Types of Mutual Funds: Stop Memorising, Start Understanding

The main types of mutual funds include equity, debt, and hybrid funds. Based on the structure, there are open-ended and closed-ended funds that you should know. The management style suggests that there are active and passive funds.

All these types of mutual funds are quite common, and as an advisor or investor, you must have come across all of these. But the problem is identifying them. The first category, which is based on asset class, is easiest to find. But for the rest, you would need to understand them a little better.

So, read this guide to know all the types of funds and understand their USPs.

What are the Types of Mutual Funds?

The table below offers you a quick analysis of the common categories and types of mutual funds.

Category	Type of Mutual Fund	What It Means	Examples
Based on Asset Class	Equity Funds	Invest primarily in company shares	Large-Cap, Mid-Cap, Small-Cap Funds
	Debt Funds	Invest in fixed-income securities	Corporate Bond Funds, Gilt Funds, Liquid Funds
	Hybrid Funds	Invest in a mix of equity and debt	Aggressive Hybrid Funds, Balanced Advantage Funds
Based on Investment Structure	Open-Ended Funds	Units can be bought and redeemed at any time	Most mutual fund schemes
	Close-Ended Funds	Investments are allowed only during a specific period	Fixed Maturity Plans
	Interval Funds	Buying and redemption are permitted only during predetermined intervals	Interval schemes
Based on Market Capitalisation	Large-Cap Funds	Invest in the largest listed companies	Blue-chip funds
	Mid-Cap Funds	Invest in medium-sized companies	Mid-cap growth funds
	Small-Cap Funds	Invest in smaller companies with higher growth potential	Small-cap funds
Based on Investment Style	Active Funds	Fund managers actively select securities	Actively managed equity funds
	Passive Funds	Track a benchmark index	Index Funds, ETFs
Based on Investment Objective	Growth Funds	Focus on long-term capital appreciation	Equity growth funds
	Income Funds	Focus on generating regular income	Income funds, debt funds
	Solution-Oriented Funds	Help investors achieve specific financial goals	Retirement Funds, Children's Funds
Based on Sector or Theme	Sectoral Funds	Focus on a particular industry	Banking Funds, Technology Funds
	Thematic Funds	Invest according to a broader investment theme	Infrastructure Funds, ESG Funds
Based on Liquidity	Liquid Funds	Invest in short-term instruments with easy access to funds	Liquid Funds, Overnight Funds
	Arbitrage Funds	Generate returns by taking advantage of market price differences	Arbitrage Funds

Now that you have a brief idea, let us explore the details of these types of funds here.

So, keep reading to explore the types of funds and get insights on each so that you understand these mutual funds and can explain them to the clients in a quicker manner.

Based on Asset Class

This classification groups mutual funds according to the assets they invest in. It is influenced by risk, returns, and the investment horizon.

1. Equity Funds

Equity funds invest primarily in the stock market and aim to generate long-term capital appreciation. These funds are ones with a considerable amount of risk and offer greater returns too.

Key Features:

• Higher growth potential
• Greater market risk
• Best suited for long-term goals

2. Debt Funds

Debt funds invest in fixed-income instruments such as government securities, corporate bonds, and treasury bills. The focus here is to ensure the investor capital is safe and risk is low.

Key Features:

• More stable returns
• Lower volatility
• Suitable for conservative investors

3. Hybrid Funds

Hybrid funds combine equity and debt in a single portfolio. This allows the investors to gain the growth from equity and the safety from the debt. This is a perfect mix for those who want growth but do not wish to compromise on safety.

Key Features:

• Diversified investment approach
• Balanced risk and return
• Suitable for moderate investors

Based on Investment Structure

This classification explains how a mutual fund is organised and what the terms of redemption are. So, not all funds can be redeemed when you wish with no charge. This is section which you must know for charges.

1. Open-Ended Funds

Open-ended funds allow investors to enter or exit the scheme at any time. Most mutual funds available in India fall under this category.

Key Features:

• High liquidity
• No fixed maturity period
• Flexible investments

2. Close-Ended Funds

Close-ended funds accept investments only during the initial offer period. Investors usually remain invested until the scheme reaches maturity.

Key Features:

• Fixed investment tenure
• Limited liquidity
• More structured portfolio management

3. Interval Funds

Interval funds combine features of open-ended and close-ended schemes. Transactions are allowed only during specific periods announced by the fund house.

Key Features:

• Periodic redemption windows
• Controlled liquidity
• Suitable for planned investments

Based on Market Capitalisation

This classification applies specifically to equity funds. It groups funds according to the size and market value of the companies included in the portfolio.

1. Large-Cap Funds

Large-cap funds invest in well-established companies with strong financial performance. These are the companies with a good history, a great market standing, and potentially are leaders. 

Key Features:

• Greater stability
• Lower risk within the equity segment
• Suitable for first-time equity investors

2. Mid-Cap Funds

Mid-cap funds invest in companies that have already established themselves. These companies have good potential for growth and are in a position where they will show good outcomes in the future.

Key Features:

• Better growth opportunities
• Moderate to high risk
• Suitable for long-term investing

3. Small-Cap Funds

Small-cap funds invest in smaller companies that have the potential to grow rapidly over time. These are funds where you will find upcoming or new companies with great and promising outcomes.

Key Features:

• Highest growth potential
• Greater market volatility
• Longer investment horizon required

Based on Investment Style

This classification explains how investment decisions are made within a mutual fund.

1. Active Funds

Active funds are managed by professional fund managers who regularly buy and sell securities to outperform the market. These funds are more risky as they need to match the market.

Key Features:

• Professional management
• Continuous portfolio monitoring
• Higher expense ratio

2. Passive Funds

Passive funds aim to replicate the performance of a market index rather than outperform it. These funds do not follow an aggressive approach and so need less management by the manager.

Key Features:

• Lower management costs
• Index-based strategy
• Minimal portfolio changes

Based on Investment Objective

This classification groups mutual funds according to the financial goals they are designed to achieve.

1. Growth Funds

Growth funds focus on increasing the value of investments over time by prioritising capital appreciation.

Key Features:

• Long-term wealth creation
• Equity-focused strategy
• Higher return potential

2. Income Funds

Income funds aim to provide a steady flow of returns through investments in fixed income securities.

Key Features:

• Regular income potential
• Lower market volatility
• Better capital preservation

3. Tax-Saving Funds (ELSS)

ELSS funds help investors save taxes while building wealth through equity investments. You get good returns but if you stay invested, the total value is tax-free.

Key Features:

• Tax deduction under Section 80C
• Three-year lock-in period
• Equity market exposure

4. Solution-Oriented Funds

Solution-oriented funds are designed for specific goals such as retirement planning or funding a child's education.

Key Features:

• Goal-based investing
• Longer investment horizon
• Focused financial planning

Based on Sector or Theme

This classification groups funds according to a specific industry or a broader investment idea.

1. Sectoral Funds

Sectoral funds invest in a single industry such as banking, healthcare, or technology. The idea is to gain the benefit of the sector and grow accordingly. 

Key Features:

• Industry-specific exposure
• Higher concentration risk
• Suitable for experienced investors

2. Thematic Funds

Thematic funds invest in businesses connected to a common trend, idea, or economic opportunity. These funds are more aligned with the market movements or policies in the longer run.

Key Features:

• Theme-based investing
• Exposure across multiple sectors
• Long-term growth opportunities

Based on Liquidity

This classification focuses on how quickly investors can access their money.

1. Liquid Funds

Liquid funds invest in short-term money market instruments and are commonly used for emergency or surplus funds.

Key Features:

• Quick access to money
• Lower investment risk
• Suitable for short-term goals

2. Arbitrage Funds

Arbitrage funds generate returns by taking advantage of price differences in different markets.

Key Features:

• Lower equity-related risk
• Tax-efficient returns
• Suitable for short-term investments

Conclusion

Many people try to remember these funds like a definition or theory. But this is wrong. The right process is to understand what their goal is, and this way, you would be able to actually recall them with ease. As an advisor, you would need to have the list handy so you can match the needs with the right funds.

So, if you are an expert who is looking to start your journey as a mutual fund advisor, you would need an expert by your side. This is where joining Choice Connect will help you grow well. So, register today and build a passive income.

 

FAQs

1. What Is Meant by Mutual Funds?

A mutual fund is an investment vehicle that pools money from multiple investors and invests it in assets such as stocks, bonds, government securities, and money market instruments. The fund is managed by professionals who make investment decisions on behalf of investors.

2. Is Mutual Fund 100% Safe?

No, mutual funds are not 100% safe, as their performance is linked to the market.

 

3. Which Is Better, FD or Mutual Fund?

FD is better if you want fixed returns, and a mutual fund is good if you want better returns and are comfortable with risk. So, neither of the options is better as it is based on the investor.

4. What Are the 7 Types of Mutual Funds?

The 7 types of mutual funds are equity funds, debt funds, hybrid funds, index funds, liquid funds, ELSS funds, and solution-oriented funds. Each category serves a different investment objective and risk profile.

5. What Are the Five Categories of Mutual Funds?

Mutual funds are commonly classified into five broad categories: asset class, investment structure, market capitalisation, investment objective, and investment style. Some classifications also include sector-based and liquidity-based categories.