Mutual funds are categorised into various types based on the asset class, structure, investment strategy, and speciality and many such factors.
Here is a comprehensive guide on the classification of mutual funds and various types of mutual funds available under each category.
- Classification of mutual funds based on the asset class
- Classification of mutual funds based on the structure
- Classification of mutual funds based on investment strategy
- Classification of mutual funds based on speciality
A. Classification of mutual funds based on the asset class
Mutual funds are mainly classified based on the types of underlying assets in its portfolio. The following are the classification of mutual funds based on the asset class
1) Equity mutual funds
Equity mutual funds are the mutual funds that primarily invest in stocks. Equity mutual funds involve high risk in comparison to other funds and are mainly suitable for investors with high-risk appetite and of long-term investment perspective.
Equity funds are further classified into various types depending on the types of stocks and investment style. Following are the main categories of equity funds –
- Large cap funds
These funds invest 80% of your money into stocks of large-cap companies. By investing in blue-chip companies, large-cap funds offer you the stability to a larger extent along with the good potential for growth over the long-run.
- Mid-cap funds
Mid-cap funds mainly allocate your money into equity and equity-related instruments of mid-cap companies. As these companies can good growth potential, you can expect a higher return with higher risk over the long-run.
- Small cap funds
Small cap funds allocate a minimum 65% of your money into stocks of small-cap companies. These funds come with the highest risk and also holds the potential to generate high returns.
- Multi-cap funds
These are the most diversified funds that invest your money into all types of companies’ right large-cap to small-cap. This can offer you considerable return as risk is diversified.
- Value funds
Fund managers of value funds mainly follow a value investing strategy wherein he identifies the value stock to create a portfolio. This can offer you long-term wealth creation opportunity.
- Sector-specific funds
Sector-specific funds mainly focus on stocks of the specific sector for investing the major chunk of pooled money. For example, investing in IT stocks and pharma stocks etc.
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2) Debt mutual funds
Debt Mutual funds are the type of mutual funds that primarily invest in debt instruments like treasury bills, bank deposits and other fixed-income bearing securities. Debt funds are further classified as –
- Liquid funds
Liquid funds invest mainly in money market securities like call money, treasury bills and certificate deposits of up to 91 days maturity. These funds are highly liquid, very low risk and are an ideal choice to park your excess corpus for a shorter period.
- Short duration funds
Short duration funds invest in fixed income securities with maturity ranging between 1 year and 3 years. Short duration funds are an ideal choice for you if you are a conservative investor with a short-term goal.
- Medium duration funds
Medium duration funds invest in fixed income securities with maturity ranging between 3 year and 5 years. You can expect a moderate return with capital protection.
- Long duration funds
Medium duration funds invest in fixed income securities with a maturity of more than 7 years. You can expect a relatively higher yield.
- Credit risk funds
Credit risk funds primarily invest in the highest rated debt instruments.
- Dynamic bond funds
Dynamic bond funds are actively managed by the fund manager by investing in debt instruments across the duration depending on the interest rate scenario.
3) Balanced mutual funds
Balanced mutual funds are hybrid in nature as they invest in both equity and debt securities in a significant proportion. Balanced funds can offer to moderate to a good return.
B. Classification of mutual funds based on the structure
Mutual funds are classified based on their structure which defines the flexibility it offers to you as an investor. Following are the types of mutual funds categorised based on the structure –
1) Open-ended mutual funds
Open-ended mutual funds are the type of mutual funds that can be purchased and redeemed anytime. There is also a restriction on the upper cap for investing open-ended mutual funds. These funds do not come with any predefined time frame or maturity period.
The net asset value of open-ended mutual funds is declared on a daily basis. You can invest or redeem open-ended mutual funds based on the NAV prevailing on that day which makes them the most liquid. As there is continuity in investment, the historical performance of open-ended funds can be easily tracked and referred for making investment decisions.
2) Closed-ended mutual funds
You can subscribe for closed-ended mutual funds during the New Fund Offer (NFO) period. Fixed number of units are allocated and you cannot redeem these units till the completion of maturity period. Though closed-ended mutual funds are not liquid in nature, they offer stability. In the case of closed-ended funds, you cannot sell back your fund units to the mutual fund houses. These funds are listed and traded on an exchange just like exchange-traded funds.
3) Interval funds
Interval funds swing both sides with the characteristics of both open-ended mutual funds and closed-ended mutual funds. These funds are open for investment only at specific time intervals as directed by the mutual fund houses as they invest mainly in unconventional and illiquid assets.
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C. Classification of mutual funds based on investment strategy
The following are the classification of mutual funds based on their investment strategy –
1) Growth mutual funds
Growth mutual funds are primarily based on growth investment strategy. The main of these funds is a capital appreciation by investing in growth stocks.
2) Liquid funds
Liquid funds are based on the strategy of offering high liquidity to investors.
3) Income funds
Income funds are a type of debt funds that intends to offer regular income to the investors. If you are a conservative investor looking for regular income option, you can consider income funds.
4) Tax-saving mutual funds
Tax saving funds or ELSS (Equity Linked Savings Schemes) are equity-oriented funds that are designed to provide you tax benefits under Section 80C of the Income Tax Act, 1961. These funds come with three years lock-in period.
5) Pension funds
Pension funds are primarily based on a long-term investment strategy that can help you draw monthly income or pension after retirement.
6) Fixed maturity funds
Fixed maturity funds invest mainly in bonds and debt securities that allow you to invest for a particular period ranging from one month to five years.
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D. Classification of mutual funds based on speciality
Following are the classification of mutual funds based on their speciality –
1) Index funds
Index funds replicate the performance of a particular index such as NSE 50 or Sensex. These are passively managed funds.
2) Gilt Funds
Gilt funds are the funds that invest predominantly in government securities. These are funds with almost no risk.
3) Global funds
These are the funds that invest in markets across the globe, including India. These funds are unique and diversified which can offer you a potentially high return over the long-term.
4) Fund of funds
These are funds that invest in other mutual fund schemes and offers you diversification by spreading the risk.
5) Exchange-traded funds
Exchange-traded funds are the type of index funds that are listed and traded on exchange-like equity stocks.
Knowing the wide variety of mutual funds available and understanding each one of them can help you take an informed decision.
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