The different types of mutual funds available can be classified broadly based on structure, asset class, and investment goals. Currently, there are over 44 registered mutual funds in India, offering different schemes to satisfy the dynamic needs of diverse investors. Going a step further, funds can also be categorized based on risk.
The structure is based on:
There are various types of mutual funds that depend on the type of assets they invest in. These include:
Investing in shares of companies whose returns vary based on stock market movements is what equity funds do. Although these funds have the potential for high returns, they are also considered risky. They can be further divided by their characteristics such as Large-Cap Funds, Mid-Cap Funds, Small-Cap Funds, Focused Funds among others or ELSS etc.
Equity funds are suitable for investors with a long-term horizon and a higher risk appetite. SEBI has decided a total of 11 categories under Equity Schemes, but a mutual fund company can only have 10 categories and it must choose between Value or Contra. Still 10 categories look a bit high, but I think it's fair considering the possible variations in the strategy. Mutual Funds will be permitted to offer either Value fund or Contra fund.
| S.No | Type of equity fund/scheme | Asset allocation | Description |
|---|---|---|---|
| 1. | Multi Cap Funds | Minimum investment in equity & equity related instruments is 65% of total assets | Invests across Large Cap, Mid Cap, and Small Cap stocks |
| 2. | Large Cap Funds | Minimum investment in equity & equity related instruments of large cap companies is 80% of total assets | These funds predominantly investing in Large Cap stocks |
| 3. | Large & Mid Cap Funds | Minimum investment in equity & equity related instruments of large cap companies are 35% of total assets Minimum investment in equity & equity related instruments of mid cap stocks are 35% of total assets | These funds are open-ended equity mutual fund investing in both large cap and mid cap stocks |
| 4. | Mid Cap Funds | Minimum investment in equity & equity related instruments of mid cap companies are 65% of total assets | These funds predominantly investing in Mid Cap stocks |
| 5. | Small Cap Funds | Minimum investment in equity & equity related instruments of small cap companies are 65% of total assets | These funds predominantly investing in Small Cap stocks |
| 6. | Dividend Yield Funds | The scheme should predominantly invest in dividend yielding stocks. Minimum investment in equity is 65% of total assets | An equity mutual fund predominantly investing in dividend yielding stocks |
| 7. | Value Funds | The scheme should follow a value investment strategy. Minimum investment in equity & equity related instruments is 65% of total assets | An equity mutual fund following a value investment strategy |
| 8. | Contra Funds | The scheme should follow a contrarian investment strategy. Minimum investment in equity & equity related instruments is 65% of total assets | An equity mutual fund following contrarian investment strategy |
| 9. | Focused Funds | A scheme focused on the number of stocks (maximum 30) Minimum investment in equity & equity related instruments is 65% of total assets | An equity scheme investing in maximum 30 stocks (mention where the scheme intends to focus, viz., multi cap, large cap, mid cap, small cap) |
| 10. | Sectoral Funds or Thematic | Minimum investment in equity & equity related instruments of a particular sector/particular theme is 80% of total assets | An open-ended equity scheme following the theme as mentioned |
| 11. | ELSS Funds | Minimum investment in equity & equity related instruments is 80% of total assets (in accordance with Equity Linked Saving Scheme, 2005 notified by Ministry of Finance) | An open-ended equity linked saving scheme with a statutory lock in of 3 years and tax benefit |
These types of mutual fund investment involve putting money into debt instruments like corporate bonds, government securities and treasury bills. Debt schemes can provide stability and regular income at low risk levels. These plans can then be sub-divided further depending on the timeframe such as low-duration funds, liquid funds among others overnight funds credit risk funds among others gilt schemes.
SEBI has decided a total of 16 categories under Debt Schemes. 16 categories are very high for debt funds considering their similarity in risk and returns from a retail investor perspective. Some categories like Overnight Fund and Liquid Fund are similar. Same is the case with money market fund and ultra-short term debt fund categories.
| S.No | Type of debt scheme | Time period | Description |
|---|---|---|---|
| 1. | Overnight Funds | Investment in overnight securities having maturity of 1 day | A debt scheme investing in overnight securities |
| 2. | Liquid Funds | Investment in Debt and money market securities with maturity of up to 91 days only | A liquid scheme |
| 3. | Ultra Short Duration Funds | Investment in Debt & Money Market instruments such that the Macaulay duration of the portfolio is between 3 to 6 months | An ultra-short term debt scheme investing in instruments with Macaulay duration between 3 months and 6 months |
| 4. | Low Duration Funds | Investment in Debt & Money Market instruments such that the Macaulay duration of the portfolio is between 6 to12 months | A low duration debt scheme investing in instruments with Macaulay duration between 6 months and 12 months |
| 5. | Money Market Funds | Investment in Money Market instruments having maturity up to 1 year | A debt scheme investing in money market instruments |
| 6. | Short Duration Fund | Investment in Debt & Money Market instruments such that the Macaulay duration of the portfolio is between 1 to 3 years | A short-term debt scheme investing in instruments with Macaulay duration between 1 year and 3 years |
| 7. | Medium Duration Funds | Investment in Debt & Money Market instruments such that the Macaulay duration of the portfolio is between 3 to 4 years | A medium-term debt scheme investing in instruments with Macaulay duration between 3 years and 4 years |
| 8. | Medium to Long Duration Fund | Investment in Debt & Money Market instruments such that the Macaulay duration of the portfolio is between 4 to 7 years | A medium-term debt scheme investing in instruments with Macaulay duration between 4 years and 7 years |
| 9. | Long Duration Fund | Investment in Debt & Money Market Instruments such that the Macaulay duration of the portfolio is more than 7 years | A debt scheme investing in instruments with Macaulay duration greater than 7 years |
| 10. | Dynamic Bond Funds | Investment across duration | A dynamic debt scheme investing across duration |
| 11. | Corporate Bond Funds | Minimum investment in corporate bonds is 80% of total assets (only in highest rated instruments) | A debt scheme predominantly investing in highest rated corporate bonds |
| 12. | Credit Risk Funds | Minimum investment in corporate bonds is 65% of total assets (investment in below highest rated instruments) | A debt scheme investing in below highest rated corporate bonds |
| 13. | Banking and PSU Fund | Minimum investment in Debt instruments of banks, Public Sector Undertakings, Public Financial Institutions – 80% of total assets | A debt scheme predominantly investing in Debt instruments of banks, Public Sector Undertakings, Public Financial Institutions |
| 14. | Gilt Fund | Minimum investment in Gsecs is 80% of total assets (across maturity) | A debt scheme investing in government securities across maturity |
| 15. | Gilt Fund with 10-year constant duration | Minimum investment in Gsecs is 80% of total assets such that the Macaulay duration of the portfolio is equal to 10 years | A debt scheme investing in government securities having a constant maturity of 10 years |
| 16. | Floater Fund | Minimum investment in floating rate instruments is 65% of total assets | A debt scheme predominantly investing in floating rate instruments |
Macaulay duration: The Macaulay duration also represents the weighted mean of the period from when a bond’s cash flows are received till maturity. The weight for every cash flow is computed by dividing its present value by the price. Portfolio managers who have adopted immunization as an investment strategy commonly use this metric.
To balance equity and debt hybrid Funds invest in both debt and equity instruments. The ratio of investments may be fixed or flexible as decided by the fund house itself. Hybrid type categorized into balanced/aggressive schemes is the broadest category of these asset classes based on risk tolerance levels whereas there exists multi asset allocation who invests across at least 3 categories.
SEBI has decided a total of 7 categories under Hybrid Schemes, but a mutual fund company can only have 6 categories and they must choose between Balanced Hybrid Fund or Aggressive Hybrid Fund. Also, Finally SEBI has made Arbitrage Fund under Hybrid Fund category.
| S.No | Type of hybrid schemes | Asset allocation | Description |
|---|---|---|---|
| 1. | Conservative Hybrid Funds | Investment in equity & equity related instruments is between 10% and 25% of total assets; Investment in Debt instruments is between 75% and 90% of total assets | A hybrid mutual fund investing predominantly in debt instruments |
| 2. | Balanced Hybrid Funds | Equity & Equity related instruments are between 40% and 60% of total assets; Debt instruments are between 40% and 60% of total assets. No Arbitrage would be permitted in this scheme | 50-50 balanced scheme investing in equity and debt instruments |
| 3. | Aggressive Hybrid Funds | Equity & Equity related instruments are between 65% and 80% of total assets; Debt instruments are between 20% to 35% of total assets | A hybrid scheme investing predominantly in equity and equity related instruments |
| 4. | Dynamic Asset Allocation Funds or Balanced Advantage | Investment in equity/ debt that is managed dynamically. | A hybrid mutual fund which will change its equity exposure based on market conditions |
| 5. | Multi-Asset Allocation Funds | Invest in at least three asset classes with a minimum allocation of at least 10% each of all three asset classes. Foreign investment will be considered as a separate asset class. | A scheme investing in 3 different asset classes. |
| 6. | Arbitrage Funds | Scheme following arbitrage strategy. Minimum investment in equity & equity related instruments is 65% of total assets | A scheme investing in arbitrage opportunities |
| 7. | Equity Savings | Minimum investment in equity & equity related instruments is 65% of total assets and minimum investment in debt is 10% of total assets. Minimum hedged & unhedged to be stated in the SID. Asset Allocation under defensive considerations may also be stated in the Offer Document. | A scheme investing in equity, arbitrage, and debt |
| S.No | Type | Time Period | Description |
|---|---|---|---|
| 1. | Retirement Fund | Scheme having a lock – in for at least 5 years or till retirement age whichever is earlier | A retirement solution-oriented scheme having a lock-in of 5 years or till retirement age (whichever is earlier) |
| 2. | Children’s Fund | Scheme having a lock – in for at least 5 years or till the child attains age of majority whichever is earlier | A fund for investment for children having a lock-in for at least 5 years or till the child attains age of majority (whichever is earlier) |
| S.No | Type | Asset allocation | Description |
|---|---|---|---|
| 1. | Index Funds/ ETFs | Minimum investment in securities of a particular index (which is being replicated/ tracked) – 95% of total assets | A mutual fund replicating/ tracking any index |
| 2. | FoF’s (Overseas/Domestic) | Minimum investment in the underlying fund – 95% of total assets | A fund of fund is a mutual fund that invests in other mutual funds |
These funds are made for certain financial goals and give a wide range of choices to fit the particular targets of investors.
The categorization of Mutual Funds can be done from the way the portfolio is managed. Active and passive mutual fund schemes are two types.
These are mutual funds, which are actively managed by a fund manager for the purpose of ensuring that better returns are obtained. Whenever he identifies an opportunity, the fund manager trades in securities.
These funds are managed passively, meaning there is no active management by the fund managers. The portfolio replicates a given index i.e., money allocated exactly follows that underlying index. Only changes in the composition of the index result in any adjustments being made to it.
During 2012, SEBI made some changes like the introduction of direct plans in mutual funds. Differentiated by this criterion, all Indian mutual funds have two types: a Regular Plan and Direct Plan.
Those are simply mutual fund schemes where asset management companies (AMC) do not charge any distributor expenses, trail fees or transaction charges so they tend to have a lower expense ratio.
Therefore, it means that even though the mutual fund portfolio is still the same, as an investor you will be able to get higher return from your mutual fund than before. Such direct plans do not levy distribution expenses or commission hence their annual charges are much lower and finally their NAV differs from regular plans.
There is a sales commission paid by mutual funds to intermediaries who bring business to them under regular plan. Traditionally retail investors have bought through broking firms and agents who earn commissions for selling the funds which they add into the expense ratio of the fund.
It should be borne in mind that both versions are exactly similar products with identical portfolio managers investing in the same stocks and bonds. But with direct mutual funds there is no broker/distributor commission. Which means, as an investor, you get higher returns from the exact same mutual fund.
Bonds of high quality for a short period of time could be considered as low-risk mutual fund schemes. These funds usually imply an extremely small chance and so may help grow an investor’s money gradually. However, low-risk mutual funds are unlikely to beat inflation by a huge margin.
This includes liquid funds, overnight funds, ultra-short duration funds, etc.
Mutual fund schemes that are medium-risk or moderate-risk aim to strike a balance between their risk and return. E.g., some hybrid schemes combine equities and debts among others.
These funds have the potential to beat inflation by a decent margin because of equity allocation; however, they also provide better downside protection than pure equity funds due to allocation to debt instruments. Thus, these funds are most suitable for those who are willing to take on a moderate amount of risk in their investments.
For example, mutual fund investments made under this category can be highly volatile which might result in massive gains but also substantial losses during market crashes. Therefore, such kinds of investment are suitable for investors who want to take more risks with their money.
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