Types of Mutual Funds with Details

In this article, you will learn about the types of mutual funds. According to the assets in which the mutual fund is investing, there are 3 types of mutual funds:

1. Equity Mutual Funds
2. Debt Mutual Funds
3. Hybrid Mutual Funds

Equity Mutual Funds

Equity Mutual Fund means those funds that invest in the stock market. There are also different types of equity mutual funds such as:

• Large-cap fund
• Mid-cap fund
• Small-cap fund
• Sector fund
• Diversified equity fund
• Dividend yield schemes
• ELSS
• Thematic Fund

Large Cap Fund

The companies whose market capitalization is above Rs 100000 crores are called large-cap companies.

A few years ago, the company whose market capitalization was 50 thousand crores, that company used to come in large-cap companies.

Today the company whose market capitalization is 50 thousand crores, that company comes in the mid-cap company.

Large-cap companies are large and well-established companies with a very strong market presence. Almost all large-cap companies are leader companies in their respective sectors.

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L&T, Reliance Industries, TCS, etc are all large-cap companies. So the funds which invest in large-cap companies are called large-cap funds.

Mid cap fund

Companies whose market capitalization is between 5000 crores to 100000 crores, then they are called mid-cap companies.

Large-cap companies have the good financial strength to survive in bad times, so large-cap companies have less risk than small-cap and mid-cap companies.

The funds which invest in mid-cap companies are called mid-cap funds.

Small cap fund

Usually, companies whose market capitalization is less than Rs 5000 crores are called small-cap companies. There are no fixed criteria for Small Cap, Mid Cap, and Large Cap.

The large-cap company has already touched the sky of success, hence the growth potential in the large-cap company is limited.

Small-cap companies are in the early stages of development, so they have more growth potentials, but due to the high failure rate, the risk is also high.

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And the funds which invest in small-cap companies are called small-cap funds.

Sector Funds

Sector funds are those funds that invest only in companies in a specific sector. For example, Reliance Media and Entertainment fund is a sector fund that invests only in companies in the media and entertainment sector.

SBI Pharma funds invest only in Pharma sector companies.

Diversified Equity Fund

A diversified equity fund means those funds that invest in different sectors and companies of different market capitalization.

Dividend Yield Fund

The company shares some part of its profit with the shareholders, it is a dividend. Paying a dividend is not compulsory for the company.

The board of directors of the company takes the decision whether to give a dividend to the shareholders or not.

Dividend yield funds invest in companies that are stable, safe, consistent, and less volatile and give good regular dividends.

ELSS (Equity Linked Saving Scheme)

The full form of ELSS is Equity Linked Saving Scheme. This is a tax saver mutual fund scheme. The investment you make in ELSS gets locked for 3 years. One cannot invest in ELSS for a period of less than 3 years.

In ELSS scheme, you can get exemption from income tax up to 1.5 lakh under section 80c.

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Thematic Fund

Thematic funds invest in themes such as rural India theme, e-commerce theme, etc.

For example, HDFC Housing Opportunities Fund is a thematic fund whose theme is Housing. This fund buys stocks related to housing such as cement companies, construction companies, metal & paint companies, etc.

Debt Fund

Government or companies borrow money through Debt instruments and then return that money with interest. Funds that invest in debt instruments such as debentures, bonds, certificates of deposit, etc. are called debt funds.

Debt funds have less risk than equity funds and also lower returns. There are 4 types of debt funds:

1. Gilt Fund
2. Junk Bonds Schemes
3. Fixed Maturity Plans
4. Liquid Schemes

Gilt Fund

The debt funds which invest only in government securities are called gilt funds. Government securities are issued by the government, so the default risk is zero in this. There are both short-term and long-term gilt funds.

Junk Bonds Schemes

As the name suggests, the default risk in junk bonds is high but interest is also very high. Debt funds that invest in junk bonds are called junk bond schemes.

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Fixed Maturity Plans

Fixed Maturity Plan has a specific predefined maturity like a bank FD. Fixed maturity plans usually invest in certificates of deposit, commercial papers, corporate bonds, etc.

The returns of fixed maturity plans are generally better than bank FDs.

Liquid Fund

A liquid fund is a debt fund that invests in money market instruments. Those financial instruments come in the money market through which companies borrow money from investors for the short term.

So liquid funds invest in money market instruments with very short-term maturity such as Certificate of Deposit, Treasury bills, commercial papers, term deposits, etc.

Liquid funds give higher returns than savings accounts, the risk in liquid funds is very low and they are very less volatile, so liquid funds can be a good option for short-term investment.

You can withdraw your money from liquid funds anytime.

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Hybrid Fund

A hybrid fund means those funds which invest in more than one asset class. Hybrid funds invest in both debt and equity.

There are generally 3 types of hybrid funds:

1. Monthly Income Plan
2. Balanced Fund
3. Arbitrage Fund

Monthly Income Plan

In the Monthly Income Plan, most of the 60% to 90% portion of the fund is invested in debt instruments and the rest is invested in equities.

Most of the portion in the Monthly Income Plan is invested in debt instruments, hence equities in it are much safer than mutual funds.

But this does not mean that the Monthly Income Plan is a risk-free and fixed returns scheme.

Some part of the Monthly Income Plan is invested in equity, so there is risk in it but less than equity fund.

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Balanced Fund

From the name of the balanced fund, it seems that 50% of the balance fund will be invested in debt and 50% in equity, but the balance fund has more equity and less debt.

65% to 85% portion of the balanced fund is invested in equities and the rest in debt.

Here the equity balance helps the fund to bring in good returns while the debt balance helps in reducing the risk of the fund.

Arbitrage Fund

If the price of a stock is different in the cash market and in the derivative market, then profit is earned from that difference by doing arbitrage. More than 65% portion of the arbitrage fund is invested in equity.

The money you invest in Arbitrage remains safe but the returns can be more or less. Arbitrage fund returns generally range between 6% and 10%.

An arbitrage fund is considered an equity fund for taxation. So these were the types created according to the assets classes.

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Types of Mutual Funds Structure

According to the structure of mutual funds also there are 3 types of mutual funds:

1. Open-Ended Fund
2. Close Ended Fund
3. Interval Fund

So whatever mutual fund scheme you invest in, it is either open-ended or close-ended. Investors in open-ended funds can buy or sell units of that mutual fund at any time.

Whereas in a close-ended fund only in a specific time i.e. when there is NFO (New Fund Offer) of that fund then you can invest in that fund and after investing you can never sell that mutual fund unit.

Read Also: What is NFO in Mutual fund and NFO vs IPO | New fund offer

For that, you have to wait till the maturity of that fund.

Close-ended funds are listed on the stock exchange, so if you have to invest in that close-ended mutual fund scheme after NFO or sell your units before maturity, then you can buy and sell your units on the stock exchange.

But generally, the liquidity of close-ended funds is very less on the stock exchange i.e. very few buyers and sellers of that fund are available, hence there may be a problem in buying and selling units of the close-ended fund on the stock exchange.

Open-ended funds can issue any number of units, whereas the units of close-ended funds are fixed.

Most of the mutual fund schemes are open-ended.

Types of Fund Management

According to how the funds are managed, there are also 2 types of funds:

1. Actively Managed Fund
2. Passively Managed Fund

Actively Managed Fund

In an actively managed fund, the fund manager is actively involved in the investment decision related to that fund, which means in which stock or debt instrument to invest, all the decisions like these are taken by the fund manager himself.

Passively Managed Fund

In a passively managed fund, the fund manager or fund is not actively involved in the investment decision associated with that fund.

For example, if a passively managed fund is tracking Nifty, then that fund will invest in the stocks in Nifty in the same proportion so that the returns of that fund will be equal to the returns of Nifty.

So here the fund manager is not actively involved in the investment decision related to that fund, he is simply investing in the stocks included in Nifty in the same proportion.

Other Mutual Funds

There are other types of funds such as international funds which invest outside India.

• Real estate funds
• Gold funds
• ETF (Exchange Traded Fund)

Read Also: What is ETF (Exchange Traded Fund)

What is Market Capitalization

By market capitalization, we know the size of the company. The company shows whether the company is small or big. According to market capitalization, companies are generally divided into 3 categories:

1. Large-cap company
2. Mid Cap Company
3. Small-Cap Company