Investing in mutual funds can help grow your money over time. These funds pool together money from many individual investors and invest in assets like stocks, bonds, and more. By spreading investments across different assets, mutual funds reduce overall risk. One type of mutual fund to consider is an interval funds, which allows investors to buy or redeem units at specific intervals, providing a flexible investment option. Let’s explore the main types of mutual funds in India, including options like pension funds, that investors typically choose to grow their wealth.
Types of Mutual Funds in India
The Indian mutual fund industry has evolved over the years to offer a diverse suite of schemes catering to different investment objectives and risk-return profiles of investors. As per SEBI classification norms aimed at bringing standardisation, mutual fund schemes have been structured into a few major buckets that you should understand after knowing the mutual funds meaning:
WHY SMC
- 20 Lac+ unique clients
- 33+ Years of Serving
- Advance Technical Analysis
- Free Demat Account
1. Equity Schemes
Equity mutual funds predominantly invest in shares of publicly listed companies. Based on the market capitalisation focus, equity schemes can be further classified into:
Large Cap Equity Funds: These funds invest in large-cap companies, offering stability and sustainable returns over time. Large-cap stocks are less volatile, making them less risky, and tend to perform better during recessions.
Mid-Cap Equity Funds: Mid-cap funds invest in developing companies with higher growth potential than large-cap stocks but come with more risk. They balance between the stability of large-caps and the growth potential of small-caps.
Small Cap Funds: These funds invest in smaller companies with high growth potential but greater volatility. Small-cap stocks are riskier, especially during recessions, but can outperform large-cap stocks when the economy recovers.
Multi Cap Equity Funds: Multi-cap funds diversify investments across large, mid, and small-cap stocks, offering exposure to various sectors and market caps. This reduces risk and provides a balanced growth opportunity.
Thematic Equity Funds: These funds focus on specific sectors like IT, banking, or pharma. They can deliver higher returns but carry more risk due to their sector-specific focus.
2. Debt Schemes
Debt mutual funds, also known as income funds, invest majorly in fixed-income securities like corporate bonds, government securities, and money market instruments across maturities to generate regular interest payouts while emphasising capital preservation. The various categories are:
WHY SMC
- 20 Lac+ unique clients
- 33+ Years of Serving
- Advance Technical Analysis
- Free Demat Account
Liquid Funds: Liquid funds invest in short-term instruments with maturities under 91 days. They are ideal for those seeking better returns than savings accounts while maintaining liquidity.
Ultra Short-Term Bond Funds: These funds have maturities under a year, offering slightly better returns than liquid funds. They are suitable for parking surplus money for short periods.
Short-Term Income Funds: With maturities of 1-3 years, these funds are great for investors with a horizon over one year, especially when interest rates are rising.
Fixed Maturity Plans (FMPs): FMPs are closed-ended funds held until maturity, similar to fixed deposits, and are best for investors with a horizon of more than three years.
Long-Term Income Funds: These funds have maturities of 3-10 years and benefit long-term investors, particularly when interest rates fall as bond prices rise.
Gilt Funds: Gilt funds invest in government securities, offering low credit risk and benefiting from falling interest rates. They are suitable for conservative, long-term investors.
Monthly Income Plans (MIPs): MIPs combine debt and a small portion of equity, providing stability with potential growth. Ideal for conservative investors seeking better returns than traditional debt instruments.
Capital Protection Oriented Funds (CPFs): Capital Protection Funds aim to protect the principal while offering some equity exposure, which is suitable for risk-averse investors looking for limited equity market participation.
WHY SMC
- 20 Lac+ unique clients
- 33+ Years of Serving
- Advance Technical Analysis
- Free Demat Account
Dynamic Bond Funds: These funds adjust portfolio maturity based on interest rates, offering flexibility for investors uncertain about interest rate movements.
Credit Opportunity Funds: These funds invest in lower-rated bonds for higher returns, making them suitable for investors with a high-risk appetite.
3. Hybrid Schemes
Hybrid mutual funds invest in an optimal proprietary mix of equities and fixed-income assets to balance stability and growth. The different types of mutual funds are:
Equity Savings Funds: These are open-ended funds that invest in debt, equities, and arbitrage opportunities. However, according to their investment mandate, these funds must allocate at least 10% of their net assets to debt securities and at least 65% to equity and equity-related securities. Derivative contracts are typically used to hedge the equity exposure, and the fund must report in the Scheme Information Document (SID) both the minimum amount of exposure that is hedged and unhedged.
Aggressive Growth Funds: These are open-ended mutual funds that invest between 20% and 35% of their net assets in debt securities, with most of their investments being made in equities and equity-related instruments (65% to 80%).
Conservative Hybrid Funds: These are open-ended mutual funds that invest between 75% and 90% of their net assets in debt securities and the remaining 10% to 25% in equity securities.
Dynamic Asset Allocation: These funds, sometimes called “balanced advantage funds,” can allocate their investing mandate between debt and equity. The allocation management is dynamic and contingent on the relative debt and equity prices. When equity prices are lower, these funds will boost the allocation to equity. On the other hand, when the values appear high, the fund will reduce the equity valuation and book gains. Thus, these funds use the ‘buy cheap and sell high’ approach.
WHY SMC
- 20 Lac+ unique clients
- 33+ Years of Serving
- Advance Technical Analysis
- Free Demat Account
Multi-Asset Allocation: These funds allocate at least 10% of their investments to each of the minimum of three asset groups.
Arbitrage Funds: These schemes use arbitrage techniques to produce returns for investors who hold at least 65% of equity and equity-related instruments. Nonetheless, the fund’s exposure to stock is suitably hedged using derivative techniques, which helps to reduce investors’ risk associated with equity investments.
The gap between the equity valuations in the cash and futures markets is called arbitrage. Over time, fund managers can produce returns with little investment risk by taking advantage of the valuation disparity between the cash and futures markets, which converge on the expiry date.
The Bottom Line
The above list answers the question, “How many types of mutual funds are there in India?” and clarifies the mutual funds meaning. Investing in mutual funds that match your risk appetite and financial goals is key to building wealth. Conservative investors can opt for debt funds to earn stable income or money market funds to park surplus money safely. Equity funds aid long-term wealth generation for risk-takers, while hybrid funds balance safety and growth. Tax saving funds, retirement funds, or fixed maturity funds target specific needs.
Understanding the core investment strategy, the meaning of mutual funds, and the risk-return trade-off of different types of mutual funds can help you identify the right fit for your portfolio and investment objectives. Consult your advisor, assess your risk tolerance, and invest wisely.
FAQs
1. What type of mutual fund is best?
Mutual funds with high rates of return and liquidity are the greatest choice for investors. When investing in mutual funds, it’s critical to consider your risk tolerance and choose a plan that offers the ideal balance of income, stability, and growth.
2. What are the 4 types of mutual funds?
In India, mutual funds are classified into four types: Equity Funds, which invest in stocks for high growth potential; Debt Funds, which focus on bonds for steady income; Hybrid Funds, combining equity and debt for balanced risk and returns; and Solution-oriented schemes for retires and children.
3. How to select a mutual fund?
WHY SMC
- 20 Lac+ unique clients
- 33+ Years of Serving
- Advance Technical Analysis
- Free Demat Account
When selecting a mutual fund, decide your investing goals (retirement, education, building wealth, etc.), what kind of fund you are OK with taking on risk (equity, debt, hybrid), and research fund managers, expense ratios, and past performance.
4. What is the best age to invest in mutual funds?
Investments can be made at any age. However, it is quite advantageous to begin investing early to guarantee that you can generate healthy returns over time. You can even begin investing when you are a minor to guarantee higher returns based on long-term compounding effects.
References:
https://www.bajajfinserv.in/investments/types-of-mutual-funds-in-india-a-comprehensive-overview
https://groww.in/p/types-of-mutual-funds
https://cleartax.in/s/mutual-fund-types
https://www.etmoney.com/learn/mutual-funds/mutual-fund-types/
