Types of Mutual Funds In India- Risks, Return Potential & Asset Class

Mutual funds are some of the most popular investment options, with varied goals, risk tolerances, timeframes, and more. Understanding the types of mutual funds could help you make informed decisions that align with your investments and financial goals. Below, we discuss mutual fund categories based on asset class, investment objectives, time to maturity, and risk.

What Are the Types of Mutual Funds?

In order to understand mutual funds, we need to understand the classifications that they come under. Mutual funds have different types of classifications that serve to match the varied needs of the investors. Classification is determined by factors such as:

• Asset classes invested in
• Financial goals intended to be met
• Investment horizon or maturity period
• Risk level involved

By considering these classifications, investors can determine whether funds match their financial strategy and ability to take risks.

Classifications of Mutual Funds According to Asset Class

Mutual funds are classified into several categories according to the type of assets in which they invest, as shown below:

1. Equity Funds

   Equity funds are heavily invested in stocks and offer long-term capital growth. Based on the company’s area of focus, equity funds can be categorized as large-cap, mid-cap, or small-cap funds.

2. Debt Funds

   Debt funds invest in fixed-income securities, like bonds, treasury bills, and corporate debt. They are suited to a risk-averse investor seeking stability in returns.

3. Hybrid Funds

   Hybrid funds provide both equity and debt investments so that an investor can balance both risks and rewards. It is also suitable for those moderate risk investors.

4. Money Market Funds

   Investment in money market funds comprises short-term debt instruments, mainly certificates of deposit and treasury bills, with high liquidity and shallow risk.

Kinds of Mutual Funds Based on Investment Goals

Mutual funds could also be classified according to their investment objectives. These are the most common types.

1. Growth Funds

   A growth fund is the most risk-related fund on the mutual funds spectrum. It invests in high-rate growth stocks and generates substantial capital gains over the long term.

2. Income Funds

   Income funds invest in securities that yield regular income, like bonds and dividend-paying stocks. These are suitable for conservative investors looking for steady cash flow.

3. Tax-Saving Funds (ELSS)

   Equity Linked Savings Schemes provide tax benefits under specific tax laws while investing mainly in equities. Lock-in is required for three years.

4. Index Funds

   Index funds replicate the performance of a specific market index, such as the S&P 500 or Nifty 50. They are passively managed and have a relatively low expense ratio.

5. Sectoral and Thematic Funds

   These funds invest in particular sectors, such as technology, healthcare, or energy, or themes, such as ESG (Environmental, Social, and Governance). They are for investors who are confident about the prospect of a particular sector or theme.

6. International Funds

   International funds invest in global markets, hence providing geographical diversification. They can include equities of emerging or developed markets.

Types of Mutual Funds Based on the Maturity Period

Mentioned below are the kinds of mutual funds based on the types of maturity periods that they carry:

1. Open-Ended Funds

   These mutual funds facilitate entry and exit at any time. They are very liquid and best for investors who want some flexibility.

2. Close-Ended Funds

   Close-ended funds have a predetermined maturity date. The units can be purchased during the initial offer period and redeemed at the maturity date only.

3. Interval Funds

   Interval funds are something in between open-ended and closed-ended funds, permitting purchases and sales only at definite time intervals.

Types of Mutual Funds According to Risk

Mutual funds are also classified according to their risk profiles:

1. Low-Risk Funds

   Money Market Funds and Liquid Funds are low-risk funds. They invest in low-risk, short-time frame securities with modest returns and high liquidity.

2. Moderate-Risk Funds

   Debt Funds and Hybrid Funds are ideal for moderate-risk investors. These funds strike a balance between growth and stability by investing in a combination of debt and equity.

3. High-Risk Funds

   Equity Funds, Sectoral Funds, and Thematic Funds come under high-risk funds. These funds aim for substantial capital appreciation but are more volatile due to market fluctuations.

   Understanding your risk tolerance can be of great help when it comes to selecting the right kind of mutual fund for your financial goals.

Conclusion

Many types of mutual funds cater to various financial goals, risk profiles, and time horizons. From the very ambitious investor who seeks income to the conservative investor who seeks long-term growth, there is a mutual fund for everyone.

In order to make the right mutual fund choice, you must first know your financial goals, risk tolerance, and time horizon. Given professional management and diversification, mutual funds are a good investment vehicle to grow wealth and stay ahead of inflation.

FAQs

Q1. How Many Variations Do Mutual Funds Have?

Mutual funds come in variants that can broadly be classified under four heads – asset class, investment goal, maturity period and risk. The major categorization includes equity, debt, hybrid, and sectoral funds.

Q2. Which Kind of Mutual Fund?

“The best” mutual fund will always depend on your current and potential financial goals and appetite to take risks:

• For faster growth and capital appreciation: Equity fund or Growth funds.
• For stability: debt funds or balanced advantage funds.
• For tax savings: ELSS funds.

Q3. What is an excellent mutual fund for 5 years?

For 5-year view, one should consider these:

• Hybrid Funds: for well-balanced risks and returns.
• Large-Cap Equity Funds: for reasonable growth with lower volatility
• Short-term Debt Funds: stability and relatively low risk.

Q4. What is a less-risky mutual fund?

Some of the low-risk mutual funds are debt funds and hybrid funds.

FAQs

You can identify the best suited mutual fund for you through the following:

• Identifying your investment goal.
• Knowing your risk tolerance.
• Understand your investment capacity.
• Understanding your liquidity requirement.

Since mutual funds come in different shapes and sizes, you need to align your goals with each kind of mutual fund to know the one best suited for you.