What are the Types of Mutual Funds?
Based on the nature of the investment, mutual funds are broadly categorized into two heads- equity funds, debt funds, and hybrid funds.
1) Mutual Funds Based on Investment Strategy
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Active Mutual Funds
In the case of active mutual funds, the fund manager actively participates in taking decisions pertaining to buying and selling of stocks. The primary goal of active funds is to outperform the benchmark index in terms of returns.
The fund manager’s investment decisions may result in the fund outperforming or underperforming the benchmark. One of the downsides of active mutual funds is that since these funds require the active participation of fund managers, the expense ratio or fund management fees is slightly on the higher side. -
Passive Mutual Funds
Passive funds are mutual funds that replicate the performance of the underlying index - Nifty, Sensex. The primary goal of passive funds is to generate returns that closely match the performance of the benchmark index. In the case of passive funds, the fund manager’s role is to create a portfolio that mirrors the components of the index and rebalance the portfolio whenever necessary.
Since there’s no active involvement of fund managers, the expense ratio or fund management fee is extremely low. This is the reason why passive mutual funds are referred to as low-cost funds. Some of the popular passive mutual funds are the Nifty 50 index fund, Nifty Midcap 150 index fund and passive ELSS fund, among others.
2) Mutual Funds Based on Structure
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Open-ended Funds
Open-ended funds are mutual funds that don’t have any fixed maturity period, meaning you can remain invested in these schemes as long as you want. You can buy or sell mutual fund units of open-ended schemes at any given point. Open-ended schemes are preferred by investors because of the liquidity they provide, meaning you can sell your mutual fund units anytime, subject to exit load.
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Close-ended Funds
Close-ended funds come with a specific maturity period, meaning you cannot sell your units before the maturity period. Once the maturity period expires, the units get automatically redeemed and the proceeds are directly credited into your account. Some AMCs convert close-ended schemes to open-ended schemes upon maturity.
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Interval Funds
Interval funds have an uncanny resemblance with close-ended funds. However, they are slightly different in terms of functionality. For such funds, you can buy or sell units only during specific intervals. The time intervals are declared by the fund houses managing such funds.
3) Mutual Funds Based on Asset Class
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Equity Funds
Equity mutual funds are funds that invest at least 65% of their corpus in equities and equity-related instruments. These funds provide the benefit of a diversified portfolio and professional fund management to ordinary investors, who find it difficult to invest in individual stocks. While equity funds hold the potential of delivering high returns, they carry a higher risk than debt funds.
These schemes can also be categorised based on their market capitalisation and investment style. Some of the different types of equity funds are large cap funds, mid cap funds, small cap funds, sectoral funds and ELSS, among others. -
Debt Funds
Debt funds are mutual fund schemes that primarily invest in fixed-income instruments like corporate and Government bonds, money market instruments, corporate debt securities, etc. Though these funds provide low to moderate returns, they are considered to be less risky than equity funds.
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Hybrid funds
These mutual funds invest in both debt and equity-linked instruments to give investors a balanced portfolio. The AMC decides whether the investment ratio will be fixed or varied. Hybrid funds can be broadly categorised into equity-oriented or debt-oriented funds.
4) Mutual Funds Based on Market Cap
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Large Cap Funds
Large cap mutual funds invest in stocks of the top 100 companies listed on the stock market based on their market cap (more than ₹20,000 crore). These funds are considered to be less risky than mid-cap and small-cap funds.
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Mid Cap Funds
Mid cap funds invest in stocks of companies of the mid-cap segment ranked 101-250 based on their market cap between ₹5,000 crore and ₹20,000 crore. These funds carry more risk than large cap funds but also have a better return potential.
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Small Cap Funds
Small cap funds invest in stocks of companies having a market share of less than ₹5,000 crore. Though these are primarily small companies, they have high growth potential. Small cap funds have the ability to deliver the highest returns among all other asset classes. However, these funds are extremely prone to market movements and carry high-risk.
5) Mutual Funds Based on Investment Goals
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Tax-saving Mutual Funds (ELSS)
ELSS or Equity Linked Saving Schemes are equity mutual funds that offer tax deduction benefits of up to ₹1.5 lakh under Section 80C of the I-T Act. ELSS funds have a mandatory lock-in period of 3 years, which is the lowest compared to other saving schemes like PPF (15 years), NPS (5 years), NSC (5 years), SSY (21 years), etc.
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Growth Funds
Growth funds aim to offer higher returns on investments by investing in growth stocks. A growth fund’s portfolio typically comprises stocks of reputed and established companies.
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Capital Protection Funds
The portfolios of these mutual funds comprise equities and fixed-income instruments. While these schemes ensure capital protection, their returns are taxable.
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Liquidity-based Funds
Mutual funds can be categorised based on their high liquidity. Liquid funds and ultra-short-term liquid funds are examples of such schemes. An important feature of this mutual fund type is that they are ideal for short-term goals.
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Pension Funds
The primary objective of pension funds is to provide investors a regular stream of income after retirement. Pension funds primarily invest in low-risk investment options to provide steady returns.
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Fixed-maturity Funds (FMF)
These mutual funds invest in debt instruments that have the same/similar maturity period as that of the fund. For example, a 3-year FMF will invest in securities with a maturity period of 3 years or lower.
6) Mutual Funds Based on Risk Appetite
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High-risk mutual funds
Generally, these are equity schemes that carry high risks. However, such funds could also have the potential to generate higher returns. Small cap funds are considered as high-risk mutual funds.
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Growth Funds
Growth funds aim to offer higher returns on investments by investing in growth stocks. A growth fund’s portfolio typically comprises stocks of reputed and established companies.
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Medium-risk Mutual Funds
These are hybrid schemes that invest both in equity and debt instruments. The hybrid portfolio construction offers diversification and mitigates risk.
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Low-risk Mutual Funds
Low-risk mutual funds are funds that carry low risk and have a balanced mix of asset classes. Though flexi-cap and other hybrid mutual fund schemes fall under this category, the most popular low-risk mutual funds are debt funds.