Types of Mutual Funds: Based on Asset Classes, Structure

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The number of mutual fund investors in India has increased with its growing popularity. A large range of investors find mutual funds attractive as they offer a diversified and professionally managed portfolio of securities, making it easier for individuals to access the financial markets and reap returns. Let's see the various types of mutual funds available in India.

Types of Mutual Funds based on asset class

4 types of mutual funds in India based on asset class are as follows:

Equity Mutual Funds

In general, equity mutual funds are invested in stocks or equities. The focus of these funds is to get capital appreciation from a broadly diversified portfolio. Equity mutual funds are helpful as they offer professional management, portfolio diversification and liquidity.

Debt Mutual Funds

Debt mutual funds primarily invest in fixed-income securities like bonds, government securities, and money market instruments. These offer a constant yield and are ideal for investors who want to receive regular income. Mostly, debt funds are perceived as less risky than equity funds.

Hybrid Mutual Funds

Hybrid mutual funds, also known as balanced funds, combine equity and debt investments and balance each other. They are hybrid assets that combine the advantages of both asset classes, aiming at both capital appreciation and income generation. Fund managers use various approaches to manage the risk in hybrid funds.

Money Market Funds

Money Market Funds are a type of mutual fund that invests primarily in short-term debt securities. These include Treasury bills, commercial paper, and certificates of deposit. They aim to provide investors with high liquidity and safety of capital, making them an attractive option for conservative investors seeking a low-risk, short-term investment vehicle. Money Market Funds typically offer modest returns.

Types of Mutual Funds Based on Investment Goals

Growth Funds: Growth funds invest heavily in stocks and growth sectors, targeting investors with surplus funds willing to take on higher risk for potentially high returns. These funds are ideal for those optimistic about their investment choices.
Income Funds: Income funds, a type of debt mutual fund, invest in bonds, certificates of deposit, and other securities. Managed by experienced fund managers, these funds adjust to interest rate fluctuations while maintaining creditworthiness, typically offering better returns than traditional deposits and suiting risk-averse investors looking at a 2-3 year investment horizon.
Tax-Saving Mutual Funds (ELSS): Equity-Linked Savings Schemes (ELSS) are a type of equity mutual fund with double benefits. They not only offer potential capital appreciation but ELSS funds are eligible for a tax deduction of up to Rs 1.5 lakh under sections of the Income Tax Act.
Liquid Mutual Funds: Liquid mutual funds are best for investors looking for high liquidity and safety of capital. The funds are primarily invested in short-term debt securities and money market instruments, making them an ideal choice for making surplus funds. Investors use liquid funds to park their money temporarily, as it is easily accessible when needed.
Aggressive Growth Funds: These funds aim for significant monetary gains through riskier investments and are subject to market volatility. Their performance is often measured by a higher beta compared to the market, indicating greater fluctuations and potential for higher returns.
Capital Protection Funds: Designed to safeguard the principal investment while earning modest returns, Capital Protection Funds invest in bonds and equities. Although losses are rare, these closed-ended funds recommend a minimum three-year investment period, with returns being taxable.
Fixed Maturity Funds: Fixed Maturity Plans (FMPs) invest in bonds, securities, and money markets with a fixed maturity period ranging from one month to five years, similar to fixed deposits. These close-ended funds aim to reduce tax burden through triple indexation benefits at the fiscal year-end, providing accrual interest upon maturity.
Pension Funds: Pension funds help secure financial stability post-retirement by accumulating savings over a long period. These funds are essential for managing retirement expenses and unexpected costs like medical emergencies. Examples include the Employee Provident Fund (EPF) and other schemes offered by banks and insurance companies.

Types of Mutual Funds Based on Structure

Open-Ended Funds: Open-ended funds offer flexible trading with no restrictions on the period or the number of units. Investors can buy or sell units at any time based on the current Net Asset Value (NAV), allowing them to enter or exit the fund as needed. The capital in these funds fluctuates with investor activity. Fund managers can also limit new investments if managing large volumes becomes challenging.
Closed-Ended Funds: Closed-ended funds have a fixed number of units that cannot exceed the amount established at their inception. These funds often feature a New Fund Offer (NFO) with a specific buying deadline and a predetermined maturity period. To provide liquidity, regulations require that these funds offer a repurchase option or be listed on stock exchanges, giving investors a means to exit the investment.
Interval Funds: Interval funds combine aspects of both open-ended and closed-ended funds. They are open for trading only during specified intervals set by the fund house and remain closed at other times, with a prohibition on transactions for at least two years. These funds are ideal for investors aiming to allocate a lump sum towards short-term financial goals within a period of 3-12 months.

Classification of Mutual Funds

Types of Mutual funds can be classified based on an array of criteria, including their structure, asset class, investment goals, and risk.

Structure of Mutual Funds

There are different types of mutual funds in India, such as open-ended funds, close-ended funds and interval funds. Despite all the differences in structures, each of them possesses unique traits that are beneficial for the diverse needs and goals of the investors.

Mutual Fund Asset Classes

Equity funds, debt funds, hybrid funds, solution-oriented funds, and other specialised categories are the classes within mutual funds. Every class investor provides users with access to specific asset categories, having different risk-return profiles.

Mutual Funds Based on Investment Goals

Mutual funds are mostly chosen by investors depending on their financial goals. These include growth funds, ELSS, liquidity-based funds, short-term funds, and retirement funds. To achieve financial success, ensure your investments are made according to your goals.

Risk Appetite and Risk-o-Meter

When choosing mutual funds, understanding your risk appetite is essential. One such instrument for an investor is a risk-o-meter provided by mutual fund houses which can be used in gauging the risk associated with a particular fund. It is important to align risk tolerance to expected gains.

Specialised Mutual Funds

The area of specialised mutual funds involves numerous groups including sector funds, index funds, emerging market funds, foreign funds, global funds, commodity-focused stock funds, market-neutral funds, leveraged funds, asset allocation funds, and gift funds. Each of these categories serves a unique purpose and is suitable for specific investment methods and preferences.

How to Invest in Mutual Funds?

Compared to other countries, investing in mutual funds in India is simple. Mutual funds are bought and sold by investors via asset management firms and regulated agents. One should be above the age limit of 18 years and also possess a PAN card for identification to invest in mutual funds.

Frequently Asked Questions (FAQs)

1. Can NRIs Invest in Indian Mutual Funds?

Yes, a Non-Resident Indian can invest in mutual funds. By setting up an account under the Foreign Exchange Management Act (FEMA), NRIs can invest in mutual funds.

2. What is the Minimum Investment Amount?

Although the minimum investment amount for a mutual fund varies for different funds, it starts from ₹100. There are many mutual funds with higher minimum investment requirements.

3. How does an investor buy and sell mutual funds?

An investor can buy or sell mutual funds through registered asset management firms and regulated agents. There are certain requirements one should meet to be able to invest in mutual funds.

4. What are the 4 types of MF?

Mutual funds are typically categorised into four broad types based on their investment objectives: Equity Funds (invest in stocks), Debt Funds (invest in bonds and other debt instruments), Hybrid Funds (combine investments in both stocks and bonds), and Money Market Funds (invest in short-term money-market instruments).

5. What are types of mutual funds in India?

In India, mutual funds are categorised into Equity Funds, Debt Funds, Hybrid Funds, Solution-Oriented Funds (like retirement and children’s savings funds), and other funds like Index Funds, Sector Funds, and Tax Saving Funds (ELSS).

6. What are the structural classifications of mutual funds?

Structurally, mutual funds can be classified as Open-Ended Funds (allow continuous buying/selling of units), Closed-Ended Funds (have a fixed number of shares and are traded on stock exchanges), and Interval Funds (allow transactions only at specific intervals).

7. How many mutual funds are there in India?

As of the latest data, there are over 2,000 mutual fund schemes offered by various asset management companies in India. These encompass a wide range of categories and investment objectives to cater to diverse investor needs.

8. Which type of mutual fund is best?

The "best" type of mutual fund depends on the investor's goals, risk tolerance, investment horizon, and financial situation. Equity funds are suitable for long-term growth, debt funds for stability, hybrid funds for balanced risk, and money market funds for liquidity.

9. What type of mutual fund should I invest in?

The choice of mutual fund should align with your financial goals, risk appetite, and investment timeline. For long-term growth, consider equity funds. For safety and steady income, look at debt funds. Hybrid funds are suitable for those seeking a mix of stability and growth.

Types of Mutual Funds in India