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What is Mutual Fund and Types of Mutual Fund

Updated: Dec 8, 2023


Mutual Fund is a pool of investments that collects money from investors under different schemes. Mutual Funds are managed by a professional known as Fund Manager who has expertise in this area. In India, Mutual Funds are regulated by Association of Mutual Fund in India (AMFI). Mutual funds give retail or small investors an opportunity to invest in diversified and professionally managed portfolios which may not be possible for every investor on individual basis. At the time of issue of mutual funds, a legal document is issued known as Prospectus which contains all the important details related to the scheme such as investment objectives, strategies of fund, past performance of fund, managers and financial information. Prior to investing money in mutual funds, an investor needs to carefully read prospectus and evaluate whether it is a suitable investment option by considering factors such as investment objective, strategies, risk involved, return expectations and tenure of investment. There are different types of Mutual Funds based on different parameters.


Types of Mutual Funds based on Asset Class

Asset class refers to the category of assets or securities in which the money will be invested as per the mutual fund scheme. Asset class can be equity, debt, money market instruments and alternate investments such as real estate, infrastructure and so on depending on the mutual fund scheme.

A. Equity Funds: Mutual Fund schemes that invest in equity stocks are known as equity funds. These funds are relatively high in risk as they are affected by the prevalent market conditions.

Equity Funds can be categorised based on Geography such as regional, domestic, single country and international. Equity funds can also be categorised based on sector or industry in which investment is being made such as Telecom, Automobile, IT, Financial Sector and so on. Similarly, Equity funds are also categorised based on market capitalization such as:

1. Large Cap Funds: Mutual Funds that invest most of the funds (around 80%) in large cap stocks (ranked from 1 to 100 in the stock market based on market capitalization. Top performing funds in this category are Nippon India Large Cap Fund, HDFC Top 100 Fund, ICICI Prudential Blue-chip Fund, SBI blue chip fund and Mirae Asset Large Cap Fund.

2. Mid Cap Funds: Mutual Funds that invest most of the funds (around 65%) in mid cap stocks (ranked from 101 to 250 in the stock market based on market capitalization. Top performing funds in this category are Quant Mid Cap Fund, Motilal Oswal Mid cap Fund, SBI Magnum Mid Cap and HDFC Mid Cap Fund.

3. Small Cap Funds: Mutual Funds that invest most of the funds (at least 65%) in small cap stocks (ranked above 250 in the stock market based on market capitalization. Top performing funds in this category are Aditya Birla Sun Life Nifty Small cap 50 Index Fund, Axis Nifty small cap 50 index fund, Edelweiss Nifty Small cap 250 Index fund and HDFC NIFTY small cap 250 Index fund.

4. Multi Cap Funds: As the name suggests itself, Mutual Funds that invest across all the market capitalization with certain predefined limits are known as Multi Cap Funds. Top performing funds in this category are Mahindra Manulife Multi Cap Fund, Invesco India Multi cap fund, ICICI Prudential Multi cap Fund and Sundaram Multi Cap Fund.

5. Flexi Cap Funds: Mutual Funds that invest across all the market capitalization and are flexible in nature which simply means that fund manager can invest and rebalance the portfolio regardless of the company size or rank. Top performing funds in this category are Parag Parikh Flexi Cap Fund, JM Flexi Cap Fund, SBI Flexi cap Fund and Aditya Birla Sun Life flexi cap fund.

6. Focused Funds: Mutual funds that have a concentrated portfolio where 30 is the maximum number of stocks in which investment can be made. Top performing funds in this category are Motilal Oswal Focused Equity Fund, Invesco India Focused 20 Equity Fund, Quant focused fund and JM Focused Fund.

These funds are suitable for investors who have the required risk appetite as per the category of equity funds and aims to make long term investment for wealth creation.

B. Fixed Income or Debt Funds: Mutual Fund schemes that invest in money market instruments like treasury bills, commercial papers and debt instruments such as debentures, government or corporate bonds with the aim of generating periodic returns until maturity. These funds are suitable for investors who have low risk appetite and aims regular income from investment.


1. Long Term Debt Funds: These funds invest in securities with longer maturities (5-10 years) like government securities, debentures and government bonds. Top performing funds in this category are Nippon India Nivesh Lakshya Fund, ICICI Prudential Long Term Bond Fund, Aditya Birla Sun Life Long Duration Fund and Axis Long Duration Fund.

2. Short Term Debt Funds: These funds invest in securities with shorter maturities (1-5 years) like corporate bonds. It is suitable for investors who don’t want to lock their funds for a long period. Top performing funds in this category are UTI Short Term Income Fund, HDFC Short Term Debt Fund, ICICI Prudential Short-Term Fund, BNP Paribas Short Term Fund and Aditya Birla Sun Life Short Term Opportunities Fund.

3. Fixed Rate Funds: Fixed rate funds are those funds investing in debt or money market securities with fixed rate for periodic returns until maturity.

4. Floating Rate Funds: Floating rate funds are those funds investing in instruments or securities with floating rate for periodic returns until maturity. Floating rate basically means that rate is not fixed and is dependent on a base rate. In other words, as the base rate fluctuates, the rate of periodic return on the investment also fluctuates. The floating rate can be based upon Funds rate offered by Central Bank, benchmark interest rate, lowest rate offered by commercial banks for loans and so on. Top performing funds in this category are Franklin India, Aditya BSL and HDFC Floating Rate Debt.


C. Hybrid/Balanced Funds: Mutual Fund schemes that invest in a mix of different investment options such as equity, debt, money market instruments and alternative investments. These funds aim to reduce the level of risk by diversifying its portfolio.

1. Equity Oriented Mutual Funds: Mutual Funds that invest most of the funds (at least 65%) in equity and remaining in debt securities and money market instruments. These funds are suitable for investors who wishes to invest for long term and possess high risk appetite. Top performing funds in this category are Edelweiss Aggressive Hybrid Fund, Canara Robeco Equity Hybrid Fund and Kotak Equity Hybrid Fund.

2. Debt Oriented Mutual Funds: Mutual Funds that invest most of the funds (at least 60%) in debt instruments and remaining in equity. These funds are suitable for investors who wishes to invest for long term and possess low risk appetite. Top performing funds in this category are Kotak Debt Hybrid Fund HSBC Conservative Hybrid Fund and UTI Conservative hybrid Fund.

3. Arbitrage Funds: Arbitrage funds invest in equity markets and aims to earn profit using price difference in the market. These funds simultaneously buy and sell the same securities for making gains in short term. These funds are suitable for investors who wishes to invest for short term and have high risk appetite. Top performing funds in this category are Tata Arbitrage Fund and Invesco India Arbitrage Fund

4. Solution oriented Funds: These funds aim to achieve a specific financial objective. For instance, retirement planning, child’s education and so on. These funds are suitable for the purpose of fulfilling a particular requirement of the investor. Top performing funds in this category are Invesco India Infrastructure Fund, Bank of India Manufacturing and Infrastructure Fund, Sundaram Consumption Fund and DSP Natural Resources and new energy fund.


Types of Mutual Funds based on Investment Objectives

Investment objective is basically the end goal or purpose of making the investment. At the time of making an investment in mutual funds, an investor needs to ensure that the individual’s investment objectives are aligned with the investment objective of mutual fund scheme.

A. Growth Funds: These funds invest in stocks and focus on capital appreciation. These funds are suitable for investors who wishes to make a long-term investment with a high-risk appetite as most growth funds offer high risk and high reward for investment. Growth funds are further categorised by market capitalization such as small cap, mid cap, large cap and International Growth funds. Top performing funds in this category are SBI Long Term Equity Fund, UTI Nifty Next 50 Fund, SBI Contra Fund and UTI Large Cap Fund.

B. Liquid Funds: These Funds invest in money market instruments like commercial papers, treasury bills and government securities where the investment tenure is not more than 91 days. The objective of these funds is to invest funds and at the same time ensuring liquidity of funds for the investor. These funds are suitable for investors who wishes to make short term investment and have low risk appetite. Even though these investments are highly liquid and less risky than other investment options they offer better returns as compared to savings accounts in a bank. Top performing funds in this category are Quant Liquid Fund, Mahindra Manulife Liquid Fund and Aditya Birla Sun Life Liquid Fund.

C. Income Funds: These funds invest in debt instruments or securities which generate regular or periodic income (for example interest, dividend) for the investor. These funds make investment for term, which is generally said to be at least 4 years. These funds offer better return than fixed deposits, high liquidity and tax benefits to the investor. These funds are suitable for an investor who aims to generate regular income though investment such as a retired or aged person who requires funds for daily or monthly expenses. Top performing funds in this category are SBI Magnum Income Regular Bonus, Aditya Birla Sun Life Income Fund Regular Plan Growth, Canara Robeco Income Fund, HDFC Income Fund Growth and UTI-Short Term Income- Regular Plan- Growth Option.

D. Tax Saving Funds: These funds make investment with the objective of tax benefits. In India, Equity Linked Savings Scheme (ELSS) is the only Tax saving mutual fund where investor can claim deduction in income tax filings. AS PER Income Tax Act, for ELSS a person can claim deduction of maximum 100000 Rs under section 80 C. In ELSS, returns are more than PPF and there is lock in period of 3 years. It is suitable for an investor who wishes to claim tax benefits and can invest for long period. Top performing funds in this category are HDFC ELSS Tax Saver, Bandhan Tax Advantage Fund and Motilal Oswal ELSS Fund.


Types of Mutual Funds based on Structure

A. Open Ended Funds: Open ended funds are those funds in which investor can buy or sell its holdings anytime which means that these funds offer high liquidity. The units of these funds are traded on the basis of current Net Asset Value (NAV) at the end of each day. Top performing funds in this category are Axis Value Fund, HDFC Top 100 Fund and UTI Large Cap Fund.

B. Close Ended Funds: Close ended funds are those funds that can be purchased only during the New Fund Offer period and sold at the time of maturity. However, these are listed on stock exchange, hence, can be traded on stock exchange as well. Top performing funds in this category are Motilal Oswal Midcap Fund, Quant Tax Plan and Axis Value Fund.

C. Interval Fund: Interval Fund offers combined benefits of open ended and close ended funds. Asset Management companies allows investors to buy or sell units at specific intervals, however, these funds do not trade on stock exchanges. Top performing funds in this category are UTI Annual Interval Fund, Nippon India Interval Fund, Aditya Birla Sun Life Interval Income Fund and UTI Quarterly Interval Fund.


Types of Mutual Funds based on Management Style

A. Active Funds: These funds are actively managed by the fund manager which simply means that the creation and rebalancing decisions of portfolio are taken by the fund manager. These funds aim to perform better than the benchmark such as Sensex, NIFTY and so on. These funds are comparatively high in risk and offers higher return than Passive Funds.

B. Passive Funds: These funds are a replication of the benchmark itself. In simple words, passive funds have the same composition as the benchmark and the fund manager just copies the movement of benchmark in its portfolio. These funds aim to perform at par with the benchmark. Top performing funds in this category are Nippon India Index Fund, LIC MF Index Fund Sensex, ICICI Prudential Nifty Index Fund, SBI Nifty Index Fund and Franklin India Index Fund Nifty Plan.


Types of Mutual Funds based on Mode of Investment

A. Lump Sum: Funds in which investor makes a one-time payment for investment to buy the units of mutual fund are known as Lump Sum Funds. Top performing funds in this category are Baroda BNP Paribas Large Cap Fund, UTI Nifty 200 Momentum 30 Index Fund, HDFC Credit Risk Debt Fund and ICICI Prudential Equity and Debt Fund.

B. Systematic Investment Plan (SIP): SIP is a popular and well-known mode of investment where an investor can invest a fixed amount on regular basis. This is a convenient option for those investors who cannot afford or does not wish to make lump sum payment for investment. Top performing funds in this category are UTI Large Cap Fund, SBI Long Term Equity Fund, HDFC S&P BSE 500 Index Fund and UTI Value Fund.


Prior to making investment in any mutual fund scheme, it is important to read all the scheme related documents carefully and analyse all the scheme related factors such as asset class, structure, mode of investment, management style and investment objective and ensure that these factors are aligned with the investor’s requirement and will be beneficial in the future.


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