Types of Mutual Funds in India

After putting in much effort to earn money, you may wonder where to invest. One option that crosses your mind is a mutual fund. However, if you decide to invest in mutual funds, you might need to know which kind is best for you.

In this blog post, we will discuss the different types of mutual funds offered in India.

Overview of Mutual Fund

An investment product known as a mutual fund pools the capital of several investors who share a common investment objective or goal. The fund managers use the pooled capital to invest it in various asset classes, such as stocks, bonds, commodities, etc. The investor receives the return on their investment after the costs and fees of mutual funds are subtracted. The company responsible for this process is called an asset management company. 

Types of Mutual Funds in India

The mutual funds in India have 4 major categories, some of which are mentioned below:

• Equity Mutual Fund
• Debt Mutual Fund
• Hybrid Fund
• Money Market Fund
• Open-Ended Fund
• Closed-Ended Fund
• Interval Funds
• Growth Fund
• Income Fund
• Tax Saving Funds
• Liquid Funds
• Very Low-Risk Funds
• Low-Risk Funds
• Medium Risk Funds
• High-Risk Funds

Types of Mutual Funds Based on Asset Class

There are 4 types of mutual funds in India based on asset class-

• Equity Mutual Fund: This particular mutual fund category primarily invests in stocks or equities, making it riskier than other categories due to its sensitivity to changes in the market. 
• Debt Mutual Fund: Fund managers of these mutual funds invest money in fixed-income instruments like bonds, treasury bills, commercial papers, etc. Investors in this category of mutual funds are risk-averse. 
• Hybrid Fund: This fund combines debt and equity investments since the portfolio of hybrid funds will have a specific allocation of debt to give stability and predictable returns, along with some equity to support portfolio growth. 
• Money Market Fund: This mutual fund allocates to low-risk money market instruments, including commercial paper and treasury bills that mature in less than a year. 

Types of Mutual Funds Based on Organization Structure

There are 3 types of mutual funds in India based on organization structure-

• Open-Ended Fund: This type of mutual fund has no limit on the number of units that can be traded, and the capital under management continuously changes with new entries and exits. Depending on the fund’s net asset value (NAV), an investor is fully entitled to make investments or withdraw money at any moment in this type of mutual fund. 
• Closed-Ended Fund: Mutual funds in this category can only offer a specified number of units. When a mutual fund falls into the close-ended category, the investor can only redeem their units on the maturity date, which is issued at the time of the original offer. Nonetheless, SEBI has given close-ended fund investors a way out via the stock exchange. 
• Interval Funds: Under this plan, mutual fund units may be bought and redeemed only during specific intervals designated by the asset management business. By designating specific intervals, fund managers can focus on developing an investment strategy without worrying about redemptions.

Types of Mutual Funds Based on Investment Objectives

There are 4 types of mutual funds in India based on investment objectives-

• Growth Fund: These funds primarily invest in growth-oriented asset classes like equity. These funds are suitable for investors looking for capital appreciation. An extended investment horizon is necessary, though, for the investor. 
• Income Fund:  The managers of these funds allocate the capital to fixed-income instruments like corporate bonds, debentures, etc. Investors of this fund receive a consistent and predictable income. 
• Tax Saving Funds: Mutual funds in this category invest primarily in equities, also known as equity-linked saving schemes (ELSS). The funds offer tax benefits under section 80C. 
• Liquid Funds: Mutual funds in this category invest in money market instruments that provide liquidity to investors. Still, they give you a higher return than conservative liquid investing options like fixed deposits and bank savings accounts. 

Types of Mutual Funds Based on Risk

There are 4 types of mutual funds in India based on risk-

• Very Low-Risk Funds: Investment in money market funds, such as liquid funds and ultrashort duration funds, are considered the safest option among all categories of mutual funds.
• Low-Risk Funds: Your money is invested in low-risk fixed-income assets like corporate and government bonds in a low-risk fund since these products are deemed to be marginally riskier than money market funds. 
• Medium Risk Funds: These funds combine various asset classes, such as debt and equities, to provide a blend of stability and return. 
• High-Risk Funds: These funds are considered the riskiest because their allocation is concentrated in the equities asset class. Only investors who can handle portfolio volatility should consider these types of funds.  

Conclusion

Investing in mutual funds can help you grow your capital over time. However, many different types of mutual funds are available for investors to select from based on their preferences. Before making investment decisions, you must speak with your financial advisor, as each mutual fund category has a distinct risk-return profile.

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