Planning to invest in mutual fund schemes but want to know your options first? A mutual fund is a professionally managed investment vehicle that pools money from multiple investors to invest in a diversified portfolio of equities, bonds, or other securities.
In India, there are different categories of mutual funds, each catering to different financial goals and risk levels.
Whether you want growth, stability, or a balanced approach, understanding these categories is important for making calculated decisions.
Let’s go through the top mutual fund categories to help guide your investment choices.
Equity schemes
These are one of the most popular types of mutual funds, especially for investors with a long-term horizon and a higher risk tolerance.
As per the Securities and Exchange Board of India’s (SEBI) regulations, an equity mutual fundmust invest at least 65% of its assets in equities and equity-related instruments.
This exposure increases the possibilities of better returns over time, but it also means that these funds carry more risk than debt or hybrid funds.
Below are the subcategories of equity funds:
- Multi-cap fund
- Flexi-cap fund
- Large-cap fund
- Large and mid-cap fund
- Mid-cap fund
- Small-cap fund
- Dividend yield fund
- Value fund
- Contra fund
- Focused fund
- Sectoral/ thematic fund
- Equity-Linked Savings Scheme (ELSS)
Debt schemes
Adebt mutual fund invests in fixed-income securities like corporate bonds, treasury bills, money market instruments, and government securities.
These schemes generate income primarily through capital appreciation and interest income. Although debt funds offer more stable returns than most other mutual funds, they still carry credit and interest rate risks.
Below are the subcategories of debt funds:
- Overnight fund
- Liquid fund
- Ultra short duration fund
- Low duration fund
- Money market fund
- Short duration fund
- Medium duration fund
- Medium to long duration fund
- Long duration fund
- Dynamic bond
- Corporate bond fund
- Credit risk fund
- Banking and Public Sector Undertaking (PSU) fund
- Gilt fund
Hybrid schemes
Hybrid mutual funds invest in more than one asset class. They can include equities, debt, and sometimes gold, silver, and Real Estate Investment Trusts (REITs).
These funds allow for better portfolio diversification and reduce the risks associated with a purely equity or debt portfolio.
Below are the subcategories of hybrid funds:
- Conservative hybrid fund
- Balanced hybrid fund
- Aggressive hybrid fund
- Balanced advantage fund or dynamic asset allocation fund
- Multi-asset allocation fund
- Arbitrage fund
- Equity savings
Solution-oriented schemes
Solution-oriented schemes are designed to meet specific financial goals, such as retirement or funding a child’s education.
These funds have a mandatory lock-in period, typically of five years, which encourages long-term holding and disciplined investing.
Other schemes
This category includes passive investment strategies that track specific indices or invest in other mutual funds:
Index funds: Index funds are passive funds that aim to mirror the performance of a specific market index like the S&P BSE Sensex or the Nifty 50.
Exchange-Traded Funds (ETFs): An ETF aims to track an index, bonds, or a commodity. They combine the benefits of mutual funds (diversification) with the flexibility of stocks (real-time trading).
You can buy and sell ETFs throughout the trading day, unlike mutual funds, which are priced at the end of the trading day.
Fund of Funds (FoFs): FoFs may invest in equity, debt, or international funds, depending on their investment objective.
If you choose to invest in mutual fund schemes, you now know there are plenty of categories available to match your personal financial strategy. So, explore your options and start your investments with a well-considered approach.
Key takeaways
There are different types of mutual funds in India that can be used to achieve different goals. Equity funds provide more growth potential, while debt funds offer stability.
Hybrid funds help in balancing risk and return, and solution-oriented schemes are useful for specific goals like retirement or children’s education. Moreover, ETFs and index funds offer cost-effective market exposure.
Choosing the right mutual fund category will largely depend on your financial goals, risk appetite, investment horizon, and market conditions.
