Types of Mutual Funds
Once a very small player in the financial market, mutual funds now play a large and decisive role in the valuation of tradable assets such as stocks and bonds.
As an investor, you own units, which basically represent the portion of the fund that you hold, based on the amount invested by you. The increase in the value of the investments is then passed on to the investors/ unit holders in proportion to the number of units owned after deducting applicable expenses.
Mutual funds have both advantages and disadvantages compared to direct investing in individual securities.
Today, they play a vital role in household finances, most notably in retirement planning.
Let’s understand the various types of mutual funds in India here.
Types of Mutual Funds in India
The mutual fund industry is continuously emerging. Several industrial bodies are also investing in investor education. Yet, according to a report by Boston Analytics, less than 10% of our households do not consider mutual funds as an investment avenue.
In fact, a basic inquiry about the types of mutual fund reveals that these are perhaps one of the most flexible, comprehensive and hassle-free modes of investments, that can accommodate various types of investment needs.
Various types of mutual fund categories are designed to allow investors to choose a scheme based on the risk they are willing to take, the investable amount, their goals, the investment term, etc.
Schemes Based on the Maturity Period
Types of mutual fund schemes based on the maturity period are as follows-
- Open Ended Funds
- Close Ended Funds
- Interval Funds
– Open Ended Scheme
This scheme allows investors to buy or sell units at any point in time. It does not have a fixed maturity date either. You deal directly with the Mutual Fund for your investment and redemption.
The key feature is liquidity. You can conveniently buy or sell your units at net asset value (“NAV”) related prices. The majority of mutual funds, 59% approximately are open-end funds.
– Close Ended Scheme
This type of scheme has a stipulated maturity period and investors can invest only during the initial launch period known as the New Fund Offer (NFO).
Once the offer closes, no new investments are permitted. The market price at the stock exchange could vary from the scheme’s Net Asset Value (NAV), because of the demand and supply situation, unit holder’s expectations and other market factors.
Some close ended schemes will give you an additional option of selling your units directly to the mutual funds through periodic repurchase at NAV related prices.
SEBI Regulations ensure that at least one of the two exit routes are provided to the investor.
– Interval
It operates as a combination of open and closed ended scheme, it allows investors to trade units at predefined intervals. They may be traded on the stock exchange or they may even be open for sale or redemption during pre-determined intervals at NAV related prices.
When it comes to selecting a scheme to invest in, one should look for customized advice. Choose the scheme that provides the right combination of growth, stability and income, keeping your risk appetite in mind.
Based on Principal Investments
One of the most important points in the circular is that different types of mutual fund schemes should be clearly distinct in terms of investment strategy and asset allocation. The schemes will be broadly classified into following categories
- Equity Schemes
- Debt Schemes
- Hybrid Schemes
- Solution Oriented Schemes
- Other Schemes
The existing type of scheme would be replaced with the new type of schemes. Let’s look at each type of scheme
– Equity Schemes
SEBI has decided total 11 categories under Equity Schemes but a mutual fund company can only have 10 categories and it has to choose between Value or Contra. Still 10 categories looks bit high but I think its fair considering the possible variations in the startegy. To make this easier SEBI has also defined meaning of Large Cap, Mid Cap and Small Cap.
- : Top 100 companies in terms of market capitalization
- : 101st- 250th companies in term of market capitalization
- : 251st company onwards in terms of market capitalization
1. | Multi Cap Funds | Minimum investment in equity & equity related instruments–65% of total assets | Multi Cap Fund – An equity mutual fund investing across Large Cap, Mid Cap, Small Cap stocks |
2. | Large Cap Funds | Minimum investment in equity & equity related instruments of large cap companies – 80% of total assets | Large Cap Fund – An equity mutual fund predominantly investing in Large Cap stocks |
3. | Large & Mid Cap Funds | Minimum investment in equity & equity related instruments of large cap companies – 35% of total assets Minimum investment in equity & equity related instruments of mid cap stocks – 35% of total assets | Large & Mid Cap Fund – An open ended equity mutual fund investing in both large cap and mid cap stocks |
4. | Mid Cap Funds | Minimum investment in equity & equity related instruments of mid cap companies – 65% of total assets | Mid Cap Fund – An equity mutual fund predominantly investing in Mid Cap stocks |
5. | Small Cap Funds | Minimum investment in equity & equity related instruments of small cap companies – 65% of total assets | Small Cap Fund – An equity mutual fund predominantly investing in Small Cap stocks |
6. | Dividend Yield Funds | Scheme should predominantly invest in dividend yielding stocks. Minimum investment in equity – 65% of total assets | An equity mutual fund predominantly investing in dividend yielding stocks |
7a. | Value Funds* | Scheme should follow a value investment strategy. Minimum investment in equity & equity related instruments – 65% of total assets | An equity mutual fund following a value investment strategy |
7b. | Contra Funds* | Scheme should follow a contrarian investment strategy. Minimum investment in equity & equity related instruments – 65% of total assets | An equity mutual fund following contrarian investment strategy |
8. | Focused Funds | A scheme focused on the number of stocks (maximum 30) Minimum investment in equity & equity related instruments – 65% of total assets | An equity scheme investing in maximum 30 stocks (mention where the scheme intends to focus, viz., multi cap, large cap, mid cap, small cap) |
9. | Sectoral Funds or Thematic | Minimum investment in equity & equity related instruments of a particular sector/particular theme – 80% of total assets | An open ended equity scheme following the theme as mentioned |
10. | ELSS Funds | Minimum investment in equity & equity related instruments – 80% of total assets (in accordance with Equity Linked Saving Scheme, 2005 notified by Ministry of Finance) | An open ended equity linked saving scheme with a statutory lock in of 3 years and tax benefit |
*Mutual Funds will be permitted to offer either Value fund or Contra fund.
– Debt Schemes
SEBI has decided total 16 categories under Debt Schemes. 16 categories are very high for debt funds considering their similarity in risk and returns from a retail investor perspective.
Some categories like Overnight Fund and Liquid Fund are similar. Same is the case with money market fund and ultra-short term debt fund categories.
1. | Overnight Funds | Investment in overnight securities having maturity of 1 day | A debt scheme investing in overnight securities |
2. | Liquid Funds | Investment in Debt and money market securities with maturity of upto 91 days only | A liquid scheme |
3. | Ultra Short Duration Funds | Investment in Debt & Money Market instruments such that the Macaulay duration of the portfolio is between 3 months – 6 months | An ultra – short term debt scheme investing in instruments with Macaulay duration between 3 months and 6 months |
4. | Low Duration Funds | Investment in Debt & Money Market instruments such that the Macaulay duration of the portfolio is between 6 months – 12 months | A low duration debt scheme investing in instruments with Macaulay duration between 6 months and 12 months |
5. | Money Market Funds | Investment in Money Market instruments having maturity up to 1 year | A debt scheme investing in money market instruments |
6. | Short Duration Fund | Investment in Debt & Money Market instruments such that the Macaulay duration of the portfolio is between 1 year – 3 years | A short term debt scheme investing in instruments with Macaulay duration between 1 year and 3 years |
7. | Medium Duration Funds | Investment in Debt & Money Market instruments such that the Macaulay duration of the portfolio is between 3 years – 4 years | A medium term debt scheme investing in instruments with Macaulay duration between 3 years and 4 years |
8. | Medium to Long Duration Fund | Investment in Debt & Money Market instruments such that the Macaulay duration of the portfolio is between 4 – 7 years | A medium term debt scheme investing in instruments with Macaulay duration between 4 years and 7 years |
9. | Long Duration Fund | Investment in Debt & Money Market Instruments such that the Macaulay duration of the portfolio is greater than 7 years | A debt scheme investing in instruments with Macaulay duration greater than 7 years |
10. | Dynamic Bond Funds | Investment across duration | A dynamic debt scheme investing across duration |
11. | Corporate Bond Funds | Minimum investment in corporate bonds – 80% of total assets (only in highest rated instruments) | A debt scheme predominantly investing in highest rated corporate bonds |
12. | Credit Risk Funds | Minimum investment in corporate bonds – 65% of total assets ( investment in below highest rated instruments) | A debt scheme investing in below highest rated corporate bonds |
13. | Banking and PSU Fund | Minimum investment in Debt instruments of banks, Public Sector Undertakings, Public Financial Institutions – 80% of total assets | A debt scheme predominantly investing in Debt instruments of banks, Public Sector Undertakings, Public Financial Institutions |
14. | Gilt Fund | Minimum investment in Gsecs – 80% of total assets (across maturity) | A debt scheme investing in government securities across maturity |
15. | Gilt Fund with 10 year constant duration | Minimum investment in Gsecs – 80% of total assets such that the Macaulay duration of the portfolio is equal to 10 years | A debt scheme investing in government securities having a constant maturity of 10 years |
16. | Floater Fund | Minimum investment in floating rate instruments – 65% of total assets | A debt scheme predominantly investing in floating rate instruments |
– Hybrid Schemes
SEBI has decided total 7 categories under Hybrid Schemes but a mutual fund company can only have 6 categories and they have to choose between Balanced Hybrid Fund or Aggressive Hybrid Fund. Also, Finally SEBI has made Arbitrage Fund under Hybrid Fund category.
1. | Conservative Hybrid Funds | Investment in equity & equity related instruments – between 10% and 25% of total assets; Investment in Debt instruments – between 75% and 90% of total assets | A hybrid mutual fund investing predominantly in debt instruments |
2A. | Balanced Hybrid Funds* | Equity & Equity related instruments – between 40% and 60% of total assets; Debt instruments – between 40% and 60% of total assets. No Arbitrage would be permitted in this scheme | 50-50 balanced scheme investing in equity and debt instruments |
2B. | Aggressive Hybrid Funds | Equity & Equity related instruments – between 65% and 80% of total assets; Debt instruments – between 20% – 35% of total assets. Most of the balanced funds will fall into this category. | A hybrid scheme investing predominantly in equity and equity related instruments |
3. | Dynamic Asset Allocation Funds or Balanced Advantage | Investment in equity/ debt that is managed dynamically. All famous balanced advantage or dynamic funds will fall into this category. | A hybrid mutual fund which will change its equity exposure based on market conditions |
4. | Multi-Asset Allocation Funds | Invests in at least three asset classes with a minimum allocation of at least 10% each in all three asset classes. Foreign investment will be considered as a separate asset class. | A scheme investing in 3 different asset classes. |
5. | Arbitrage Funds | Scheme following arbitrage strategy. Minimum investment in equity & equity related instruments – 65% of total assets | A scheme investing in arbitrage opportunities |
6. | Equity Savings | Minimum investment in equity & equity related instruments – 65% of total assets and minimum investment in debt – 10% of total assets. Minimum hedged & unhedged to be stated in the SID. Asset Allocation under defensive considerations may also be stated in the Offer Document | A scheme investing in equity, arbitrage, and debt |
*Mutual Funds will be permitted to offer either an Aggressive Hybrid fund or Balanced fund
– Solution Oriented Schemes
1. | Retirement Fund | Scheme having a lock – in for at least 5 years or till retirement age whichever is earlier | A retirement solution oriented scheme having a lock-in of 5 years or till retirement age (whichever is earlier) |
2. | Children’s Fund | Scheme having a lock – in for at least 5 years or till the child attains age of majority whichever is earlier | A fund for investment for children having a lock – in for at least 5 years or till the child attains age of majority (whichever is earlier) |
– Other Schemes
1. | Index Funds/ ETFs | Minimum investment in securities of a particular index (which is being replicated/ tracked) – 95% of total assets | A mutual fund replicating/ tracking any index |
2. | FoF’s (Overseas/Domestic) | Minimum investment in the underlying fund – 95% of total assets | A fund of fund is a mutual fund that invests in other mutual funds |
| Asset Management Company | |
Axis Mutual Fund | DHFL Pramerica Mutual Fund | Principal Mutual Fund |
Kotak Mutual Fund | Sundaram Mutual Fund | BOI Mutual Fund |
Reliance Mutual Fund | Invesco Mutual Fund | Union Mutual Fund |
HDFC Mutual Fund | LIC Mutual Fund | Taurus Mutual Fund |
SBI Mutual Fund | JM Financial Mutual Fund | Edelweiss Mutual Fund |
ICICI Prudential Mutual Fund | Baroda Pioneer Mutual Fund | Essel Mutual Fund |
Aditya Birla Sunlife Mutual Fund | Canara Robeco Mutual Fund | Mahindra Mutual Fund |
UTI Mutual Fund | HSBC Mutual Fund | Quantum Mutual Fund |
Franklin Templeton Mutual Fund | IDBI Mutual Fund | PPFAS Mutual Fund |
IDFC Mutual Fund | Groww Mutual Fund | IIFL Mutual Fund |
DSP Blackrock Mutual Fund | Motilal Oswal Mutual Fund | Escorts Mutual Fund |
TATA Mutual Fund | BNP Paribas Mutual Fund | |
L and T Mutual Fund | Mirae Asset Mutual Fund | |
FAQs
What type of mutual fund is best?
The best type of mutual fund for investment is the one providing high liquidity rates and returns. When it comes to investing in mutual funds, it is important to look for a scheme that provides the right combination of growth, stability and income, keeping your risk appetite in mind.
How many types of funds are there?
There are various types of mutual funds available for investment, but most of these mutual funds fall under one of these four main categories-
- Stock Funds : This fund invests majorly in equity or stocks. These equity funds are again categorized into small-cap, mid-cap, and large-cap equity funds based on the company’s size.
- Money Market Funds : Money market funds are known to be safe and risk-free. They invest in short-term debt instruments, mostly government treasury bills. Although the returns are low on this type of fund, a substantial principal amount can be received.
- Bond Funds : A mutual fund that generates a minimum return is part of the fixed income category. A fixed-income mutual fund focuses on investments that pay a set rate of return, such as government bonds, corporate bonds, or other debt instruments.
- Target-date Funds : A target-date mutual fund is a type of asset allocation mutual fund where the mix of securities and asset classes, equities, and fixed income gradually shifts as your target date for needing the money (usually for retirement) draws near.
How do I start a mutual fund?
To start your investment in mutual funds, it is important to follow these 5 easy steps-
- Step 1) Start with risk profiling, i.e., to understand your risk tolerance and capacity. Knowing the amount of risk one can take before investing in mutual funds is essential.
- Step 2) After completing the risk profiling, the next step is asset allocation, where you must divide your money between various asset classes. To balance out the risk factors, asset allocation should include a mix of equity and debt instruments.
- Step 3) The third step is the identification of funds that invest in each asset class. Then, you can check for past performance or investment objectives for comparing mutual funds.
- Step 4) Select and decide the mutual fund scheme you will invest in. You can then start the application either online or offline.
- Step 5) Diversifying your investments and regular follow-ups are essential to ensure better results and higher profit.
Which type of mutual fund is safest?
All those mutual funds are considered to be the safest for investors who have good returns and minimal risks. Investment safety varies from person to person. So be it equity funds, hybrid funds, or any other type of mutual fund, depending upon a person’s investment strategy and market conditions, one can earn decent returns and have the safety of the investment.
Which mutual fund is good for 5 years?
Mutual funds are focused on specific industries or segments of companies and are managed by experienced fund managers. You can choose the type of fund depending on the risk appetite and targeted return. The best kind of mutual funds are the one providing high liquidity rates, low-risks and higher returns.
Usually, most of the mutual funds are categorised mainly under these four categories-
- Equity Funds : This type of funds invests primarily in equity stocks. Mid-cap funds, Blue-chip funds and index funds are few examples of equity funds.
- Debt Funds : They invest in long-term fixed income securities. For example, Dynamic bond funds, Fixed Maturity Plans.
- Hybrid Funds : They are a mix of equity debts and gold. Multi-asset allocation fund, Equity savings fund are included under hybrid funds.
- Liquid Funds : This type of funds invest in money market securities & bonds maturing within a year. For example, ultra-short term debt funds.