• HDFC securities
• 31 May 2023
• Knowledge Centre

Liquidity, diversification and affordability make mutual funds a good investment tool. Over time, it also has the potential to offer returns that can beat inflation. They encourage early financial planning, giving you the benefit of being able to start your wealth creation journey with as little as ₹500 per month if you choose to invest in mutual funds through the SIP route.

You gain multiple other benefits, such as tax savings and more than 2,000 schemes to choose from, based on your investment goals and timeframe. No wonder the average Assets Under Management (AUM) of the Indian Mutual Fund Industry stood at ₹40,04,638 crore in March 2023.

Mutual fund investment is also highly convenient, with an experienced fund manager taking care of ensuring the best possible returns. But it is critical to know the types of mutual funds to pick the right one. Here’s a look.

Classification Based on Asset Class

Apart from solution-oriented funds and index funds, you can choose from three other types of mutual funds.

1.    Debt Funds

This is a good option for passive investors. They cost relatively lower than other active mutual funds in India. Debt funds invest in fixed-income securities, such as:

• Treasury bills
• Corporate bonds
• Government securities

With low risk and high stability, debt funds are also a good choice for investors low risk appetite. These funds can further be categorised into low-duration funds, overnight funds, liquid funds and credit risk funds.

2. Equity Funds

Choose equity funds if you wish to invest in the Indian stock market. These come in variations such as large-cap equity fund, mid-cap mutual funds and small-cap mutual funds. However, remember that stock investing entails higher risk, albeit with higher returns. Also, a long-term horizon gives the best results. Only a small capital is required to get the shares of an equity fund.

 

3.    Hybrid Funds

These funds invest in a mix of equity and debt. The ratio can be fixed or variable, depending on the fund house. Hybrid funds are perfect for those who are willing to take risks for the “debt plus returns” benefits. There are two basic types of hybrid mutual funds: aggressive funds and balanced funds.

Classification Based on Structure
This classification is mainly based on the ease of investment.

Open-Ended Funds
These funds come with zero limits on fund units. There are no restrictions on the time period either. Investors can invest at their convenience and exit whenever they wish to, at the current NAV. This is perfect for those who require high liquidity.

 Close-Ended Funds

These come with a pre-fixed unit amount. The fund company cannot sell more than this limit. You can purchase units only during a particular time. Further, liquidity or redemption is available only after maturity. SEBI has also given an option to investors to list the units on the stock exchange or simply repurchase them.

 Interval Funds

This is a cross between close-ended and open-ended funds, which means that they include the traits of both types of mutual funds. Interval funds are typically useful for investors looking to build wealth within a short timeframe or a short-term goal. This can include paying college fees or clearing credit card debt. You can purchase or redeem the units only at specific intervals. In addition, you cannot make transactions for a minimum of 2 years.

Classification Based on Goals

Pick the below funds according to your financial objectives.

Liquid Mutual Funds

As the name suggests, these are highly liquid finds, usually meant for ultra-short-term or short-term goals. Investments are usually made in debt instruments.

Growth Funds

These funds invest in high-performing stocks. Growth funds are typically suited to millennials who might have extra money and a longer investment horizon.

ELSS Funds

These funds qualify for tax deduction under Section 80C of the Income Tax Act. You can save up to ₹1.5 lakhs annually on your taxable income. They come with a short lock-in period of 3 years.

Other types of mutual funds are fixed-maturity schemes and capital protection funds. Make sure you learn all you can about the fund before investing.