Types of Mutual Funds: Based on Risk, Asset Class and Structure

Mutual funds are among the most popular investment options for individuals looking to grow their wealth. However, with so many different types of mutual funds available, it can be overwhelming to choose the right one. In this article, we'll break down the various types of mutual funds with examples based on risk, asset class, structure, and investment goals.

4 Types of Mutual Funds

Mutual funds can be broadly categorized into four main types:

1. Equity Mutual Funds - Invest primarily in stocks and are suitable for long-term wealth creation.

2. Debt Mutual Funds - Invest in fixed-income securities like bonds which are ideal for those seeking stable returns.

3. Hybrid Mutual Funds - A mix of equity and debt instruments, balancing risk and return.

4. Solution-Oriented Mutual Funds - Designed for specific financial goals like retirement or children's education.

Understanding these categories will help you choose a fund that aligns with your investment objectives and risk appetite.

Categories of Mutual Funds in India

Mutual funds can be classified based on different factors such as asset class, structure, risk level, and investment goals. Let’s explore the different types of mutual funds in India.

Mutual Fund Types Based on Asset Class

Asset class refers to the type of securities a mutual fund invests in. The major types of mutual funds based on asset class are:

1. Equity Funds - These funds invest primarily in equities and related instruments. They offer high growth potential but come with higher risk. Types of equity funds include:

   • Large-Cap Funds

   • Mid-Cap Funds

   • Small-Cap Funds

   • Multi-Cap Funds

   • Sectoral Funds

   • Thematic Funds

   • ELSS (Equity Linked Savings Scheme)

2. Debt Funds - These invest in fixed-income securities like government bonds, corporate bonds, and treasury bills. They are less risky compared to equity funds. Types of debt funds include:

   • Liquid Funds

   • Gilt Funds

   • Corporate Bond Funds

   • Short-Term and Long-Term Debt Funds

   • Credit Risk Funds

   • Dynamic Bond Funds

3. Hybrid Funds - These funds invest in a combination of equity and debt investments to balance risk and returns. Types of hybrid funds include:

   • Aggressive Hybrid Funds

   • Conservative Hybrid Funds

   • Dynamic Asset Allocation Funds

   • Arbitrage Funds

4. Commodity Funds - These invest in commodities like gold, silver, and oil. The most common type is:

   • Gold Funds

Mutual Fund Types Based on Structure

Mutual funds can also be classified based on their structure, which determines how they function and how investors can buy or sell units. The major types of mutual funds based on structure are:

1. Open-Ended Funds - Investors can buy or sell units anytime without restrictions. These funds offer liquidity and flexibility.

2. Close-ended Funds - These funds have a fixed maturity period. Investors can invest only during the initial offer period and can redeem at maturity. Types include:

   • Fixed Maturity Plans (FMPs)

   • Capital Protection Funds

3. Interval Funds - A mix of open-ended and close-ended funds. They allow redemption only during specific intervals.

Mutual Fund Types Based on Risk

Risk is a major factor when selecting a mutual fund. Based on risk levels, the types of mutual funds based on risk are:

1. Low-Risk Mutual Funds - Debt funds like:

   • Liquid Funds

   • Ultra Short-Term Funds

   • Gilt Funds

   • Fixed Maturity Plans (FMPs)

2. Medium-Risk Mutual Funds - Hybrid funds provide a balanced approach, combining equity and debt. Examples include:

   • Balanced Funds

   • Conservative Hybrid Funds

   • Dynamic Asset Allocation Funds

3. High-Risk Mutual Funds - Equity funds, especially those investing in specific sectors or smaller companies, carry higher risks but offer higher potential returns. Examples include:

   • Small-Cap Funds

   • Mid-Cap Funds

   • Sectoral/Thematic Funds

Mutual Fund Types Based on Investment Goals

Investment objectives vary from person to person. The types of mutual funds based on investment goals include:

1. Growth Funds - Invest in equity stocks for capital appreciation. Suitable for long-term investors. Examples include:

   • Large-Cap Growth Funds

   • Multi-Cap Growth Funds

2. Income Funds - Focus on generating regular income through bonds and fixed-income securities. Examples include:

   • Corporate Bond Funds

   • Short-Term Debt Funds

3. Tax-Saving Funds (ELSS) - They offer tax benefits under Section 80C of the Income Tax Act.  They come with a lock-in period of three years.

4. Retirement Funds - Designed to help investors build a retirement corpus over time.

5. Children’s Education Funds - Help parents accumulate funds for their child's education expenses.

Conclusion

When choosing a mutual fund, your age plays a crucial role in deciding the right investment strategy:

• Young investors (20s to early 30s): With a long investment horizon, you can afford to take more risks. Investing in equity mutual funds can help maximise returns.

• Mid-career investors (30s to 50s): A balanced approach is ideal, incorporating a mix of equity and debt funds. Hybrid funds and large-cap equity funds can provide stability while still ensuring growth.

• Pre-retirement investors (50s and above): Capital preservation becomes a priority. A shift towards debt funds, fixed-income securities, and low-risk hybrid funds is recommended to maintain financial security while earning steady returns.

Now that you understand the classification of mutual funds options, you can choose the one that suits your risk profile and financial goals. Investing in mutual funds wisely can help you build long-term wealth.