Types of mutual funds in India: From equities to debt

Thu, 27 Jun 2024

7 mins

When diversifying your investments, mutual funds offer a variety of options to suit different needs. These funds can be categorized based on several characteristics, including equity, debt etc. In the following blog, explore the different types of mutual funds in India and the benefits each type can provide. 

• Types of mutual funds

  Mutual funds come in various types, each classified based on different characteristics. Discover more about how many types of mutual funds are offered by Asset Management Companies (AMCs) below.
  

• Equity Funds

  These funds invest primarily in stocks or equities, aiming for capital appreciation over the long term. They can focus on specific sectors, market caps (large-cap, mid-cap, small-cap), or investment styles (value, growth). The following are some popular types of equity mutual funds.
   

  • Large-Cap Funds
    These funds primarily invest in stocks of large-cap companies, which are top 100 companies ranked according to their market capitalization by the stock exchange. Large-cap companies are often leaders in their respective industries and are considered relatively stable compared to smaller companies. These companies have a market cap of more than Rs. 20,000 Cr.  
  
  
  • Mid-Cap Funds
    Mid-cap funds invest in stocks of companies with rankings from 101 to 250 according to their market capitalization by the stock exchange. The market capitalization of these companies tends to be between Rs. 5,000 and Rs. 20,000 crores. These companies are generally considered to have higher growth potential than large-cap companies but may also carry more risk. 
  
  
  • Small-Cap Funds
    Small-cap funds invest in stocks of companies that are ranked 251 and below according to their market capitalization by the stock exchange. The market capitalization of small cap stocks tend to be less than Rs. 5,000 crores. These companies may have higher growth potential than large-cap and mid-cap companies but also tend to be more volatile and riskier. 
  
  
  • Flexi Cap Funds
    Flexi Cap funds are mutual funds that invest in a diversified portfolio of stocks across different market capitalizations, including large-cap, mid-cap, and small-cap companies. This flexibility allows them to adapt to changing market conditions and potentially deliver higher returns over the long term.
  
  
  • ELSS funds
    ELSS (Equity Linked Savings Schemes) funds are mutual funds that primarily invest in equity markets and offer tax benefits under Section 80C of the Indian Income Tax Act. They have a lock-in period of three years, making them a popular choice for investors seeking tax-saving avenues with the potential for higher returns.
  
  
  • Index Funds
    These funds aim to replicate the performance of a specific market index, such as the S&P 500. They invest in the same securities in the same proportion as the index they track, offering low-cost exposure to broad market returns.  

• Debt Funds

  Debt funds focus on investing in fixed-income securities like bonds, treasury bills, and other similar instruments. They include various types such as Fixed Maturity Plans (FMPs), Gilt Funds, Liquid Funds, Short-Term Plans, Long-Term Bonds, and Monthly Income Plans. These investments typically offer a fixed interest rate and have a set maturity date, making them an excellent choice for passive investors seeking regular income and capital appreciation with minimal risk.
   

  • Liquid funds
    Liquid funds are mutual funds that invest in short-term, low-risk securities like treasury bills and commercial paper. They offer high liquidity and are suitable for investors looking for stability and easy access to funds.
  • Short-duration funds
    Short-duration funds invest in fixed-income securities with maturities typically ranging from one to three years. They invest in a mix of government and corporate bonds of different varieties.

• Hybrid Funds

  Hybrid funds, also known as balanced funds, combine both bonds and stocks to bridge the gap between equity funds and debt funds. The asset allocation ratio can be either fixed or variable. Typically, they distribute around 60% of assets in stocks and the remaining in bonds, or vice versa. These funds are ideal for investors willing to take on more risk for the potential of higher returns compared to traditional fixed-income schemes, while still enjoying the benefits of a diversified portfolio.

• Thematic funds

  Thematic funds are mutual funds that focus on specific investment themes or trends, such as sectors (e.g. technology, healthcare), geographical regions (e.g. emerging markets), or global trends (e.g. sustainability, artificial intelligence).  As these funds invest only in specific sectors with only a few stocks, these funds may be risky. These funds aim to capitalize on opportunities within a particular theme or trend, allowing investors to gain exposure to specific areas of interest.

• Funds of funds (FoFs)

  They are mutual funds that invest in other mutual funds rather than individual securities. In other words, instead of directly buying stocks, bonds, or other assets, FoFs pool investors' money to invest in a diversified portfolio of mutual funds managed by different asset managers.
  
  FoFs offer investors the benefit of diversification across various asset classes and investment strategies within a single fund, making them a convenient option for those seeking broader exposure to different markets and investment styles.  

• Commodity funds

  Commodity funds are investment vehicles that primarily invest in commodities such as gold, silver, oil, or agricultural products. They allow investors to gain exposure to the performance of commodity markets without directly owning physical assets.
  
  These funds are ideal for investors with a sufficient risk appetite who are looking to diversify their portfolios. Returns may not be periodic and depend on the performance of the underlying stocks or commodities. In India, mutual funds can directly invest in gold, while for other commodities, they typically purchase fund units or shares from commodity-related businesses.

• Open and close ended Mutual funds

  • Open-ended Mutual funds
    An open-ended mutual fund is a scheme that remains open for buying or selling shares at any time, providing investors with a convenient and economical means of pooling their money. Investors have the opportunity to purchase a diversified portfolio tailored to their investment objectives, whether they seek income or growth from investments in organizations of varying sizes. 
     
  • Closed-ended Mutual funds
    Close-ended mutual fund schemes have a stipulated maturity period wherein the investor can invest directly in the scheme at the time of the initial issue and thereafter units of the scheme can be bought or sold on the stock exchanges where the scheme is listed.

• To bring it to a close

  At InCred Premier, we acknowledge that your hard-earned wealth deserves nothing less than the utmost care and attention. Rest assured, we are committed to providing you with unparalleled investment services.
  
  If you need help or have any questions as you progress, our dedicated team is here for you. You may reach out to us at care@incredpremier.com