All You Need to Know About Various Types of Mutual Funds

With easy access to the internet and constant promotion by the AMFI (Association of Mutual Funds In India) through the ‘Mutual Funds Sahi Hai’ campaign, more and more people are becoming aware of mutual fund investment. Especially millennials and gen Z are more open to high-risk investment avenues compared to older generations.

That said, every individual has different financial goals, and hence, their investment objectives are different from one another. There are various types of mutual funds in India available for individual investors, and would be a simple and convenient way to diversify your portfolio.
However, before investing in mutual funds, it is crucial to thoroughly understand the concept and know the types of mutual funds schemes that are best suited to your investment objectives to ensure your financial goals are achieved.
Mutual fund schemes can be broadly classified into two categories.

1. Types of Mutual Funds by Structure
2. Types of Mutual Funds by Underlying Asset Class

1. Types of Mutual Funds by Structure:
The structure of mutual funds defines the flexibility and ease to buy and sell the units of the mutual fund scheme.

Here are the types of mutual funds by structure:
Open-Ended Mutual Funds:
Open-ended mutual funds are available for purchase and redemption throughout the year. These funds neither have a fixed maturity period, nor any kind of limit on when and how much you can invest in them. The purchase and redemption of these funds are carried out continuously at the prevailing Net Asset Values (NAVs). One can get several investment facilities with open-ended mutual funds, such as lump sum investment, Systematic Investment Plan (SIP), Systematic Transfer Plan (STP), Systematic Withdrawal Plan (SWP), etc.

Close-Ended Mutual Funds:
Close-ended mutual funds are open for investment only during the initial offer period. Most of the close-ended funds come with a stipulated maturity period of around 1 month, 1 year, three years, five years, etc., which is specified at the time of launch. Hence, these funds can be redeemed only after the completion of a specified maturity period. However, for liquidity close-ended mutual funds are listed on the stock exchange, from where investor can buy or sell the units of the scheme.

2. Types of Mutual Funds by Underlying Asset Class:
Mutual funds can be categorised based on the underlying asset class as below. These schemes can be open-ended or close-ended, as discussed earlier.

Equity Mutual Funds:
Equity mutual funds predominantly invest in equity stocks with a primary objective of capital appreciation and wealth creation in the long run. The investment in equity funds is considered to have the potential to generate higher returns in long term . Equity mutual fund schemes are comparatively more volatile than Debt Mutual fund schemes. Therefore, equity mutual funds are suitable for long-term investors with a high-risk appetite.

Here are some of the types of Equity Mutual Funds:
1. Large Cap Funds – They primarily invest in large established companies (First 100 companies on a full market capitalisation basis).

2. Mid Cap Funds – They invest in medium-sized companies (Companies from 101st to 250th on a full market capitalisation basis).

3. Small-Cap Funds – They predominantly invest in small-sized companies (251st company onwards on a full market capitalisation basis).

4. Multi-Cap Funds – They invest in a mix of large, mid, and small-sized companies, with at least 25% in each segment.

5. Sector Funds – They mainly invest in companies from one particular sector. For example, pharmaceutical funds primarily invest in pharmaceutical companies.

6. Thematic Funds – They invest in sectors/businesses of a common theme. For example, a thematic fund built on an agriculture theme might invest in equity stocks of core agricultural companies, automobiles, chemicals, fertilisers, etc.

7. Equity Linked Saving Schemes (ELSS) – These are special category funds that invest in equities and equity-related products and qualify for income tax deduction under Section 80C of the Income Tax Act, 1961.

Debt Mutual Funds:
Debt Mutual Funds are a type of mutual funds that primarily invest in fixed income instruments, such as government bonds, treasury bills, corporate bonds, certificates of deposit, etc. Debt funds are comparatively less volatile than Equity Mutual Funds and range between low to high risk category.

The investment in debt funds is suitable for short or medium-term investors with low to high risk appetites. Even if you prefer to invest in equity mutual funds, a small allocation to debt funds may be considered for portfolio diversification.

Some of the examples of debt mutual funds are Liquid Funds, Dynamic Bond Funds, Short Duration Funds, Corporate Bond Funds, Gilt Funds, etc.

Hybrid Mutual Funds:
As the name suggests, hybrid funds invest in a mix of equity debt and other instruments, thus providing the best of both worlds. These funds are ideal for investors with moderate to high-risk appetites as the volatility level of these funds lies between equity funds and debt funds.

Hybrid mutual funds are further classified as Aggressive Hybrid Funds, Conservative Hybrid Funds, Balanced Advantage Funds, Dynamic Asset Allocation Funds, Multi-Asset Allocation Funds, etc.

To Conclude:
With the availability of several types of mutual funds in India, choosing the right fund that suits your specific requirement can be a daunting task. Therefore, it is advisable to understand your requirement first and set your investment objective accordingly. Once your investment objective is defined, you need to assess how much risk you are willing to take. As discussed earlier, higher returns generating mutual funds are generally considered high-risk investments. Hence, if you are expecting high returns and willing to take that risk, you can invest in carefully selected equity mutual funds.

However, if you expect moderate to high returns, you should consider investing in medium to high -risk taking hybrid mutual funds. When you are investing for multiple financial goals, it makes sense to invest across different types of mutual funds and create a diversified portfolio. If you are not sure or need more clarity on the basics, do not hesitate to take help from professionals who can suggest to you the best suitable mutual funds based on your needs and financial goals.

Disclaimer: The views expressed here in this Article / Video are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. Quantum AMC / Quantum Mutual Fund is not guaranteeing / offering / communicating any indicative yield on investments made in the scheme(s). The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. The Article / Video has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date. Readers of the Article / Video should rely on information/data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments. None of the Quantum Advisors, Quantum AMC, Quantum Trustee or Quantum Mutual Fund, their Affiliates or Representative shall be liable for any direct, indirect, special, incidental, consequential, punitive or exemplary losses or damages including lost profits arising in any way on account of any action taken basis the data / information / views provided in the Article / video.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.