Types of Mutual Fund in India
Mutual funds are a popular investment choice in India due to their ease, flexibility, and diversification benefits. With over 44 registered mutual funds in the country, investors have access to a wide range of schemes to meet their diverse financial needs. Mutual funds in India can be categorized based on their structure, asset class, investment goals, and risk profile.
1. Structure of Mutual Funds
Mutual funds in India are structured in different ways to cater to investors’ preferences:
1.1 Open-ended Funds
Open-ended mutual funds offer flexibility as investors can buy or sell units at any time during the year, based on the current net asset value. They are ideal for those seeking liquidity. For example, “ICICI Prudential Bluechip Fund” is an open-ended equity fund.
1.2 Close-ended Funds
Close-ended funds have a predetermined capital amount and a specific purchase window. Redemption is possible only at maturity, but these funds can be traded on stock exchanges for added liquidity. An example is the “HDFC Housing Opportunities Fund.”
1.3 Interval Funds
Interval mutual funds combine features of both open-ended and close-ended funds. Investors can transact during specific intervals when the trading window is open. “Axis Equity Hybrid Fund” is an example of an interval fund.
2. Mutual Fund Asset Class
Mutual funds are categorized based on the assets they invest in:
2.1 Equity Funds
Equity funds invest in company shares, and their returns depend on stock market performance. They include Large-Cap Funds, Mid-Cap Funds, Small-Cap Funds, Focused Funds, and ELSS. An example is the “Aditya Birla Sun Life Frontline Equity Fund.”
2.2 Debt Funds
Debt funds invest in fixed-income securities like corporate bonds, government securities, and treasury bills. They offer stability and regular income with lower risk. “SBI Magnum Gilt Fund” is an example of a debt fund.
2.3 Hybrid Funds
Hybrid funds invest in both debt and equity instruments to balance risk and return. They come in various types, including balanced and aggressive funds, as well as multi-asset allocation funds. “HDFC Hybrid Equity Fund” is a well-known hybrid fund.
2.4 Solution-oriented Funds
These funds target specific financial goals, such as children’s education, marriage, or retirement, with a lock-in period of at least five years. An example is the “Axis Children’s Gift Fund.”
2.5 Other Funds
This category includes index funds, which track specific stock indices, and fund of funds that invest in other mutual funds. “UTI Nifty Index Fund” is an example of an index fund.
3. Mutual Funds Based on Investment Goals
Investors can select funds based on their financial objectives:
3.1 Growth Funds
Growth funds primarily invest in high-performing stocks with the goal of capital appreciation. They are suitable for investors seeking high returns over a long period. An example is the “Mirae Asset Emerging Bluechip Fund.”
3.2 Tax-saving Funds (ELSS)
Equity-linked saving schemes invest in company securities and offer tax deductions under Section 80C of the Income Tax Act, with a minimum investment horizon of three years. “Axis Long Term Equity Fund” is an example of an ELSS fund.
3.3 Liquidity-based Funds
Funds in this category vary in liquidity, with options like ultra-short-term and liquid funds for short-term goals and retirement funds with longer lock-in periods. “HDFC Liquid Fund” is an example of a liquid fund.
3.4 Capital Protection Funds
These funds balance their investments between fixed income instruments and equities to minimize potential losses while maintaining taxable returns. “Tata Retirement Savings Fund – Progressive” is an example of a capital protection fund.
3.5 Fixed-maturity Funds (FMF)
FMFs invest in debt market instruments with maturities matching the fund’s duration, providing stability and predictability. “ICICI Prudential Fixed Maturity Plan – Series 86 – 1201 Days Plan R” is an example of a fixed-maturity fund.
3.6 Pension Funds
Pension funds aim to provide regular returns over a long investment period, typically through hybrid fund investments. An example is the “UTI Retirement Benefit Pension Fund.”
4. Risk Appetite
Investors can select mutual funds based on their risk tolerance:
- Very-low-risk and low-risk funds aim to mitigate market risk with low returns. “Reliance Liquid Fund” is an example of a low-risk fund.
- Medium-risk funds, such as hybrid funds, balance risk with debt investments. “Franklin India Equity Hybrid Fund” is an example of a medium-risk fund.
- High-risk funds have a significant equity exposure, offering the potential for higher returns. “SBI Small Cap Fund” is an example of a high-risk fund.
Every mutual fund discloses its risk exposure via a risk-o-meter that investors can check to decide if it lines up with their risk capacity.
Understanding the different categories of mutual funds in India allows investors to align their choices with their financial goals and risk preferences. Using online tools like the SIP calculator can help investors calculate returns and monthly investments for mutual fund options.