Types of Mutual Funds explained


There are various types of mutual funds in India today.

The Mutual Fund industry has come a long way in our country and today you have the option to choose from a variety of categories to invest in mutual funds to achieve your objectives.

Unfortunately, at the same time though due to the various types of mutual funds available, you could also be confused where to make your mutual fund investment.

With so many types of mutual funds in India today, it has become all the more important to resort and pay heed to professional advice when it comes to investing in mutual funds.

With mutual funds, knowing where not to invest is as important as knowing where to invest.

types of mutual funds


Funds based on maturity period

Open ended mutual funds

With open ended mutual funds, you can invest and redeem as and when you wish to.

Open ended mutual funds therefore provide you with the benefits of liquidity, flexibility and the opportunity to make decisions relating to investing and redeeming based on prevailing market conditions.


Close ended mutual funds

With close ended mutual funds, you can invest only during the allotted time period.

Once the period expires, you cannot then invest in the fund.

Once invested you cannot redeem your investments for a specific period.

Close ended mutual funds come with a maturity period for 3-6 years.

Once your funds mature, you can either redeem your investments or let them stay in the fund as they are.


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Interval Funds

Interval funds are a mixture of open and close ended mutual funds.

They mostly operate as close ended mutual funds though.

Interval funds can trade on the stock exchanges.


Funds based on Investment Objectives

Equity Mutual Funds

An equity mutual fund is any mutual fund that by SEBI regulations needs to invest a minimum of 65% of its overall portfolio into equities.

If you are investing in an equity mutual fund then you are basically investing in stocks of different companies.

Of all the different types of mutual funds, equity mutual funds have the potential to give you the highest returns.

Equity mutual funds are best suited for investors with long term goals and a high-risk appetite.

Equity mutual funds are best form of investment since they can also beat inflation in the long run if invested well and with a plan in place.

 Additional reading: Click Here to read our complete report on everything that you should know about a Mutual fund NAV.

Debt Mutual Funds

Debt mutual funds invest in fixed returns instruments such as corporate bonds, government securities, treasury bills and commercial papers and so on.

Debt mutual funds are less volatile than equity mutual funds.

They are most suited for investors with a low risk appetite and for short term goals.

Debt mutual funds can be seen as an alternative to bank fixed deposits.

You have to keep in mind that merely because debt mutual funds are less risky it does not mean they do not carry any risk at all, be it equity mutual funds, debt mutual funds or any other type of mutual fund, returns from mutual funds are not guaranteed.


Hybrid Mutual Funds

Hybrid mutual funds invest in a mix of equity and fixed income instruments.

Their main purpose is to find a balance between the high returns of equities and stability of fixed income instruments.

Hybrid mutual funds are more suited to conservative and first-time investors in mutual funds.


Liquid Mutual Funds

As the very name suggests, liquid mutual funds are highly liquid in nature.

Liquid funds invest in debt and money market instruments such as government bonds and treasury bills with a maturity period of up to 91 days.

These funds can be utilized for short term goals or even to do a Systematic Transfer Plan into an equity mutual fund.

These funds can also be utilized to park money for emergencies and can also work as a better alternative to a bank savings account.


Gilt Mutual Funds

Gilt mutual funds invest in government securities.

Although gilt mutual funds do not carry a credit risk, they however do carry interest rate risks.

They are affected by fluctuating interest rates.


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Other Mutual Funds


Index Funds

Unlike other mutual fund schemes, index funds are not actively managed but rather passively managed.

An Index fund would track a particular index such as Nifty or Sensex.

To put it simply, index funds would invest in the same stocks as the index has.

In an equity mutual fund, the primary objective is to beat the benchmark but in an Index fund the primary objective is to match the performance of the Index.

The difference between fund performance and index is known as tracking error.

Lower the tracking error the better.


Additional reading: Click Here to read our complete report on everything that you should know about a Mutual fund SIP, SWP and STP.

Tax Saving/ELSS Mutual Funds

Tax saving/elss mutual funds allow you an exemption of up to 1,50,000 in your taxes under section 80c of the income tax act.

Tax saving funds have the lowest lock in period of 3 years among the instruments available for tax exemption.

Elss funds need to invest a minimum of 80% of its overall portfolio into equities.

In case of sip plans, you have to keep in mind that each sip instalment completes 3 years in case you wish to redeem.

Unlike other mutual fund schemes, elss mutual funds are regulated by the government of India and not SEBI.


types of mutual funds

Thematic and Sectoral Mutual Funds

Thematic mutual funds

A Thematic Mutual Fund as the name suggests follows a particular theme when investing.


A Thematic Mutual Fund can invest across various sectors that fall within one particular theme.


It is far more diversified than a Sectoral Mutual Fund since it is not restricted to any one particular sector.


An infrastructure fund is an example of a thematic mutual fund, it invests only in stocks that are considered to be a part of the infrastructure story.

An infrastructure fund can invest in companies belonging to the paint (chemicals), cement, banks, etc sectors

Therefore, infrastructure is the theme in this example.


Sectoral mutual funds

A Sectoral Mutual Fund as the name suggests invests only in one particular sector.


It is less diversified than a Thematic Mutual Fund since it is restricted to just one particular sector.


   Think of Sports as a theme and various disciplines like Football and Basketball like sectors. Sports constitute both Football and Basketball but Football does not constitute Basketball and Basketball does not constitute Football.


In the same manner a Thematic Mutual Fund constitute various sectors but it is not necessary that various sectors fall within the same theme.


Think of a Pharma mutual fund scheme, it can only invest in companies belonging to the pharmaceutical sector.



Solution based Mutual Funds

Solution based mutual fund schemes are marketed around being able to provide you with solutions to a particular aspect like say your retirement or your child’s future.


These mutual funds are nothing but merely equity and hybrid mutual funds with different names.


There is nothing unique about the investing strategies adopted by solution based mutual funds.


The drawback of these funds is that they usually come in with a lock in period.


For example, for a retirement based mutual fund the lock in period is until you reach 60 years or 5 years from the date of investment, whichever is earlier.


For a child based mutual fund the lock in period is until your child turns 18 or 5 years from the date of investment, whichever is earlier.

You cannot redeem your investments when the lock in period has not expired even if you feel your fund is underperforming and therefore needs shifting.


The only positive point of solution based mutual funds is that if you are someone who is unable to handle volatility and struggles with discipline then these could be a good fit since they come with a lock in period with no chance of redemption as long as the lock in period is in existence.



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Disclaimer : While due precaution has been undertaken in the preparation of this article, The Mutual Fund Guide or any of its authors will not be held liable for any investments based on the above article. The above article should not be considered financial advice and has been published only for your perusal. Due credit has been given in case wherever required, in case you feel any part violates any rights then do get in touch with us and we shall get it duly removed.  
Mutual Fund investments are subject to market risks. Please read the offer document carefully before investing

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