Different Types of Mutual Funds and Features

Mutual funds are lucrative investment options offering liquidity, easy access, and simple exits while removing investment management risks for individual investors. However, before investing in them, one must understand their various types designed to meet various investor goals. The Securities and Exchange Board of India (SEBI) classifies mutual fund schemes based on their structure, asset class, and other parameters. Let’s have a look at them.

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Types of Mutual Funds Based on Structure

Based on structure, mutual funds can be open or close-ended, or with intervals:

  1. Open-Ended Funds: These mutual funds are perpetual, allowing investors to invest and exit the investment anytime. They are highly liquid and don’t have a lock-in investment period.
  2. Close-ended Funds: These schemes come with a specific maturity date. Investors can only invest in a new close-ended fund offer and redeem only on maturity. These funds do not allow investors to purchase whenever they please.
  3. Interval funds: These mutual fund schemes allow investors to purchase and redeem the funds during specified intervals. The transaction period can be a minimum of two days, and two transaction periods must have a gap of at least 15 days between them. 

Types of Mutual Funds Based on Asset Class

There are three types of mutual fund schemes based on asset class: 

  1. Equity Mutual Funds 

These funds invest significantly in company stocks listed on the stock exchange. Since these stocks are volatile for short terms, investors can gain higher benefits by keeping them for long periods, like over five years. Although they offer high returns, they also come with a greater risk. Equity mutual funds are of different types:

  • Large-Cap Funds: More than 80% of their portfolio stocks are of large-cap companies. These are usually the companies ranked in the top 100 stocks that the AMFI (Association of Mutual Funds of India) prepares based on market capitalisation.
  • Mid-Cap Funds: More than 65% of their portfolio stocks are of mid-cap companies ranked between 101 and 250 on the AMFI list. 
  • Small-Cap Funds: More than 65% of their portfolio stocks are of small-cap companies ranked below 251 on the AMFI list. 
  • Multi-Cap Funds: These mutual fund schemes invest in stocks across large, mid, and small-cap companies. The SEBI does not define any investment limit at the level of market capitalisation.
  • ELSS (Equity Linked Savings Scheme): These are tax-saving equity mutual funds that invest at least 80% of their portfolio in stocks. ELSS investments are eligible for a tax deduction of up to Rs 1.5 Lakh per annum under section 80C of the Income Tax Act. They have a lock-in period of three years from the investment date.
  • Index Funds: These mutual funds simply impersonate an index. Fund managers invest the investor’s money in the same companies as the index and in the same proportion. For instance, the fund manager will purchase all the stocks on the SENSEX in the same ratio. Whenever the SENSEX removes a stock, the index fund also removes it from the portfolio. Similarly, the fund manager will do the same when it adds new stocks.
  1. Debt Mutual Funds 

These mutual fund schemes primarily invest in instruments with fixed income, such as corporate bonds and government securities. The volatile stock market does not affect them, offering more stable returns than equity mutual funds. They can be of different types based on their maturity period, including these:

  • Liquid Funds: These funds invest in higher-rated and debt securities with a maturity date of less than 91 days. Their low maturity mitigates the volatility of interest rates; thus, they are less risky for investors. Liquid funds are better for building emergency funds than keeping them in savings accounts. 
  • Overnight Funds: These security investments have a maturity date of one day. Their shorter maturity periods again make them less risky for investors. Corporate investors commonly use these funds to invest their money. 
  • Money Market Funds: These schemes primarily invest in government securities or similar debt instruments. With a maturity period of fewer than 12 months, they are more suitable for investors expecting less volatile and stable funds with low-interest risk.
  • Banking and PSU Funds: More than 80% of their funds go into debt securities of public sector undertakings, banks, public financial entities, municipal bonds, etc. They are more suitable for investors planning to invest for short to medium terms. 
  • Glit Funds: 80% or more go into government securities for different maturity periods. Since government securities have more volatility for short terms, they are more suitable for long-term investments.
  1. Hybrid Mutual Funds

These mutual fund schemes invest in both debt and equity funds in varying proportions based on the fund’s investment objective. They give diversified exposure to different asset classes. They are of various types, including the following:

  • Aggressive Hybrid Funds: These hybrid funds invest 20-35% of their portfolio in debt funds and 65-80% in equity. 
  • Conservative Hybrid Funds: They invest 10-25% of their portfolio in equity and 75-90% in debt securities. 
  • Balanced Advantage Funds: These have dynamic investments in both debt and equity. Their allocation keeps changing according to market fluctuations, maximising the gains and minimising the risks.

Types of Mutual Funds Based on Investment Objectives

Mutual funds are of different types based on their investment objectives, including the following:

  1. Growth Funds: These funds aim at growing the investor’s capital in the long run. 
  2. Liquid Funds: They invest in funds with short maturity periods to ensure liquidity and make funds available whenever the investor needs them.
  3. Income Funds: Investors who wish to generate regular income from their investment will find income funds highly attractive. Investments in bonds and debentures generate fixed income with a maturity date.

When deciding upon a mutual fund scheme, it is not necessary to invest a lump sum amount at once. SIP investment schemes allow investors to invest in a mutual fund by paying monthly instalments and gradually achieving financial goals. One must explore the various types of mutual fund schemes and invest in one that best suits their investment goals, risk appetite, and duration for which they can lock their investments.

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