User Activity Modal/Pop Up Component
banner

Types of Mutual Funds in India

Plan and Invest Your Hard-Earned Money. Learn About the Various Types of Mutual Funds Available in India

#Investments 100 Views 83 Shares
banner
avatar-image

Written by

Updated :

Reviewed by

Rated by users

Mutual fund investment has become quite popular in India. In recent years, the number of mutual funds as well as types of mutual funds available for investors has grown many fold. This increase in popularity is evident when you see the assets under management (AUM) data compiled by Association of Mutual Funds in India (AMFI).

The data shows that the total amount of money managed by mutual fund houses in India has increased from around Rs. 19 lakh crore in August, 2017 to over Rs. 39 lakh crore in August, 2022. What’s more as of August 2022, there were 1156 open ended schemes across various types of mutual fund, which means that investors are spoilt for choice when planning their investments.  

What are Different Types of Mutual Funds in India?

Having to choose a single investment from over 1000 competing mutual funds can lead to confusion in the investor’s mind. To reduce the confusion and help investors easily determine which type of mutual fund best suits their investment need, various types of mutual fund classification have been developed.

Some of the methods by which different types of mutual funds are classified in India include:

  • Asset Class-based classification
  • Structural classification
  • Investment type-based classification
  • Portfolio management style-based classification

There are multiple sub-categories among the above classifications too. In fact, the different types of mutual funds can be further classified based on how they can be redeemed, market cap of fund investments and type of investment and more. At present mutual fund types in India are primarily based on the SEBI classification of mutual funds introduced in 2017. 

Types of Mutual Funds in India as per SEBI Classification

The Securities Exchange Board of India (SEBI) is responsible for managing and developing the mutual fund industry in India. As part of this ongoing activity, SEBI introduced a circular titled “Categorization and Rationalization of Mutual Fund Schemes”. In this SEBI circular introduced an updated classification of the various types of mutual funds in India across 5 key mutual fund scheme types.  

The five broad types of mutual fund schemes and fund categories as per SEBI categorization of mutual funds are as listed below:

Types of Mutual Funds (SEBI Classification)

Key Fund Categories

Equity Schemes

· ELSS Funds

· Large Cap Funds

· Multi-cap Funds

· Small-cap Funds, etc.

Debt Schemes

· Liquid Funds

· Ultra Short Duration Funds

· Low Duration Funds

· Gilt Funds

· Money Market Funds, etc.

Hybrid Schemes

· Balance Hybrid Funds

· Conservative Hybrid Funds

· Dynamic Asset Allocation Funds

· Multi Asset Allocation Funds, etc.

Solution Oriented Schemes

· Retirement Fund

· Children’s Funds

Other Schemes

· Index Funds

· Exchange Traded Funds (ETFs)

· Overseas Fund of Funds

· Domestic Fund of Funds 

This list above is not exhaustive and for illustrative purposes only. There are currently a total of 36 types of mutual funds across the 5 key scheme categories. Each fund house can operate only 1 fund for each type of mutual fund mentioned in SEBI’s mutual fund classification circular.  

Types of Mutual Funds Based on Structure

Based on its structure, there are 3 key types of mutual funds in India. These are:

1. Open-ended Funds: This is one of the most flexible structures of mutual funds. In this, the investor is allowed to invest as well as withdraw as per their convenience. There is no maturity period for the redemption or withdrawal. Since there is no fixed tenure of the scheme. The only exception is tax-saving ELSS mutual funds. While ELSS investments in open-ended funds can be made at any time, redemption of investment is subject to a 3-year lock-in period.

1. Closed-ended Fund: Contrary to open-ended, close-ended schemes have pre-defined time period allowing entry into and exit from the investment. Apart from these specified intervals, investors are not allowed to invest in or redeem their investments at other times. In case, an investor needs to redeem units of a close-ended scheme before maturity, it can be done through the stock-exchange. As a result, SEBI has mandated that all close-ended mutual funds are mandatorily required to get listed on domestic exchanges.

3. Interval Schemes: These are a type of closed-ended mutual funds with a unique feature. As the name suggests, there are intervals where the investor is allowed to exit from or invest into the scheme. During these periods, that occur at specific intervals of time, the scheme operates similar to open-ended scheme. Interval mutual funds are therefore a more flexible investment option than standard closed-end mutual funds.   

1. Closed-ended Fund: Contrary to open-ended, close-ended schemes have pre-defined time period allowing entry into and exit from the investment. Apart from these specified intervals, investors are not allowed to invest in or redeem their investments at other times. In case, an investor needs to redeem units of a close-ended scheme before maturity, it can be done through the stock-exchange. As a result, SEBI has mandated that all close-ended mutual funds are mandatorily required to get listed on domestic exchanges.

3. Interval Schemes: These are a type of closed-ended mutual funds with a unique feature. As the name suggests, there are intervals where the investor is allowed to exit from or invest into the scheme. During these periods, that occur at specific intervals of time, the scheme operates similar to open-ended scheme. Interval mutual funds are therefore a more flexible investment option than standard closed-end mutual funds. 

Types of Mutual Funds Based on Asset Class

As per SEBI, mutual fund schemes are divided based on the type of investments the fund makes. Here are the key types of mutual funds divided based on the asset classes they invest in:

1. Equity Mutual Funds: Equity mutual funds are those types of mutual funds that invest 65% or more of their portfolio in equities or equity-linked securities. This type of mutual fund is considered to be ideal for the purpose of long-term investment. These mutual funds are further divided into multiple sub-categories, including:

  a.  Large-cap funds: In this category of mutual funds at least 80% of the portfolio is invested in equities or equity-linked instruments of large-cap companies. As per Association of Mutual Funds in India (AMFI), the 1st to 100th largest companies listed on the stock market, are called large-cap companies.

b.  Mid-cap funds: These equity funds must invest 65% or more of their portfolio in equities or equity-linked instruments of mid-cap companies. As per AMFI, the 101st to 250th largest stock market listed companies are designated as mid-cap companies.

c.  Small-cap funds: In the case of this type of equity scheme, at least 65% of the portfolio is invested in equities and/or equity-linked investments of small-cap companies. The 251st stock market listed company and onwards, depending on the capitalization of the market, are called small-cap companies as per AMFI.

Other types of mutual funds included in the Equity Fund category include:

  • Large and Midcap Fund
  • Multi-cap Fund
  • Flexi-cap Fund
  • Value Fund
  • Contra Fund
  • Dividend Yield Fund
  • Focused Fund
  • Equity Linked Savings Scheme (ELSS)
  • Sectoral/Thematic Fund

2. Debt Mutual Funds: Debt Fund also referred to as an income fund primarily invests in fixed income instruments like corporate bonds, government bonds, treasury bills (T-bills), certificate of deposits, etc. These fixed income tools such as different types of bonds are relatively unaffected by stock-market movements, hence considered to be less volatile that equity investments. There are different types of mutual funds in debt mutual funds. Here’s a list of some key types of debt funds in India:

  • Overnight funds
  • Liquid funds
  • Low duration funds
  • Money market funds
  • Dynamic bond funds
  • Corporate bond funds
  • Credit risk funds
  • Gilt funds

3. Hybrid mutual funds: As the name suggests, this type of mutual fund invests in multiple types of assets like equity, debt, gold, etc. Through hybrid funds, an investor gets access to a diverse portfolio that can help grow wealth while providing a high degree of downside protection. Hybrid mutual funds are further classified into multiple sub-categories. Below is a list of key hybrid mutual fund investment options in India:

  • Multi-asset allocation funds
  • Arbitrage funds
  • Equity savings
  • Conservative hybrid funds
  • Balance hybrid funds
  • Aggressive hybrid funds
  • Dynamic Asset Allocation funds  

3. Hybrid mutual funds: As the name suggests, this type of mutual fund invests in multiple types of assets like equity, debt, gold, etc. Through hybrid funds, an investor gets access to a diverse portfolio that can help grow wealth while providing a high degree of downside protection. Hybrid mutual funds are further classified into multiple sub-categories. Below is a list of key hybrid mutual fund investment options in India:

  • Multi-asset allocation funds
  • Arbitrage funds
  • Equity savings
  • Conservative hybrid funds
  • Balance hybrid funds
  • Aggressive hybrid funds
  • Dynamic Asset Allocation funds

4. Solution-oriented Mutual Funds: These are mutual funds that are designed to generate wealth to fulfill specific long-term goals like retirement or children’s education. Solution-oriented mutual funds in India are currently divided into two categories:

a) Retirement funds

b) Children’s fund 

Types of Mutual Funds Based on Investment Type

All mutual funds in India are offered as two key variants - growth and dividend. Investors have the invest in either of the two options of mutual fund schemes. The key features of these two types of mutual funds is as follows:  

1. Growth Option: In the case of the growth option, profits from earlier investments are re-invested to grow the wealth of the investor. This, in return increases the Net Asset Value of the mutual fund, which grows the size of the investment with time.

2. Dividend Option: As the name suggests, the profit made in the investment is periodically distributed to investors in the form of dividends. Distribution of dividend however leads to a decrease in the NAV of the scheme. Currently dividend option of mutual funds has been renamed as IDCW (Income Distribution cum Capital Withdrawal) option.  

Mutual Fund Classification based on Risk and Specialty 

Every investment carries a certain risk. It varies from investment to investment. For instance, government bonds carry less risk as compared to small cap stocks. The different levels of risks involved in mutual fund investments are:

a) Aggressive: Potentially high risk and high return investment

b) Moderate: Strikes a balance between risk and potential returns

c) Conservative: Focus on capital protection with limited focus on growth

There are market risks involved in every type of mutual fund investment. Common examples include volatility risk, liquidity risk, credit risk, and concentration risk. No investor can avoid all the risks attached to an investment, but a well-chosen investment can help an investor strike a balance between potential risk and returns.

Conclusion

The categorization was done by SEBI in 2017 to make it easier for investors to compare the funds. There are different types of mutual funds available in the market have helped young individuals meet their goals. An investor now has choices to find a mutual fund as per the amount they want to invest in, period of time and even the risk involved in it.

Frequently Asked Questions (FAQs)

1. Which type of mutual fund gives a higher return?

Higher returns come at the cost of high risks. Thematic funds can offer the highest returns but as they primarily invest in a single sector or theme, they often feature a high degree of investment risk.

2. Which is better - FD or mutual fund?

FD and Mutual funds are very different investment options. Fixed deposits provide assured returns, but the rate of return is often quite low. Mutual funds, on the other hand, typically offer inflation-beating returns, but returns are not guaranteed. So, neither can be called a better investment and the choice depends on the investor’s goals.

3. Can an investor get monthly returns on investment in mutual funds?

Systematic Withdrawal Plans allow an investor to withdraw funds from the invest annually, semi-annually, quarterly, and even monthly. They do not grant interest to the investor. They are the opposite of a systematic investment plan (SIP).

4. Which type of mutual fund is considered ideal for beginners?

In most cases, new investors are seeking long-term growth of their wealth, hence equity mutual funds are considered to be the ideal option. Alternatively, if a new investor is seeking tax saving investment option, then ELSS tax saver mutual fund might be the better investment option.   

5. How much can I invest in a mutual fund?

There is no upper cap on how much one can invest in mutual funds. Investors can choose to invest either via the lump sum investment route or the SIP (systematic investment plan) route. However, cash mutual fund investments are limited to Rs. 50,000 per investor, per mutual fund per financial year.

 

Sources:

https://portal.amfiindia.com/spages/amaug2017repo.pdf

https://portal.amfiindia.com/spages/amaug2022repo.pdf

https://www.etmoney.com/mf/types-of-mutal-funds-in-india

https://www.sebi.gov.in/legal/circulars/oct-2017/categorization-and-rationalization-of-mutual-fund-schemes_36199.html

https://www.etmoney.com/mf/types-of-mutal-funds-in-india

https://www.nirmalbang.com/knowledge-center/closed-ended-mutual-funds.html  

https://economictimes.indiatimes.com/definition/interval-schemes

https://www.amfiindia.com/investor-corner/knowledge-center/SEBI-categorization-of-mutual-fund-schemes.html

https://www.miraeassetmf.co.in/knowledge-center/what-is-idcw-in-mutual-funds   

https://cleartax.in/s/use-systematic-withdrawal-plans-earn-regular-income-funds

https://www.sebi.gov.in/sebi_data/faqfiles/may-2017/1494501305219.pdf

https://www.bankoncube.com/post/types-of-mutual-funds-based-on-allocation-risk-investment-type-more

ARN No: Sept22/Bg/23A

Topics Covered

6:28 Min Read Time

Get Your Premiums Back At Maturity

Maximize your savings!
Guaranteed Returns + Life Cover
User Activity Modal/Pop Up Component
User Activity Modal/Pop Up Component