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What are the Different Types of Mutual Funds?


You might have thought of your future and zeroed in on various financial goals like retirement planning, emergency planning, children's education, vacations, and more. And for each of these goals, you might have set different timelines and budgets.

Therefore, your investment needs can vary for each of these goals. For example, you might prefer long-term investments to build a sizable corpus for retirement planning. In contrast, for emergency planning, you might look for investments offering short-term liquidity.

In such a case, different types of mutual fund schemes can help you meet your diverse financial goals. These mutual fund schemes can be classified based on their management style, fund structure, investment universe and more.

Let's analyse the different types of mutual funds in detail:

1. Style of Fund Management
Passively Managed Mutual Funds and Actively Managed Mutual Funds are the two types of mutual funds based on management style.

  • Passive Mutual Funds
    In passive mutual funds, the fund managers mirror benchmark indices in terms of composition and returns. The fund manager doesn't have any control over the choice or rebalancing of the portfolio.
    For example, if a fund were tracking the S&P BSE SENSEX, it would only invest in shares that are part of the index and in the same proportion. Therefore, these funds are designed not to beat but to follow an index.
    The Total Expense Ratio (TER) of these funds is comparatively lower than actively managed mutual funds since the fund manager has a lesser role to play.
    Index funds and Exchange Traded Funds (ETFs) are examples of passively managed mutual funds.
  • Active Mutual Funds
    Unlike passive funds, the fund managers of actively managed funds try to beat their respective benchmark indices.
    The performance of these funds depends heavily on the strategies of their fund managers. The fund managers can choose stocks and rebalance the portfolio to meet the investment objective of the scheme. Therefore, the TER of these funds is higher than passively managed funds.

2. Structure of the Fund
Different types of mutual fund schemes can also be categorised based on their structure. They can be divided into open-ended, closed-ended and interval funds.
Let's look at each of these types:

  • Open-Ended Mutual Funds
    You can invest in these funds or redeem from them anytime. You can buy additional units of these schemes and redeem them partially or fully.
  • Closed-Ended Mutual Funds
    You can buy units of a closed-ended mutual fund scheme only during the NFO period. These schemes have a fixed maturity period, post that it ceases to exist.
  • Interval Funds
    Interval funds are majorly closed-ended schemes, but can become open-ended during pre-specified intervals, called the "transaction period". The time between two transaction periods is called the "interval period".

3. Investment Universe
This classification focuses on the investment universe different mutual fund schemes invest in. These can be equity-based funds, debt-based funds, fixed-income funds, money market funds and more.
Let's have a look at some of the types and sub-types of mutual fund schemes under this category in detail:

  • Equity Schemes: These schemes have equities as their major underlying asset.
    They can be further categorised based on the following classifications:
    • Market Capitalisation:
      Equity funds can be classified as small-cap funds, mid-cap funds, large-cap funds, multi-cap funds. The large and mid-cap funds are based on the market capitalisations they are investing in.
    • Investment Strategy:
      - When a scheme invests only in a specific sector, it is called sectoral funds. Similarly, a fund following one particular investing theme is called a thematic fund.
      - Conversely, equity funds that invest in a maximum of 30 stocks and focus on specific capitalisation are called focused funds.
      - Contra funds or value funds focus on value. They invest in undervalued equities with long-term growth potential.
      - Furthermore, there is the Equity Linked Savings Scheme (ELSS), a tax-saving equity fund.
  • Debt Schemes: They are further classified into:
    • Duration-based Funds:
      Debt funds can be categorised based on duration into overnight, ultra-short, short, medium and long-term debt funds.
    • Liquid Funds:
      These funds invest in debt and money market instruments and have a maturity period of a maximum of 91 days only.
    • Money Market Funds:
      These schemes invest in money market instruments and have a maturity period of a maximum of one year.

Other than these, gilt funds invest in government securities, corporate bond funds with high ratings, and floater funds that invest in debt securities with fluctuating interest rates.

  • Hybrid Schemes: Hybrid schemes can help you invest in two asset classes (equity and debt) together.
    Here are some interesting facts about the hybrid scheme:
    • Conservative hybrid funds invest predominantly in debt instruments (75-90% of total assets).
    • Aggressive hybrid mutual funds majorly invest in equities (65-80% of total assets).
    • Balanced hybrid funds can have a 60:40 percentage distribution between debt and equity.
    • Arbitrage funds work on taking advantage of price differences in different markets.

Apart from these categories, there are Fund of Funds (FoFs), which have funds as their underlying asset and solution-oriented mutual funds like retirement savings funds, child's career funds, to name a few.

Mutual fund schemes can be classified in various ways, each catering to different financial goals. You can choose mutual fund schemes for your goals based on factors like your risk appetite, goal timeline, goal value and more.

Mutual Fund investments are subject to market risks, read all scheme related documents carefully

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