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As a minor player in the financial market, mutual funds play a decisive role in the valuation of trading assets such as bonds and stocks. As investors, you will own units, which represent the whole portion of the funds based on the funds you hold. The increase in value of investments is passed to the investors in proportion to the number of units owned after deducting expenses. 

But what are mutual funds, and what are the different Types of Mutual Funds in India?

Types of Mutual Funds - Table of Contents

What are Mutual Funds?

A mutual fund is an investment option where investors pool their funds to earn long-term returns. This accumulation of funds is managed by professionals known as portfolio or fund managers. To gain potential returns, they must invest the lump sum amount in options such as stocks, bonds, gold, and other assets. The gains or losses in the investment are usually shared between the investors in proportion to the funds they contributed. 

Types of Mutual Funds in India

Unlike direct investing, mutual funds are vital in household financing, especially retirement planning. After the Reliance Retirement Fund (RRF) hit the market in February 2015, HDFC also entered the market with its Retirement Savings Fund (HDFC RSF). 

Types of mutual funds in India can also be categorized as actively or passively managed. Some other types of mutual funds are:

#1. Types of Mutual Funds Based on the Structure

Open-Ended Funds:

This scheme helps investors buy or sell units at any given point. It does not have a maturity date fixed. You can directly deal with the Mutual Funds for investment and redemption. The key feature of this type of fund is liquidity. You can buy or sell units at Net Asset Value (NAV) prices. In the majority of mutual fund options, 59% of them are open-ended funds. 

Close-ended Fund: 

This scheme has a maturity period, and investors can invest only during the launch period, known as the New Fund Offer (NFO). Once the offer closes, no new investment options are allowed. The market price at the stock exchange can vary from the scheme's Net Asset Value based on the demand-supply scheme. Some close-ended funds give you additional options of selling your units directly to the mutual funds through period repurchase options at NAV-related costs. 

Interval Funds:

This combination of open and closed-ended schemes allows investors to trade units at previously defined intervals. They may be traded on the stock exchange or can be open for sale at predetermined intervals. 

#2. Types of Mutual Funds Based on Asset Class

Equity Funds: 

As per SEBI, there are 11 categories under Equity funds. But mutual fund companies can only have 10 options. The companies need to choose between Contra or Value. The types of equity funds are: 

  • Multi-cap funds 
  • Large-cap funds 
  • Large & Mid-cap funds 
  • Mid-cap funds 
  • Small-cap funds 
  • Dividend yield funds 
  • a) Value funds 
  • b) Contra funds 
  • Focused funds 
  • Sectoral or Thematic funds 
  • ELSS funds.

Debt Funds:

There are a total of 16 categories, as per SEBI. These are similar in risks and returns from the investors' point of view. Categories like Overnight Funds and Liquid Funds are very similar. The different types of debt funds are: 

  • Overnight Funds
  • Liquid Funds
  • Ultra-short duration Funds
  • Low Duration Funds
  • Money Market Funds
  • Short Duration Funds
  • Medium Duration Funds
  • Medium to Long Duration Funds
  • Long Duration Funds
  • Dynamic Bond Funds
  • Corporate Bond Funds
  • Credit Risk Funds
  • Banking and PSU Funds
  • Gift Funds
  • Gift Fund with a 10-year duration
  • Floater Fund.

Money Market Funds:

Considered to be a part of equity funds, these money market funds are instruments with a maturity of up to 1 year only. They are considered safe investments for those looking to store their surplus funds with moderate returns. Money markets, also known as cash markets, come with interest, reinvestment, and credit risks. 

Balanced or Hybrid Funds: 

SEBI has allotted 7 categories under this scheme, but mutual fund companies can only have 6. They must choose from Balanced Hybrid funds or Aggressive Hybrid funds. Also, SEBI has made arbitrage funds under this category as well. The different types of funds available are: 

  • Conservative hybrid funds
  • Balanced hybrid funds
  • Aggressive Hybrid funds 
  • Dynamic asset allocation funds 
  • Multi-asset allocation funds 
  • Arbitrage funds 
  • Equity savings.

[ Check out Beginners Guide To Mutual Funds ]


#3. Types of Mutual Funds Based on the Investment Objectives

Growth Funds:

In these funds, money is invested primarily based on equity stocks with official appreciation. They are considered to be highly risky for investors with long-term investment options. As they are risky, they also provide high returns. 

Income Funds:

Income funds are schemes where money is invested primarily in fixed-income instruments like debentures and bonds to provide protection and regular income flow. 

Liquid Funds: 

This type of fund invests money in short-term instruments, like CPs and T-Bills, for liquidity. They are low-risk funds with moderate returns that are perfect for investors with short-term timelines. 

Tax-Saving Funds (ELSS): 

These are schemes that invest in equity shares. Investments made under this scheme qualify for a deduction in the Income Tax Act. They are also considered to be high-risk but provide high returns. 

Capital Protection Funds: 

These funds are split between investments in fixed-income options and equity markets. This is done to protect the principal that has been invested. 

Fixed Maturity Funds:

These funds are those in which the assets are invested in debt and money market instruments where the maturity date is the same as those of the fund. 

Pension Funds: 

These are mutual funds that are invested in keeping long-term goals in mind. They are meant to provide regular returns during the retirement time of the investor. These investments are split between equity and debt markets, so the equities act as the problematic part and provide higher returns. In contrast, the debt market balances the risk and provides a steady return.

#4. Types of Mutual Funds Based on Specialty

Sector Funds: 

These funds invest in a particular industry sector - e.g., infrastructure funds only invest in companies in the infrastructure sector. Returns are based on the chosen sector, and the risk involved depends on the nature of the structure. 

Index Funds: 

These are funds that invest in instruments that represent a particular index or mirror the movement and returns of the index, e.g., buying shares that represent the BSE Sensex. 

Fund of Funds (FOF): 

These funds invest in other mutual funds and returns that depend on the performance of the main fund. These are also referred to as multi-manager funds. The investments are relatively safe as the funds investors look into holding other funds under them and adjust one risk to another.

[ Related Blog: Investing in Fund of Funds Explained ]

Emerging Market Funds: 

These schemes are made in developing countries with high future growth. They come with higher risks resulting from dynamic, political and economic situations that prevail in the country. 

International Funds:

These are known as foreign funds and provide investments in companies in different parts of the world. These corporations are located in emerging economies. The only companies that cannot be invested in are those in the investor's own country. 

Global Funds:

These funds are made in a company in any part of the world. They differ from foreign funds as they can be made in the investor's own country. 

Real Estate Funds: 

These schemes invest in companies that operate in real estate. These funds invest in property managers, realtors, builders and companies. Investment in real estate can be made at any stage, including projects in the planning phase. 

Commodity-focused Stock Funds: 

These funds do not invest in commodities directly. They invest in brands that are a part of the commodity market, such as producers of commodities or mining. These funds perform the same way as commodities due to their association. 

#5. Types of Mutual Funds Based on Risk

Low Risk:

These are funds where the investments are made by those who do not want to risk their money. The investment is made in debt markets and tends to be long-term plans. As a result, the returns on these investments are also meagre. 

Medium Risk:

These investments are made with a medium amount of risk to investors. These schemes are ideal for those who want to take some risk with the investment but offer high returns. These funds are used as investments to create wealth over a long period.

High Risk:

These mutual funds are perfect for those willing to take higher risks with their money and seek wealth creation. One such example is inverse mutual funds. These funds have higher risks and also higher returns. 

[ Check out Investment Tips For Beginners ]


How to Choose the Right Mutual Fund?

Due to the multiple types of mutual funds in India, picking only one is not easy. The simplest option is first to understand what exactly you are looking for regarding your requirement. The next step is to figure out what your goal is. To build wealth fast, at a moderate pace or at a slow pace. Once this is decided, the main thing to consider is the risk factor. The highest returns come with the highest risks. So, to gain returns quickly, you must be willing to take risks. But if you want to create your wealth slowly, then slow or moderate funds are perfect. 

Types of Mutual Funds FAQs

1. Which mutual funds are the best? 

The best types of mutual funds are the ones that provide higher liquidity rates with returns. Regarding investment, looking for a scheme with the right combination of stability, growth and income that keeps your risk in mind is essential. 

2. Which type of mutual funds is the safest? 

All mutual funds are safe for investors when they have good returns but minimal risks. Investment varies from person to person and depends on the person's strategy and market conditions. 

3. Which mutual fund offers tax benefits with higher returns? 

If your primary goal is to get tax benefits, then investing in Tax-Saving funds or ELSS is the best option. Such schemes invest in equity shares while the returns offer tax benefits under the Income Tax Act 1961. 


Investing in different types of mutual funds in India is one of the best ways to achieve your goal of financial freedom. But before you do that, take time to check the different options. Do not invest in a fund as your friends or family have invested. Identify your goals and invest according to them. If you want to explore your options further, contact a financial advisor to help you make the right decision.

About Author

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Founder & Managing Director of Investor Diary

I, Vishnu Deekonda, am dedicated to providing the proper financial education to every individual interested in becoming financially independent through intelligent investments.

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