Mutual funds have been a popular investment choice for experienced and new investors alike in recent years. The number of schemes has rapidly increased with the growing number of investors entering the mutual fund market. Considering the versatile investment goals of investors, the availability of diverse types of funds is easy to guess.
The article explores all the different types of mutual funds, categorised based on different factors. This offers in-depth insight for new investors and a brushup for seasoned investors. Read on!
Mutual Fund Asset Class-Based Categorisation
The following categories are based on the asset classes the funds are invested:
- Equity Funds
The funds are invested in stocks or shares of companies. Depending on market share, the funds are further divided into:
- Large-Cap: Invested in top 100 companies based on market capitalisation
- Mid-Cap: Invested in companies ranking between 101 and 250 based on market capitalisation
- Small-Cap: Invested in companies ranking 250 onwards based on market capitalisation
- Multi-Cap: Invested in large-cap, mid-cap, and small-cap
- Debt Funds
The funds are invested in bonds, including government and corporate bonds. Steady income can be expected due to the stable underlying security. SEBI has announced 16 categories under debt funds, which include overnight, liquid, ultra-short duration, short duration, medium duration, long duration, dynamic bond, credit risk, Banking and PSU, and other funds.
- Money Market Funds
The investment is made in short-term securities, like treasury bills, with maturity of up to 1 year. The liquidity is quite high. These provide a better interest-paying short-term investment alternative than fixed deposits and savings accounts.
- Hybrid Funds
Hybrid funds diversify the investment in both equity and debt instruments, striking a balance between risk and return.
- Conservative Hybrid Funds: Investment majorly in debt instruments
- Balanced Hybrid Funds: Investment equally divided in debt and equity instruments
- Aggressive Hybrid Funds: Investment majorly in equity and equity-related instruments
- Dynamic Asset Allocation Funds: Changing equity exposure according to the market conditions
- Multi-Asset Allocation Funds: Investment in three different asset classes
- Arbitrage Funds: Investment in arbitrage opportunities
- Equity Savings: Investment in equity, debt, and arbitrage
Mutual Fund Investment Goal-Based Categorisation
Investors have unique investment goals; mutual funds are also featured with different aims to serve them:
- Growth Funds
These funds invest primarily in stocks of companies that have high growth potential as a means of capital appreciation. They are suitable for investors looking for long-term investments with significant returns.
- Income Funds
These funds are best suited for investors seeking steady income sources because the key focus of these funds is steady income generation. Investments are made in bonds, fixed-income securities, and dividend-yielding stocks, which align with the investment goal.
- Liquid Funds
Liquidity is the primary focus for these bonds, and safety is the second. These short-term debt instruments are ideal for anyone who prefers quick access to their funds against minimal risk.
- Tax-Saving Funds
Under Section 80C, tax-saving funds or Equity Linked Saving Scheme (ELSS) enjoy tax exemption. These funds are tax-efficient instruments invested predominantly in equities.
- Aggressive Growth Funds
Substantial capital appreciation is the key focus and higher market risks are taken to achieve the same. High-risk tolerance and long-term investment horizons are required to reap benefits from these funds.
- Capital Protection Funds
The funds are focused on protecting the principal investment amount with modest returns. Best-suited investors are those with a low-risk appetite and a priority to safeguard their investments.
- Fixed Maturity Funds
These funds are issued with a prefixed maturity date. Investors searching for fixed returns and low-interest risk should go for these.
- Pension Funds
Pension funds are designed to offer financial security in the post-retirement age. The funds are invested in mixed asset classes to build a significant corpus.
Mutual Fund Structure-Based Categorisation
Mutual funds are divided into the following depending on the buying and selling permits:
- Open-ended Funds
Fund units are open for sale and purchase at any given time, and there is no fixed maturity date. Liquidity is, hence, the key perk of these funds.
- Closed-ended Funds
Investments are allowed during the launch period of the fund and the window is closed after that. There is a pre-decided maturity period. The units can be traded on the stock exchange.
- Interval Funds
It combines features of both open-ended and close-ended funds. Investors are allowed to trade the units but at pre-decided intervals.
Mutual Fund Risk-Based Categorisation
Risk factor is a crucial deciding parameter when it comes to most types of investments. Mutual funds can also be divided based on the risk level they pose:
- Very Low-Risk Funds: Investments are made in low-risk securities. Risk is minimal.
- Low-Risk Funds: Risk slightly higher than the previous type.
- Medium Risk Funds: The risk level is management, and growth is moderate.
- High-Risk Funds: High returns are offered against a high level of risk.
Wrapping Up!
The detailed classifications of the mutual funds here are done to help investors make informed investment decisions. Besides the discussed funds, you may come across more types of mutual funds, categorized further based on their assets. Review the features of the different funds and then decide which aligns with your investment goals and risk appetite the best.
