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Here are the Types of Mutual Funds


When it comes to Finance, the wheels for financial avenues are many. 

There is a stock market, there are government bonds, and just like that there are Mutual funds. 

You must have heard the term mutual funds, but knowing what it is, and what are the types of mutual funds is the task many of you might not have done. 

For your better understanding, we’ll be covering all the basic aspects of it.

Let us now understand what a mutual fund is. 

What is a mutual fund?

In a subtle tone, a mutual fund is a type of financial tool which is made up of a pool of money.

The collection of pool money is taken from many investors for investing in securities like bonds, stocks etc.

 Also, funds are invested on the basis of fund scheme objectives.

types of mutual fund what is mutual fund

In other words, investment through mutual funds can help even a small investor to get professional fund management services offered by the AMC.

Every mutual fund scheme carries an objective with it, so the money which is pooled in goes to such schemes. In order to understand an objective of the mutual fund scheme you can find this on SID, known as Scheme Information Document.

Funds are managed by the Asset Management companies and for managing your assets and funds,  professional help is provided to you, who is a fund manager.

WHAT ARE THE TYPES OF MUTUAL FUNDS?

Mutual funds have many categorizations. Before getting into the mutual fund investment, having a proper idea about its various types and options can give you much more benefits.

types of mutual funds-flow-chart

Let us now understand what these types are and how they work.

1 Equity mutual fund

Equity mutual funds means funds that are invested in the Stock Markets. 

Equity funds are invested with almost 60% of its assets in equity shares of companies in proportions. 

These funds also produce higher returns than debt funds and are considered as fixed deposits.

The performance of the company decides the investors’ returns which is the main concern over here. The investing style may be value-oriented or growth-oriented. 

These funds can also be managed actively as well as passively. 

Equity funds are further categorized into –

  • LARGE CAP FUND

In Large Cap, the companies are big and well-established. Companies present in large cap have strong market presence. All large companies are leaders in their respective sectors. 
L & T, Reliance Industries, Tata Consultancy Services, etc. These companies have already reached the sky, that now, they have access to limited growth possibilities. 

  • SMALL CAP FUND

Companies in Small Cap Fund, are at their initial phase of development.

These companies have enough growth rate possibilities and failure rates, but risk is what they can take.

Funds invested in small cap companies are called Small Cap funds. 
Examples of small cap companies are- Karnataka Bank, Federal Bank, TV network, etc.

  • SECTOR FUND

Sector Fund are funds invested in a specific sector. 

For instance, the SBI Pharma fund invests only in companies that are pharma companies.

  • DIVERSIFIED EQUITY FUND

Diversified Equity funds are funds invested in different sectors and into different market capitalization companies. 

A few examples of companies regarding this fund are -Reliance Focused Equity Fund, Franklin India Focused Equity Fund, and SBI Focused Equity Fund etc.

  • DIVIDEND YIELD FUND

When companies share some profits with their shareholders, this is known as Dividend. Although, the company doesn't need to give dividends to their shareholders, as it's not compulsory. This Board of Directors of the Company are merely responsible for such decisions. 
Dividend yield fund is invested in companies which are Stable, Safe, and Consistent and are low volatile, thus, providing good and regular dividend.

  • ELSS

ELSS is referred to Equity Linked Savings Scheme.

This is also referred to as the ‘Tax saver mutual fund scheme”.

This scheme is locked for 3 years. It’s like you can’t invest in ELSS for less than 3 years.

According to section 80C, you can get an exemption up to 1.5lakhs. 

  • THEMATIC FUNDS

Funds invested in the thematic fund means investment is done on specific themes for instance Rural India scheme or E-commerce theme and man y more like this. In this theme one can buy stocks related to Housing for instance a Cement Company, a Construction Company, metal and paint companies etc. 

2. DEBT FUNDS

In Debt Funds, the government and the companies borrow money from institutions and in return provide them with interest. 

This type of mutual fund mainly invests in a mix of debt and fixed income securities, for instance, Treasury Bills, Government Bonds, Corporate Bonds, Money Market instruments and just like there are many different time horizons. Debt securities contains a fixed maturity date & pay along with a fixed interest rate which is also favored by many people.

In debt funds, investment is done through debt instruments such as debentures, bonds, and certificates of deposit. As compared to the equity funds, the risk is lowered in debt funds. 

These types of funds are also for people who are not interested in investing into a highly volatile equity market. There are 4 types of debt funds-

  • Gilt Fund- Gilt funds are funds invested in government structures. The securities of government can only be issued by the government as in such a scenario the default risk is 0.
  • Junk Bond Scheme- Junk bond schemes, includes high default risk as well as high interest rates.
  • The Fixed Maturity Phase is like a Bank’s FD, as in this they have a fixed pre-defined maturity. They usually include- Commercial papers, Certificate of deposit, corporate bonds, etc. are invested in such scenarios. Fixed maturity phase is much better than the bank FD’s.
  • Liquid Funds invest money in the money market instruments. The monetary market contains certain types of financial instruments through which companies can borrow finance for a short term from the investors. 
    Short term money market instruments are Treasury Bills, Certificate of deposits, Commercial Bills, and Term deposits etc.
    This gives more returns than the savings account. For entailing low risk and low volatile investment, this is the best short term investment.

3. HYBRID FUND

Hybrid funds are funds, which are invested in more than on asset classes.

These hybrid funds invest in both Debt and Equity which is better for investing.  

Also it is seen as a mixture of both stocks and bonds, which is also known as the asset allocation funds.

types of mutual fund hybrid fund 

The asset allocation funds has been in use for numerous purposes or reasons in the financial market. 

Hybrid funds provides investors with an offer. This offer gives them an option for investing in multiple asset classes through a single fund. This can be beneficial for the investors. These funds provide a variety of options for risk management and works on three levels from being conservative to moderate and lastly to aggressive.
There are 3 types of Hybrid Funds-

Monthly Income Plan

  • MIP or monthly income plan is an investment in which major amount, up to 60-90% is invested in debt instruments and the rest is invested in equities. 
  • MIP investment is considered as a much safer option than the equity funds. 
  • Although, this does not show that it is totally risk free, as some amount, along with debt instrument is invested in equity mutual fund as well.

Balanced fund

  • By its name, balanced fund is considered that it will provide a balanced investment for both equity and debt. 
  • But that’s not the case, as in balanced funds, there is more equity than the debt fund.
  • Around 65-85% is invested in equity and the remaining in debt. Equity helps to provide balanced funds, in order to provide good returns, whereas, debt reduces the risk.

Arbitrage Funds

  • If the price of the share is different in cash market and the derivative market then by arbitraging it, one can earn a profit. In this type of fund, 65+ is invested in the equity. 
  • Money which is invested in the arbitrage fund is safe but the returns might fluctuate. 
  • There returns are generally up to 6-10%. For the purpose of taxation, arbitrage fund is considered as the best option. 

4. INTERNATIONAL MUTUAL FUNDS

International funds can be invested in assets outside your home country. 

The classification of these funds is difficult as to know if it is safe or not. For a diversified portfolio international or global funds can be considered as a great source. Like all the other mutual funds, for investing in large numbers of securities the usage of international and global securities can do wonders for you. 

International funds also gives you a cost-effective way as a benefit to share your own shares in many different companies.

International stock funds invest in companies which are situated outside of the US. 

The best thing about international funds is that it offers investors with an option of multiple layers of diversification which generally includes geographical, currency, and sector. 

Another best thing is that it helps in reducing the chances that the performance of a single stock in a single country and it can negatively impact the performance of the entire portfolio.There are three types of international mutual funds-

  • Domestic-International Hybrid

In such investment 65% is for domestic equities and 35% for the international equities. This option is considered good for the Indian investors because Indian markets are doing well and also the returns from these investments become tax free after one year. 

  • Feeder Investments

Feeder investments are meant to invest through a feeder route into a particular country or reign. In this these funds are invested in another international fund and which in turn directly invests in the foreign stocks. 

  • Thematic Investments

This is an investment which is done on the basis of a particular theme of a sector or an industry.

5. SPECIALITY MUTUAL FUNDS

In this fund, investment is predominantly done in a single industry, sector or region all over the world. For instance, one can invest in natural gas companies, financial companies, energy companies etc. 

The performance of these funds are directly linked with the performance of the industries. 

This is because there is no sectoral or industry-wise diversification in this type of investment fund. 

The specialty funds are considered as a high-risk investment due to high concentration risk involved with it. 

The potential return from specialty fund doesn’t offset the present risk at hand for the investor. 

Therefore, an investor has to choose wisely before investing in a specialty fund. However, the returns from these funds can be really high in the long run, which makes them an attractive investment option.

There are three types of Specialty funds-

  • Sectoral Funds- These types of funds make the investment in specific industries like the infrastructure, pharmaceuticals, technology, banking, etc. The main focus of sectoral funds is that they focus on one particular segment of the economy. SEBI guidelines have made it mandatory to invest 80% of assets in selected sector of sectoral funds. 
  • Thematic funds- These funds are invested in their assets based on a theme-oriented pattern that comprises multiple related sectors, for example, MNC, energy, and consumption-oriented funds.
  • Regional funds- These funds are invested in specific geographical area across the world.

6. EXCHANGE TRADED FUNDS (ETF’s)

These funds are considered as twisted form of mutual funds. 

They hold assets like stocks, commodities and bonds, and this type of investment fund is traded on the stock exchange. 

types of mutual funds etf

The benefit of this fund is that they carry less fee than the equivalent mutual fund, also they enjoy tax advantages from mutual funds. 

To further know more about ETF watch this video... 

https://www.youtube.com/watch?v=JG3cyRqmLYI

7. FUNDS OF FUNDS

Funds which can be structured to invest in various other funds, whether in India or abroad, such funds are called fund of funds. 

These ‘funds of funds’ have pre-specified the mutual funds whose schemes people buy and / or the kind of schemes they will invest in. 

These are designed in order to help the investors to get over the trouble of choosing between multiple schemes and their variants in the market.
Thus, an investor who is further planning to invest in a fund of funds, will manage the investments in various schemes and options on the market.

11 EXAMPLES OF TOP MUTUAL FUND COMPANIES

Some examples of mutual fund asset management companies are –

types of mutual finds examples

  • Axis Long Term Equity Fund
  • Aditya Birla Mutual Fund
  • SBI Blue-chip Fund
  • SBI Small Cap Fund
  • HDFC Equity Fund
  • Sundaram Mutual Fund
  • ICICI Prudential Blue-chip Fund
  • Kotak  Mahindra Mutual Fund
  • Franklin Templeton Fund
  • UTI Mutual Fund
  • Reliance Mutual fund

CONCLUSION

With such information, you might have got the idea of what different types of mutual funds are there to invest in. 

Before investing in something having an apt knowledge of that investment vehicle is very important, and when it comes to mutual funds which is itself an enormous topic, having enlightenment is important. 

With a hope that all your queries regarding the types and the meaning of mutual fund is cleared. If you like it, please share the article on different social media platforms if you like it.

By Anjali