Types of Mutual Funds in India Explained with Examples
Your Complete Guide to Understanding and Choosing the Right Mutual Fund
Mutual funds have revolutionized investing in India, making it accessible to millions of people who want to grow their wealth without directly managing stocks or bonds. But with hundreds of mutual fund schemes available, choosing the right one can feel overwhelming for beginners. This comprehensive guide will walk you through every major type of mutual fund available in India, complete with real-world examples and practical insights to help you make informed investment decisions.
What is a Mutual Fund?
Before diving into the types, let’s understand the basics. A mutual fund pools money from multiple investors and invests it in a diversified portfolio of stocks, bonds, or other securities. Professional fund managers handle the investment decisions, making it an ideal choice for those who lack the time or expertise to manage their own portfolios. When you invest in a mutual fund, you buy units, and the value of these units fluctuates based on the performance of the underlying assets.
Classification of Mutual Funds
Mutual funds in India can be classified in several ways. The most common classifications are based on asset class, structure, investment objective, and risk level. Let’s explore each category in detail.
1. Classification Based on Asset Class
EEquity Mutual Funds
Equity mutual funds invest primarily in stocks of companies. These funds aim to generate capital appreciation over the long term and are considered high-risk, high-return investment options. According to SEBI regulations, equity funds must invest at least 65% of their assets in equity and equity-related instruments.
- SBI Bluechip Fund: Invests in large-cap stocks of well-established companies like Reliance, HDFC Bank, and Infosys
- Mirae Asset Emerging Bluechip Fund: Focuses on large and mid-cap companies with growth potential
- Axis Small Cap Fund: Invests in smaller companies with high growth prospects but higher volatility
Types of Equity Funds:
- Large-Cap Funds: Invest in the top 100 companies by market capitalization (stable, lower risk within equity category)
- Mid-Cap Funds: Focus on companies ranked 101-250 by market cap (moderate risk, good growth potential)
- Small-Cap Funds: Target companies ranked 251 and beyond (highest risk and potential returns)
- Multi-Cap Funds: Can invest across all market capitalizations
- Sectoral/Thematic Funds: Focus on specific sectors like banking, pharma, technology, or themes like infrastructure
✓ Advantages
- High potential returns over long term
- Beats inflation significantly
- Tax-efficient (LTCG up to ₹1.25 lakh exempt)
- Professional management
✗ Disadvantages
- High volatility and risk
- Short-term losses possible
- Requires patience (5+ years)
- Market-dependent returns
DDebt Mutual Funds
Debt funds invest in fixed-income securities such as government bonds, corporate bonds, treasury bills, and other money market instruments. These are lower-risk options suitable for conservative investors seeking regular income and capital preservation. SEBI mandates that debt funds must invest at least 65% of their assets in debt instruments.
- HDFC Corporate Bond Fund: Invests in high-quality corporate bonds
- ICICI Prudential Gilt Fund: Invests exclusively in government securities
- Aditya Birla Sun Life Liquid Fund: For very short-term parking of funds
Types of Debt Funds:
- Liquid Funds: Invest in securities with maturity up to 91 days (emergency fund, very low risk)
- Ultra Short Duration Funds: Macaulay duration of 3-6 months
- Short Duration Funds: Macaulay duration of 1-3 years
- Medium Duration Funds: Macaulay duration of 3-4 years
- Long Duration Funds: Macaulay duration greater than 7 years
- Gilt Funds: Invest in government securities (zero credit risk)
- Credit Risk Funds: Invest at least 65% in lower-rated bonds (higher returns, higher risk)
✓ Advantages
- Lower risk than equity funds
- Regular income generation
- Better liquidity than fixed deposits
- More stable returns
✗ Disadvantages
- Lower returns than equity
- Interest rate risk
- Credit risk (in corporate bonds)
- Taxed as per income slab
HHybrid Mutual Funds
Hybrid funds, also called balanced funds, invest in a mix of equity and debt instruments. They provide diversification within a single fund, balancing the growth potential of equities with the stability of debt. The proportion of equity to debt varies based on the fund’s investment objective.
- HDFC Balanced Advantage Fund: Dynamically manages equity-debt allocation
- ICICI Prudential Equity & Debt Fund: Aggressive hybrid with 65-80% equity
- SBI Conservative Hybrid Fund: 75-90% in debt, 10-25% in equity
Types of Hybrid Funds:
- Conservative Hybrid Funds: 75-90% debt, 10-25% equity (low-moderate risk)
- Balanced Hybrid Funds: 40-60% equity and debt each (moderate risk)
- Aggressive Hybrid Funds: 65-80% equity, 20-35% debt (moderate-high risk)
- Dynamic Asset Allocation Funds: Actively rebalance between equity and debt based on market conditions
- Multi-Asset Allocation Funds: Invest in at least three asset classes including gold, international equity, etc.
✓ Advantages
- Built-in diversification
- Balanced risk-return profile
- Suitable for moderate risk-takers
- Single fund solution
✗ Disadvantages
- Returns may lag pure equity in bull markets
- More volatile than pure debt funds
- Complex tax implications
- Fund manager dependency
2. Classification Based on Structure
OOpen-Ended Funds
Open-ended funds have no fixed maturity period and allow investors to buy or redeem units at any time at the prevailing Net Asset Value (NAV). Most mutual funds in India are open-ended, offering maximum flexibility to investors.
Key Features: High liquidity, no fixed tenure, units can be bought/sold on any business day, NAV calculated daily.
CClose-Ended Funds
Close-ended funds have a fixed maturity period, typically ranging from 3 to 5 years. You can invest only during the New Fund Offer (NFO) period, and redemption is allowed only at maturity. However, these funds are often listed on stock exchanges, allowing you to exit by selling units to other investors.
Key Features: Fixed tenure, can invest only during NFO, listed on exchanges for liquidity, potentially better for fund managers as no redemption pressure.
IInterval Funds
Interval funds combine features of both open-ended and close-ended funds. These funds allow investors to buy or redeem units only during specific intervals (typically quarterly or half-yearly) as decided by the fund house.
3. Specialized Mutual Fund Categories
IIndex Funds
Index funds are passively managed funds that replicate a market index like Nifty 50 or Sensex. Instead of trying to beat the market, these funds aim to match the index’s performance by holding the same stocks in the same proportion.
- UTI Nifty Index Fund: Tracks the Nifty 50 index
- SBI Nifty Index Fund: Mirrors Nifty 50 performance
- HDFC Index Fund – Sensex Plan: Replicates BSE Sensex
Benefits: Very low expense ratio (0.1-0.5%), transparent holdings, no fund manager risk, ideal for long-term passive investors.
EExchange-Traded Funds (ETFs)
ETFs are similar to index funds but trade on stock exchanges like individual stocks. You need a demat account to invest in ETFs, and they can be bought or sold throughout trading hours at market prices.
- Nippon India ETF Nifty BeES: First ETF in India tracking Nifty
- SBI ETF Gold: Invests in physical gold
- Bharat Bond ETF: Government-backed debt ETF
Benefits: Real-time trading, lower expense ratios than actively managed funds, high liquidity, tax-efficient.
FFund of Funds (FoF)
A Fund of Funds invests in other mutual fund schemes rather than directly investing in stocks or bonds. This provides additional diversification but comes with an extra layer of fees.
Consideration: Double expense ratio (both the FoF and underlying funds charge fees), but offers convenience of professional allocation across multiple funds.
TTax-Saving Funds (ELSS)
Equity Linked Savings Schemes (ELSS) are equity mutual funds that offer tax deduction under Section 80C of the Income Tax Act. You can claim a deduction of up to ₹1.5 lakh per year by investing in ELSS funds. These funds have a mandatory lock-in period of 3 years.
- Axis Long Term Equity Fund: One of the most popular ELSS funds
- Mirae Asset Tax Saver Fund: Focuses on quality growth stocks
- DSP Tax Saver Fund: Well-diversified ELSS option
Benefits: Tax deduction up to ₹1.5 lakh, shortest lock-in among 80C instruments (3 years vs 5 years for FD, 15 years for PPF), potential for higher returns, long-term capital gains up to ₹1.25 lakh are tax-free.
Understanding Risk-Return Trade-off
One of the most important concepts in mutual fund investing is the risk-return relationship. Generally, higher potential returns come with higher risk. Equity funds offer the highest returns but also carry the most risk. Debt funds are safer but provide moderate returns. Hybrid funds fall somewhere in between. Your choice should align with your risk tolerance, investment horizon, and financial goals.
How to Choose the Right Mutual Fund
| Investment Goal | Time Horizon | Recommended Fund Type | Example |
|---|---|---|---|
| Retirement Planning | 20+ years | Equity / Multi-Cap | Parag Parikh Flexi Cap Fund |
| Child’s Education | 10-15 years | Balanced Hybrid / Equity | HDFC Balanced Advantage Fund |
| Emergency Fund | Immediate access | Liquid / Ultra Short Duration | HDFC Liquid Fund |
| Tax Saving | 3+ years | ELSS | Axis Long Term Equity Fund |
| Regular Income | 3-5 years | Debt / Conservative Hybrid | ICICI Prudential Corporate Bond Fund |
| Wealth Creation | 7+ years | Large & Mid Cap / Flexi Cap | Kotak Flexicap Fund |
- Start with SIP: Systematic Investment Plans help you invest regularly, average out costs, and build discipline. Start with as little as ₹500 per month.
- Diversify: Don’t put all your money in one fund or one type of fund. Spread across 3-5 funds covering different categories.
- Review Regularly: Check your portfolio quarterly but avoid making frequent changes based on short-term performance.
- Focus on Expense Ratio: Lower expense ratios mean more of your money is actually invested. Direct plans have lower costs than regular plans.
- Match with Goals: Align your fund choices with specific financial goals and appropriate time horizons.
- Ignore Short-term Volatility: Mutual funds, especially equity funds, require patience. Don’t panic during market downturns.
- Use Direct Plans: Direct plans have lower expense ratios (0.5-1% lower) than regular plans, leading to significantly higher returns over time.
Understanding Key Mutual Fund Terms
Net Asset Value (NAV): The per-unit market value of the mutual fund. It’s calculated by dividing the total value of all assets minus liabilities by the number of outstanding units.
Expense Ratio: The annual fee charged by the fund house for managing your money, expressed as a percentage of assets. Lower is better. Equity funds typically charge 1.5-2.5%, while debt funds charge 0.5-1.5%.
Exit Load: A fee charged when you redeem your units before a specified period. For example, many equity funds charge 1% if you exit within one year.
SIP (Systematic Investment Plan): A method of investing fixed amounts regularly (monthly, quarterly) rather than investing a lump sum.
SWP (Systematic Withdrawal Plan): A facility to withdraw fixed amounts regularly from your mutual fund investment, useful for creating regular income.
AUM (Assets Under Management): The total market value of assets managed by a mutual fund scheme. Larger AUM generally indicates investor confidence but may reduce flexibility.
Taxation of Mutual Funds in India
Equity Funds (>65% in equity)
- Short-term Capital Gains (STCG): Held for less than 12 months – taxed at 20%
- Long-term Capital Gains (LTCG): Held for more than 12 months – 12.5% tax on gains exceeding ₹1.25 lakh per year
Debt Funds (>65% in debt)
- Both STCG and LTCG: Taxed as per your income tax slab, regardless of holding period
Hybrid Funds
- Taxed as equity funds if equity allocation is >65%
- Taxed as debt funds if equity allocation is <65%
Common Mistakes to Avoid
- Chasing Past Performance: Just because a fund performed well last year doesn’t guarantee future success. Look at 3-5 year track records.
- Over-diversification: Holding 15-20 mutual funds defeats the purpose. 4-6 well-chosen funds are sufficient.
- Timing the Market: Trying to predict market highs and lows rarely works. SIPs help overcome this challenge.
- Ignoring Expense Ratios: High fees can significantly eat into your returns over time. Choose funds with competitive expense ratios.
- Investing Without Goals: Every investment should have a specific goal with a defined time horizon.
- Panic Selling: Markets are volatile. Selling during downturns locks in losses. Stay invested for the long term.
- Choosing Regular Plans: Direct plans offer the same portfolio but with lower costs, leading to better returns.
Final Thoughts
Understanding the different types of mutual funds is the first crucial step in your investment journey. Each category serves a specific purpose and caters to different investor needs, risk appetites, and financial goals. While equity funds are ideal for long-term wealth creation, debt funds provide stability and regular income. Hybrid funds offer the best of both worlds, while specialized funds like ELSS help you save taxes.
As a beginner, start with understanding your financial goals, risk tolerance, and investment horizon. Don’t rush into investing. Take time to research, compare funds, read offer documents, and if needed, consult with a certified financial planner. Remember that mutual funds are subject to market risks, and past performance doesn’t guarantee future returns.
The beauty of mutual funds lies in their accessibility and professional management. Whether you have ₹500 or ₹50,000 to invest monthly, there’s a mutual fund suitable for you. Start small, stay consistent with your SIPs, remain patient during market volatility, and review your portfolio periodically. With the right approach, mutual funds can be a powerful tool to achieve your financial dreams.
Happy Investing! May your financial journey be prosperous and your goals be achieved with smart, informed investment decisions.
- SEBI Investor Education and Awareness: www.investor.sebi.gov.in
- Association of Mutual Funds in India (AMFI): www.amfiindia.com
- Value Research: www.valueresearchonline.com (for fund analysis and comparison)
- Morningstar India: www.morningstar.in (for detailed fund research)
