Different investors have varying financial objectives they wish to obtain from their investments. Some invest with the hope of saving on tax, while other invest with the underlying aim of wealth creation, and some invest with the purpose of safeguarding their capital. Whatever might be your reason to invest in the markets, mutual fund investments have been known to offer the most flexible, comprehensive, and lucrative ways to tend to varying needs of different investors. In this article, we will understand the different types of mutual funds that you as an investor can invest in to meet your financial goals.

Types of mutual funds basis their maturity period:

Based on a fund’s maturity period, mutual fund investments are divided into two types:

  1. Open-ended funds – These types of mutual funds allow investors to enter or exit the markets at the prevailing NAV (net asset value) of mutual funds on a continuous basis. In essence, open-ended funds offer the much-needed liquidity and flexibility to investors to enter or exit the markets any time they wish to.
  2. Close-ended funds – These types of mutual funds have a set end date and investors can invest in these mutual funds only during the initial launch of the fund. Basically, close-ended funds allow investors to issue a fixed number of shares of a mutual fund scheme during the IPO (initial public offering) to raise money for initial investments.

Funds based on investment objective:

Based on the investment objective of the fund, mutual fund investments are classified into 3 types – equity funds, debt funds, and hybrid funds.

Equity funds

Equity funds are a type of mutual funds that mainly invest in the shares of different companies. The Indian markets regulator – SEBI (Securities and Exchange Board of India) has mandated these types of mutual funds to invest a minimum of 65% of their assets in equity and equity-related securities. Equity mutual funds have huge possibility to produce substantial returns as the prime objective of equity funds is to create wealth. These funds are further divided into the following types based on several parameters such as investment strategy, market capitalisation, investment style, tax treatment, etc.

  1. Sectoral equity funds
  2. Small-cap equity funds
  3. Mid-cap equity funds
  4. Large-cap equity funds
  5. Large and mid-cap equity funds
  6. Mid and small-cap equity funds
  7. Multi-cap equity funds
  8. Contra equity funds
  9. Thematic equity funds
  10. Focused equity funds
  11. ELSS tax-saving mutual funds
  12. Index funds
  13. Active funds
  14. Passive funds

Debt mutual funds or income funds

SEBI has mandated debt funds to invest a minimum of 65% of their assets in fixed income securities such as bonds, government securities (g-secs), corporate debentures, certificate of deposits (CD), commercial papers, money market instruments, treasury bills (T-bills), etc. Commnonly referred to as fixed-income funds or bond funds or income funds, debt funds are generally less volatile than equity mutual funds. The SEBI categories debt funds into the following 16 types:

  1. Money market funds
  2. Ultra-short duration funds
  3. Medium to long duration funds
  4. Gilt funds
  5. Long duration funds
  6. Corporate bond funds
  7. Overnight funds
  8. Banking and PSU funds
  9. Short duration funds
  10. Credit risk funds
  11. Floater funds
  12. Dynamic bond funds
  13. Liquid funds
  14. Gilt Funds with 10-year Constant Duration
  15. Low duration funds
  16. Medium duration funds

Hybrid funds

Hybrid funds, also known as balanced funds, invest in more than one type of asset class. Generally, balanced funds invest in equity and debt asset classes, and sometimes they also have a component of money market instruments. These funds aim to offer the best of both worlds by helping with wealth creation and at the same time offering stability to the portfolio with the debt component. These funds help an investor to diversify their portfolio without needing to invest in different types of mutual funds. Hybrid funds are bifurcated into the following types:

  1. Arbitrage funds
  2. Debt-oriented balanced funds
  3. Monthly income plans (MIP)
  4. Equity-oriented hybrid funds