Types of Mutual Funds in India

Are you interested in starting your investment journey? While there are many options to explore, mutual funds are one of the best options. Managed by experienced professionals, they reduce investors' risk and help to diversify your portfolio across many different sectors. In this article, we will understand what mutual funds are and the types of mutual funds in India.

What are mutual funds?

Mutual funds are a pool of funds, usually monitored and managed by asset management companies (AMCs) and fund managers. But how do they work? The trust collects money from investors and invests it in equities, bonds, and other securities. Any profits that are made through these investments are distributed amongst the investors. There are various types of mutual funds, and each has different risk levels, asset classes, goals, and structures. The many types of mutual funds cater to people who want to grow their assets, earn a steady income, or make specialized investments.

What are the different types of mutual funds?

Mutual funds are typically divided into different groups. The different mutual fund categories include:

1. Funds based on asset class

These financial assets all have similar characteristics. Some examples of funds in this category include equity funds, which invest in companies. These can be large-cap or small-cap funds, which invest in smaller companies focusing on growth.

Debt funds are also in this group and involve investing in government, corporate, and other bonds. They are best for those looking for a steady income. Other options are money market funds and hybrid funds. Money market funds involve investments in short-term securities like treasury bills. They are relatively low risk. Hybrid funds combine investments in bonds and stocks. They focus on stability and growth.

2. Funds based on investment goals:

This category caters to specific financial objectives. Some funds in this category include growth funds invested in stocks from companies with high growth potential. Other options are income funds, liquid funds, capital protection funds, pension funds, and tax-saving funds.

Income funds focus on regular income through fixed-income securities and bond investments. Liquid funds are investments in short-term debt instruments. They focus on safety and liquidity.  Tax-saving funds are also called ELSS and offer tax benefits to investors. Capital protection funds safeguard the principal amount while generating returns. Pension funds mix different assets to create a retirement corpus for investors. 

3. Funds based on structure

Mutual funds are divided based on how investors buy and sell them, also known as their structure. Some funds in this group include open-ended funds, which allow you to sell or buy units continuously; closed-ended funds, which have a limited number of units and a fixed maturity period; and interval funds, which are a combination of open and closed-ended funds.

4. Funds based on risk

Mutual funds are also divided based on risk levels. They include low-risk funds, like government bonds; medium-risk funds, which combine investments in debt and equity and have manageable amounts of risk; and high-risk funds, which focus on capital appreciation and have high-risk levels.