Types of Mutual Funds in India and Their Different Categories

Mutual fund investments have grown increasingly popular. While they are an excellent way to diversify your funds and risk, there’s one primary benefit to investing in mutual funds. The fact that they are managed by experts. For individuals who seldom find time to study the market or who lack the expertise to do so, mutual funds are the apt choice. 

Now, there are lots of instruments you can invest your money in, right? Well, different mutual funds invest your money in different assets too. So, naturally, there are several types of mutual funds as well. Mutual funds can be categorised into different types based on their asset allocation, risk levels, or investment objectives. Let us look at the major types of mutual funds as well as some subcategories.

Equity mutual funds: large cap, mid cap, small cap

The mutual funds that primarily invest in stocks are known as equity mutual funds. They are ideal for investors looking for capital appreciation over a longer term. Based on the market capitalisation of the companies they invest in, equity mutual funds come in different categories.

Large-cap mutual funds

Large-cap funds invest in well-established, financially stable companies with a high market capitalisation. These companies are typically industry leaders and have a track record of steady growth. Large-cap funds are considered relatively stable and offer consistent returns with lower volatility compared to mid and small-cap funds. Examples include blue-chip funds that invest in the 100 largest companies based on market capitalisation.

Mid-cap mutual funds

Mid-cap funds invest in medium-sized companies with the potential for higher growth but also carry a moderate level of risk. These companies are typically ranked between 101 and 250 in market capitalisation. Mid-cap funds are ideal for investors willing to take some risk in exchange for better returns over time.

Small-cap mutual funds

Small-cap funds focus on companies ranked beyond the top 250 in market capitalisation. These companies have high growth potential but come with significant volatility. Small-cap funds are suitable for aggressive investors who have a higher risk appetite and a longer investment horizon.

Debt mutual funds: corporate bonds, gilt funds, liquid funds

Debt mutual funds are the ones that invest in fixed-income securities. These securities include government bonds, corporate bonds, t-bills, and money market instruments. Debt mutual funds are usually suitable for investors with a conservative approach and a relatively lower risk tolerance looking for a steady income.

Corporate bond funds

As the name suggests, corporate bond funds invest in debt securities that are issued by companies. Corporate bond funds offer higher returns than government securities but also come with credit risk. They are ideal for investors looking for a relatively stable income with moderate risk.

Gilt funds

The funds that invest only in government securities are known as gilt funds. They carry no credit risk since they are backed by the government, making them a safe investment avenue. Gilt funds, however, are sensitive to interest rate fluctuations and thus, experience short-term volatility at times.

Liquid funds

Liquid funds invest in short-term money market instruments like t-bills, commercial papers, and certificates of deposit. They offer high liquidity and are ideal for parking surplus cash for short durations, typically ranging from a few days to a few months. Liquid funds usually provide better returns than savings accounts while maintaining low risk.

Hybrid mutual funds: balanced funds, asset allocation funds

Hybrid funds invest in a mix of equity and debt instruments to provide a balanced risk-return profile. These funds are suitable for investors who want exposure to both equity and debt in a single investment.

Balanced funds

Balanced funds are the ones that maintain a relatively fixed allocation between equity and debt instruments. The allocation, typically, is 60:40 or 50:50. Balanced funds offer stable returns while minimising risks, making them ideal for moderate investors who want equity exposure with reduced volatility.

Asset allocation funds

Asset allocation funds dynamically adjust their portfolio composition between equity, debt, and sometimes commodities or real estate based on market conditions. These funds provide flexibility and diversification, making them suitable for investors seeking an all-in-one investment solution.

Specialised funds: ELSS (tax-saving funds), sectoral funds, index funds

Other than the types of mutual funds we discussed, there are some mutual funds that focus on specific sectors or investment strategies.

ELSS mutual funds 

ELSS, or equity-linked savings schemes, invest in equities and provide tax benefits to individuals under Section 80C of the Income Tax Act. The catch is that the funds have a mandatory lock-in period of three years. They offer a potential for high returns and are a popular tax-saving instrument.

Sectoral funds

Sectoral funds invest in a particular sector, such as technology, pharmaceuticals, or banking. Since these funds are highly concentrated in one sector, they carry a higher risk but can deliver strong returns if the sector performs well. These funds are suitable for investors who have strong knowledge of specific industries and want to capitalise on sector-specific growth trends.

Index funds

Index funds are passive mutual funds that track a specific stock market index, such as the Nifty 50 or S&P 500. They replicate the performance of the underlying index by holding the same stocks in the same proportion. Index funds are cost-effective and provide broad market exposure with minimal active management.

Conclusion

Mutual funds cater to different types of investors based on their financial goals, risk tolerance, and investment horizon. While equity mutual funds are suitable for long-term wealth creation, debt mutual funds provide stability and regular income. Hybrid funds offer a mix of both, while specialized funds allow investors to target specific objectives such as tax savings or sectoral growth. Understanding these categories helps investors make informed decisions and build a well-balanced investment portfolio.