Mutual funds are becoming an increasingly popular investment choice in India. They allow you to start with whatever amount you have and you can invest in different types of mutual funds based on what your objective is – high returns, receiving a fixed income, international diversification, tax-saving, and more. The types of mutual funds in India are many and they can be categorised in a few ways based on their structure, asset allocation, and nature.
Classification of mutual funds based on structure
- Open-ended mutual funds
Open-ended funds are the type of mutual funds you can invest in at any point. They are liquid and there is no fixed maturity date – you can buy and sell as many units as you like at any time. A majority of the mutual funds are open-ended funds.
- Close-ended mutual funds
These are the mutual funds you can buy only when the asset management company initially launches the mutual fund during its New Fund Offer (NFO) period. After the NFO is closed, you cannot invest in these mutual funds.
Classification of mutual funds based on allocation
- Equity funds
These types of mutual funds in India primarily invest in equity shares and other equity-related instruments. Equity mutual funds are further categorised into large-cap, medium-cap, small-cap, and multi-cap funds based on the market capitalisation of the companies they primarily invest in. Equity mutual funds’ performance is primarily based on that of the stock market and hence they come with a greater risk. However, this is also the reason why they have the potential to earn higher returns for their investors over the long term.
- Debt funds
Debt funds invest in fixed-income securities such as treasury bills, government bonds, commercial papers, and more. They carry lesser risk than equity mutual funds due to the nature of the securities they invest in and hence also typically have lower returns. They can further be classified into liquid funds, overnight funds, ultra-short duration funds, and more based on their maturity period.
- Hybrid funds
For investors who want to invest in both equity and debt securities, hybrid mutual funds are a great choice. Depending on what percentage of the funds are invested in equity instruments and in debt securities, hybrid funds can further be categorised into balanced hybrid funds, aggressive hybrid funds, balanced advantage funds, and more.
Classification of mutual funds based on specialised nature
- International funds
International funds or foreign funds are mutual funds that invest in shares of companies listed on the stock exchange of foreign countries. International mutual funds are a great way for investors to add a layer of diversification to their portfolio by providing exposure to international investments.
- Index funds
Index funds are one of the types of mutual funds in India that are not actively managed by a fund manager. Such funds are created in a way so that they can track and mimic the performance and composition of a market index such as BSE Sensex. Since they are passively managed, they have a lower expense ratio.
- Sector funds
These are mutual funds that invest in the stocks of companies only from one sector or industry. These sectors include technology, healthcare, real estate, utilities, natural resources, and more. The risk is slightly higher in sector funds as the diversification is limited to just one industry.
You will have to consider your financial goals, investment horizon, risk appetite, and current investment portfolio when picking from these different types of mutual funds. You can consult a financial expert to help you to build an investment portfolio that best suits your needs.