From being a minor participant in the financial market, mutual funds have evolved into influential players, significantly shaping the valuation of tradable assets like stocks and bonds.
As an investor, you own units in a mutual fund, representing your share based on your investment. Profits are distributed to unit holders after deducting expenses. Mutual funds come across as the most enabling financial tool for retail investors in India. Now, let’s explore different types of mutual funds in India.
Mutual funds come in various types suited to various needs. Different mutual fund categories cater to different investors’ preferences regarding risk, investable amount, goals, and investment term. In line with SEBI’s guidelines on categorization and rationalization of mutual fund schemes released in October 2017, mutual fund schemes are grouped into:
Equity Funds
An equity scheme is a fund that:
• Mainly invests in stocks and related instruments.
• Aims for long-term growth but can be unpredictable in the short term.
• Better for investors comfortable with higher risk and a longer investment horizon.
Equity funds might specialize in specific market sectors or follow a particular investment style, like focusing on value or growth stocks. Since equity funds invest money into shares of companies, their performance is linked to the stock market. They are classified based on features like Large-Cap Funds, Mid-Cap Funds, Small-Cap Funds, Focused Funds, or ELSS. Consider investing in equity funds if you have a long-term investment horizon and a high tolerance for risk.
Equity Fund Categories as per SEBI guidelines on Categorization and Rationalization of schemes
| Multi Cap Fund* | At least 75% investment in equity & equity related instruments |
| Flexi Cap Fund | At least 65% investments in equity & equity related instruments |
| Large Cap Fund | At least 80% investment in large cap stocks |
| Large & Mid Cap Fund | At least 35% investment in large cap stocks and 35% in mid cap stocks |
| Mid Cap Fund | At least 65% investment in mid cap stocks |
| Small cap Fund | At least 65% investment in small cap stocks |
| Dividend Yield Fund | Predominantly invest in dividend yielding stocks, with at least 65% in stocks |
| Value Fund | Value investment strategy, with at least 65% in stocks |
| Contra Fund | Scheme follows contrarian investment strategy with at least 65% in stocks |
| Focused Fund | Focused on the number of stocks (maximum 30) with at least 65% in equity & equity related instruments |
| Sectoral/ Thematic Fund | At least 80% investment in stocks of a particular sector/ theme |
| ELSS | At least 80% in stocks in accordance with Equity Linked Saving Scheme, 2005, notified by Ministry of Finance |
Source: AMFI
Debt Funds:
These funds channel investments into fixed-income securities like corporate bonds, government securities, and treasury bills. Offering stability and a regular income with relatively low risk, debt funds further categorize into different types based on duration, such as low-duration funds, liquid funds, overnight funds, credit risk funds, and gilt funds.
Debt Fund Categories as per SEBI guidelines on Categorization and Rationalization of schemes
| Overnight Fund | Overnight securities having maturity of 1 day |
| Liquid Fund | Debt and money market securities with maturity of upto 91 days only |
| Ultra Short Duration Fund | Debt & Money Market instruments with Macaulay duration of the portfolio between 3 months – 6 months |
| Low Duration Fund | Investment in Debt & Money Market instruments with Macaulay duration portfolio between 6 months- 12 months |
| Money Market Fund | Investment in Money Market instruments having maturity upto 1 Year |
| Short Duration Fund | Investment in Debt & Money Market instruments with Macaulay duration of the portfolio between 1 year – 3 years |
| Medium Duration Fund | Investment in Debt & Money Market instruments with Macaulay duration of portfolio between 3 years – 4 years |
| Medium to Long Duration Fund | Investment in Debt & Money Market instruments with Macaulay duration of the portfolio between 4 – 7 years |
| Long Duration Fund | Investment in Debt & Money Market Instruments with Macaulay duration of the portfolio greater than 7 years |
| Dynamic Bond | Investment across duration |
| Corporate Bond Fund | Minimum 80% investment in corporate bonds only in AA+ and above rated corporate bonds |
| Credit Risk Fund | Minimum 65% investment in corporate bonds, only in AA and below rated corporate bonds |
| Banking and PSU Fund | Minimum 80% in Debt instruments of banks, Public Sector Undertakings, Public Financial Institutions and Municipal Bonds |
| Gilt Fund | Minimum 80% in G-secs, across maturity |
| Gilt Fund with 10 year constant Duration | Minimum 80% in G-secs, such that the Macaulay duration of the portfolio is equal to 10 years |
| Floater Fund | Minimum 65% in floating rate instruments (including fixed rate instruments converted to floating rate exposures using swaps/ derivatives) |
Source: AMFI
Hybrid Funds:
Combining both debt and equity instruments, hybrid funds aim to balance the risks and returns. The ratio of investment can be fixed or varied based on the scheme type.
SEBI has classified Hybrid funds into 7 sub-categories as follows:
| Conservative Hybrid Fund | 10% to 25% investment in equity & equity related instruments; and75% to 90% in Debt instruments |
| Balanced Hybrid Fund | 40% to 60% investment in equity & equity related instruments; and40% to 60% in Debt instruments |
| Aggressive Hybrid Fund | 65% to 80% investment in equity & equity related instruments; and20% to 35% in Debt instruments |
| Dynamic Asset Allocation or Balanced Advantage Fund | Investment in equity/ debt that is managed dynamically (0% to 100% in equity & equity related instruments; and0% to 100% in Debt instruments) |
| Multi Asset Allocation Fund | Investment in at least 3 asset classes with a minimum allocation of at least 10% in each asset class |
| Arbitrage Fund | Scheme following arbitrage strategy, with minimum 65% investment in equity & equity related instruments |
| Equity Savings | Equity and equity related instruments (min.65%);debt instruments (min.10%) andderivatives (min. for hedging to be specified in the SID) |
Source: AMFI
Solution-Oriented Funds:
Designed for specific goals like saving for children’s education or marriage, or one’s own retirement, these funds come with a lock-in period of at least five years.
| Retirement Fund | Lock-in for at least 5 years or till retirement age whichever is earlier |
| Children’s Fund | Lock-in for at least 5 years or till the child attains age of majority whichever is earlier |
Source: AMFI
Other Funds:
This includes index funds that track specific stock indices, and fund of funds.
| Index Funds/ ETFs | Minimum 95% investment in securities of a particular index |
| Fund of Funds (Overseas/ Domestic) | Minimum 95% investment in the underlying fund(s) |
Risk Appetite
Investors must consider their risk appetite while choosing to invest in mutual funds. Low-risk funds, such as debt funds, aim to minimize market risk but offer lower returns. Moderate-risk funds, such as hybrid funds, balance risk by investing in both equity and debt instruments. High-risk funds have more exposure to equities. Generally, higher risk comes with the potential for higher returns.
To help investors understand risk, mutual funds use a risk-o-meter, disclosing their risk exposure. Investors can check this to see if it aligns with their own risk tolerance.
Frequently Asked Questions
1. What Are the Benefits of Tax-Saving (ELSS) Mutual Funds?
ELSS (Equity Linked Savings Scheme) mutual funds offer dual benefits of potential returns from equity markets and tax-saving under Section 80C of the Income Tax Act, making them an attractive investment option for long-term wealth creation with tax advantages. Investments in ELSS are eligible for tax deduction under section 80C, upto Rs 1.5 lakh.
2. Which Types of Mutual Funds Are Considered Low-Risk?
Debt funds are the general category for low-risk mutual funds. The significant investments made by these funds are in fixed-income securities, which include corporate and government bonds, as well as other types of debt.
3. What Makes Gilt Mutual Funds Low-Risk Investments?
Gilt mutual funds are considered low-risk due to their investment in government securities, which are backed by the sovereign guarantee, providing a high level of safety and stability to the investment.
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