the name suggests, large-cap funds mandate a predominant fund allocation to large-cap companies by market capitalisation. 

The top 100 publicly listed companies in India are categorised as large-cap companies.

(Market Capitalisation = No. of outstanding shares * Price of each share)

These companies have well-established business models, are market leaders in their segment, and display a stable growth trajectory. 

Large-cap companies, known as blue chips, are usually less risky than mid-cap or small-cap companies. Large-cap funds are suitable for investors looking for stable growth in their portfolio and less volatility than mid-cap or small-cap funds.

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Mid Cap Funds

Mid-cap funds invest their corpus predominantly in stocks of mid-cap companies. These companies have a market capitalisation in the medium range. Mid-cap refers to the 101st to 250th company in terms of market capitalisation.

The growth potential is higher in mid-cap companies as they are in the early or mid-growth stage with a high potential to grow into a large-scale business. 

However, the risks are also high compared to large caps due to uncertainty, higher vulnerability to market factors, and short-term fluctuations due to sentiment. Mid-cap funds are suitable for investors with higher risk appetite, long-term horizon, and high growth expectations.

Small Cap Fund

Small-cap funds concentrate on companies with much smaller market capitalization with high growth potential in the future. In terms of market capitalization, companies in the order of 251 and onwards are called small caps. 

The risk associated with small caps is much higher due to unpredictability in future and the risk of external factors such as economic downturn, business segment slowdown, new entrants and products/services, high competition, etc. 

Small-cap funds are suitable for investors seeking high growth in future and willing to stomach volatility and risk.

Multi-Cap Funds

True to the name, multi-cap funds are equity funds that invest their corpus across large, mid, and small-cap stocks, thus diversifying the fund across companies at different size and growth stages.

Multi-cap funds can provide higher growth for long-term wealth creation with mid-cap and small-cap exposure but can also be riskier than a pure large cap.

As per SEBI norms, multi-cap funds must maintain an upper limit of 25% in each of the large-cap, mid-cap, and small-cap categories. This ensures the exposure to each market cap category is balanced.

Sectoral/Thematic Funds

Sectoral funds focus on specific sectors such as infrastructure, banks, healthcare, and real estate. These funds aim to capitalise on emerging growth stories in particular segments aided by macroeconomic factors, government focus, consumer demand, global factors, etc.

Focus on specific sectors (e.g., IT, healthcare) or themes (e.g., infrastructure).

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ELSS (Equity Linked Savings Scheme)

ELSS schemes are equity funds with specific objectives to help investors save tax and also invest in stocks for long-term growth. Investments in ELSS schemes are eligible to receive tax benefits under Section 80C.

These funds have a lock-in period of 3 years from the date of investment. ELSS schemes are an excellent alternative to traditional tax saving options with fixed returns. The equity upside and tax savings combined make ELSS a popular investment. 

Dividend Yield Funds

Dividend yield funds invest in stocks with a track record of paying high dividends to their shareholders consistently. These funds invest at least 65% of assets in equity or related instruments. 

Contra Funds

A contra fund is a mutual fund that takes contrarian investment bets. A contra fund seeks to capitalise on opportunities in stocks that are underperforming currently but look promising to deliver growth and outperform in future.

A Contra fund manager goes against market trends and currently favoured stocks to deliver above-average returns. The risk in contra funds can also be high with promise for growth.

Focused Funds

A focused fund is a type of equity mutual fund that invests in a limited number of stocks. While diversified equity funds can invest in even 100 stocks, SEBI mandates a maximum of 30 stocks in focused funds. Fund managers carefully handpick these stocks from a wide pool of companies across different market capitalizations and sectors. 

With a focused concentrated portfolio, the fund aims to provide high returns from potential outperformers without scattering the corpus across numerous stocks. 

These funds are suitable for investors who can bear high risk and volatility in the short term and invest with a 5-year+ time horizon.

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2. Debt Mutual Funds

Debt funds invest in instruments that corporations and governments issue to procure funds. There are different types of debt instruments differing in maturity. Let’s have a look:

Liquid Funds

Liquid funds invest their corpus in short-term, highly liquid instruments such as government securities, treasury bills, and commercial papers. The maturity of these instruments is up to 91 days.

Liquid funds carry the least risk among debt funds and offer high liquidity. Least affected by interest rate movements, liquid fund securities are parked for short periods often in fixed-income instruments.

Liquid funds offer a viable alternative to savings bank accounts or short-term fixed deposits bearing lower interest rates and fixed term. Investors can invest and exit liquid funds conveniently without paying heavy entry and exit loads or penalties. This category of mutual fund is suitable to park funds needed at short notice and capital protection. 

Ultra Short-Term and Low Duration Funds

Ultra short-term funds invest in instruments with a 3-6 month period of maturity whereas short-term funds invest in debt instruments with a 6-12 month maturity. They are safe to invest in and bear lower risk compared to long-term debt funds. 

Short Duration Funds

Short duration funds invest in debt instruments with a maturity period of 1-3 years. These funds aim to generally deliver returns above bank deposits while managing risks. 

The risk is low to moderate in short duration funds due to slightly longer term and interest rate risk. Fund managers control this risk by investing in good quality debt from companies with positive operative cash flows.

Medium Duration Funds

Medium duration funds invest in debt securities with a maturity of 3 years+ Since these funds have a longer time horizon, a stable interest rate environment makes them attractive and less riskier.

Medium to Long-Term Funds

Invest in longer-term debt securities with maturity between 4-7 years. These funds carry higher risk as they can revolve around a full economic cycle and are extremely prone to interest rate changes.

Gilt Funds

Gilt funds are debt funds that primarily invest in government securities. These funds are safe with zero default risk due to government backing but can be prone to interest rate changes. Gilt funds are usually long-term duration funds and suitable to longer time horizons.

Credit Risk Funds

Credit risk funds Invest at least 65% of their corpus in lower-rated debt instruments with higher potential returns. Borrowers that are not highly rated often pay higher interest to procure funds. The risk of default and propensity for loss is also high in low-rated debt funds.

Also Read: Difference Between Equity and Debt Mutual Funds

Hybrid Mutual Funds

Hybrid mutual funds are a mix of debt and equity in varying ratios. Hybrid funds aim to provide higher growth potential from equity and stable returns from debt portfolio. Let’s look at the types of hybrid funds:

Balanced Funds

Balanced funds invest the fund equally in equity and debt asset classes. The combination of equities and debt balances the risk-return equation for the investment. 

Aggressive Hybrid Funds

Aggressive balanced funds allocate up to 75% corpus in stocks and the remaining allocation to debt instruments or fixed deposits. 

Since a larger portion of the corpus is dedicated to equity, the growth potential and risk both are high in these funds. 

Compared to pure equity, the risk is slightly lower in this category, yet investors must enter with a long-term horizon to benefit from growth in equity.

Conservative Hybrid Funds

Conservative hybrid funds have a higher allocation to debt instruments and a smaller allocation to equities. These funds invest up to 75% in fixed-income and debt instruments. 

These funds are suitable for conservative and risk-averse investors looking for better returns than debt funds with some growth upside from equities. 

Dynamic Asset Allocation Funds

Dynamic asset allocation funds balance equity-debt allocation depending on the market conditions. The allocation works on a pre-set model with formulas and rules for assessing market variables such as PE & PB ratio, technical indicators, and shift allocation to equity or debt.

These funds provide automatic portfolio rebalancing without investor’s intervention. For example, when the markets are overvalued or technical & fundamental indicators point towards a fall, the allocation moves to debt and vice versa. Thus the fund manages volatility while targeting better returns.

Index Funds

Index funds replicate the stock portfolio of a particular index in the same proportion. For example, an NSE Nifty index fund invests in all Nifty stocks in the same ratio as the index. 

Since there is a fixed mandate for investment, these funds do not require any investment management and are therefore known as passive funds. Index funds track underlying index which can be equity or debt-based. The fund aims to deliver the same return as the index. 

The risk associated with index funds can be lower than actively managed equity funds since all stocks in any broad-based index are part of the portfolio. Investors with positive views about the economy and markets, and seeking long-term growth with minimal portfolio management prefer index funds. 

The biggest advantage of Index funds is a low expense ratio compared to actively managed funds, it brings down the cost of investment. 

Index funds can be of varying types depending on the index they track:

Market Cap based Index Funds

Index funds that track indices on the basis of market capitalization invest in market cap-weighted indices such as Nifty 50, BSE Sensex, Nifty 100, Nifty Midcap 150, BSE 250 Smallcap, etc. 

Sector-Specific Index Funds

These funds track indices of specific sectors such as banking, infrastructure, IT, healthcare, etc. There are index funds that have a narrower focus, such as a PSU Bank index.

Read our latest blogs “Best Index Funds in India” and “How to Invest in Index Funds” to learn more about index funds!

Fund of Funds (FoF)

Fund of Funds, as the name suggests, is a mutual fund scheme that invests in other mutual fund schemes instead of direct stocks. Invest in other mutual funds within India. 

These funds benefit from wider diversification in a single investment with multiple schemes and the expertise of different fund managers.

Exchange Traded Funds (ETFs)

Exchange-traded funds are funds that are traded on stock exchanges like a stock. ETF is essentially a basket of assets that tracks a particular index such as BSE Sensex or a sector or commodity or bonds. ETFs trade like units of a mutual fund with NAVs based on the value of the underlying basket of stocks.

Unlike mutual funds that investors buy or sell based on the NAV on the date of purchase, ETFs can be traded all day like stocks with dynamic real-time pricing that moves as per the market throughout a trading day. Thus, ETFs offer high liquidity.

ETFs are passively managed like index funds and track a particular basket of assets. Hence ETFs are cost-efficient compared to actively managed funds. 

ETFs are available in varied asset classes such as equities, commodities, currencies, specific sectors, index-based ETFs, Fixed Income ETFs etc.

Also Read: ETF vs Index Fund

Other Types of Mutual Funds

Retirement Funds

Retirement funds are an avenue to invest for meeting retirement goals. 

These funds usually have a lock-in period of 5 years+ and invest a minimum of 65% corpus in equities. They are suitable for investors with a very long term horizon, patience, and appetite for allowing the investment to grow for long periods. 

Fixed Maturity Funds

Fixed Maturity funds have a fixed maturity date and invest insecurities with fixed maturity periods and a defined time horizon. These funds generally invest in debt instruments with fixed returns with low risk.

Conclusion

To conclude, mutual funds offer a comprehensive range of funds to cater to individual investment goals, time horizons, and risk tolerance. They are convenient, cost-efficient, and suitable for new and experienced investors both. Download the Rupeezy app and select the best funds in each category within minutes. Compare funds, check portfolio overlap in your existing schemes, and make informed decisions to achieve your financial goals. With Rupeezy, you can explore various types of mutual funds tailored to your needs, ensuring a well-diversified portfolio. Start investing today and use expert insights and tools to optimize your returns.