What are the different types of mutual funds?

Posted by neha sharma on May 6th, 2019

When it comes to making investments, a mutual fund is one of the top choices. For both beginner investors and experienced investors, mutual funds provide a way to grow and increase their capital. But, what are mutual funds?

Investing as a whole can generally get daunting and risky. Mutual funds pool together resources from different investors and deploy those in a range of assets. Mutual funds are classified based on where these resources are invested. These funds are professionally managed and since they invest money pooled in from a large number of people, the overall risk of investment reduces.

Here are the different types of mutual funds:

1. Equity Mutual Funds:

These funds invest a majority of their funds in stocks from different companies. Depending on the type of stocks that the mutual fund invests in, these mutual funds can be further divided as:

• Large cap funds
• Mid cap funds
• Large and mid cap funds
• Small cap funds
• Sectoral/Thematic funds
• Value funds
• Focused funds
• Dividend yield funds
• Contra Funds

Sectoral funds invest in a particular sector or follow a particular theme such as pharma based funds, IT based funds etc. Value funds invest in stocks considered to be undervalued by the market. Contra funds make investments in stocks that are underperforming with the anticipation of gain in the future.

2. Debt Mutual Funds:

These mutual funds invest in fixed income securities such as bonds, debentures, Government securities, treasury bills etc. These funds are generally classified based on the time period of the debt instrument. Types of debt mutual funds are:

• Low duration fund
• Short duration fund
• Ultra short duration fund
• Money market fund
• Floater fund
• Corporate bond fund
• Credit risk fund
• Fixed maturity plans – debt
• Medium duration fund
• Dynamic bond fund
• Medium to long duration fund
• Gilt fund
• Long duration fund

However, while investing in these funds, it is important to remember that their value depends on the value of the debt instruments they invest in. In case the yield of the instrument falls, it impacts returns.

3. Hybrid Mutual Funds:

These mutual funds invest in a mix of debt and equity. This mutual fund investment works on the diversification principle. The asset allocations for these mutual funds depends on the risk behaviour of the investor:

• Conservative fund
• Aggressive fund
• Arbitrage fund
• Balanced fund
• Equity savings fund
• Fixed maturity plans
• Multi asset allocation fund
• Capital protection fund

These funds are less risky as compared to equity funds but provide a higher return than typical debt funds.

4. Tax saving funds:

Under Section 80C of the Income Tax Act, 1961, a deduction is available for investments made in an Equity Linked Savings Scheme (ELSS). These are special funds that are equity based.

5. Index funds/ Exchange Traded Funds (ETFs):

This mutual fund investment tracks the movement of an underlying asset, for example, the Sensex or the Nifty. It may also track an asset like gold. Since these funds mimic the movement and growth of an index, they usually show the same returns over a period of time.

Author bio:

Neha Sharma is a finance student who loves to write in her free time. She has spent considerable time researching about mutual funds. Through her work, she has listed different types of mutual funds