Mutual fund companies offer a variety of mutual fund schemes that cater to several investment objectives. Before investing in a fund, you must assess its type, its past performance and its ability to align with your investment goals.


Types of mutual funds

You can choose from a variety of mutual fund categories while investing in mutual funds. These mutual fund categories contain several mutual funds within them that cater to a variety of investor needs:

  • Types of mutual funds based on asset class: Any category of financial assets such as stocks, bonds or real estate is called an ‘asset class’. Mutual funds are divided in four major categories based on asset class:
    • Equity mutual funds invest in companies with varying market capitalisations: Equity funds are further sub-divided into three categories based on market capitalisation – small-cap, mid-cap, and large-cap mutual funds. 
  • Debt funds invest majorly in fixed income instruments: These funds are relatively less risky and include sub-categories that invest in government bonds and corporate bonds. Money-market funds, too, constitute a sub-category of debt funds. They invest in low-risk, short-term securities such as treasury bills and commercial papers. 
  • Hybrid mutual funds invest in a mix of equity and debt-based assets: If you wish to benefit from the high returns of equity funds and the predictability of debt mutual funds, you can invest in a hybrid fund. These funds help you diversify your mutual fund portfolio by mitigating risk. 
  • Types of mutual funds based on investment goals: If you often ask yourself the question, “How many mutual funds should I invest in” while planning your mutual fund investments, you should start by listing your investment goal. Identifying your investment goal can help you choose the right mutual fund schemes. Here are the categories of funds based on investment goals:
    • Growth funds focus on capital appreciation: They primarily invest in the stocks of companies with high growth potential. You can invest in a growth fund if you wish to invest for the long term. 
  • You can invest in income funds for regular income generation: They help you build a steady income stream. 
  • Liquid funds help you park excess money temporarily: They invest in short-term debt instruments with an investment horizon of 91 days and pose minimal risk.
  • Tax-saver funds help you save capital gains tax: Also called ELSS (equity-linked savings scheme) funds, they invest primarily in equity and equity-linked assets and help you save tax by leveraging Section 80C of the Income Tax Act.
  • Aggressive growth funds take higher market risks: These funds target a high capital appreciation and generally have a long-term investment horizon. 
  • Capital protection funds are ideal for risk-averse investors: These funds protect your principal investment amount and generate modest returns.
  • Fixed Maturity funds have a predetermined maturity date: These funds have a clear investment horizon and a fixed maturity date. You can earn fixed returns by investing in these funds. 
  • Pension funds help investors create a corpus for retirement: If you wish to start saving up for your retirement, you can consider investing in a pension fund. 
  • Types of mutual funds based on structure: Mutual funds are generally divided into three types based on structure – open-ended, closed-ended, and interval funds. Open-ended funds allow you to buy and sell units continuously and offer liquidity. Closed-ended funds, on the other hand, have a fixed maturity period and a limited number of units. Interval funds combine the features of both these funds by allowing periodic redemption requests at predetermined intervals. 

How are mutual funds priced?

Actively managed mutual fund schemes generally charge higher fees from investors when compared to passively managed schemes like liquid funds. You must check the expense ratio charged by a mutual fund scheme before investing in it.  


In conclusion

Mutual fund schemes can be divided into various types based on different categories such as the investor’s goals, the fund’s asset class, and the fund’s structure. Before investing in any mutual fund scheme, you must carefully research its ability to generate returns and the fees involved.