Different Types of Mutual Funds in India
As per some reports, there are approximately 2000 different mutual fund schemes present in India. So, at least one mutual fund scheme is available for almost all investors. Before investing in any mutual fund, it is suggested to understand the reward profiles and risk factors associated with it. Generally, the risk of potential loss is higher for higher potential returns. Even though all mutual funds have some or other kind of risks, but some funds are less risky than others.
At the basic level, there are four types of mutual funds available – equity funds (the funds that invest in stocks), fixed-income bonds (the funds that invest in bonds), balanced funds (the funds that invest in both bonds and stocks), and money market funds (the funds that require the risk-free rate). Most of the mutual funds are the variants of these four asset classes.
Top 10 Performing Mutual Funds
The below list shows the best mutual funds in India in the year 2019
|S.No||Scheme Name||1 Year||3 Years||5 Years|
|1||IDBI Equity Advantage Fund Regular Growth||-2.7%||8.87%||19.31%|
|2||ICICI Prudential Technology Fund Growth||22.30%||10.35%||13.57%|
|3||L&T Dynamic Equity Fund Growth||3.05%||5.42%||13.71%|
|4||ICICI Prudential Regular Savings Fund Growth||3.95%||9.09%||11.42%|
|5||Franklin India Ultra Short Bond Fund Super||8.06%||8.76%||9.24%|
|6||Axis Long Term Equity Growth||2.49%||11.25%||20.15%|
|7||JM Dynamic Debt Fund Regular||7.35%||7.79%||8.23%|
|8||Tata Hybrid Equity Fund Regular Growth||-2.75%||6.38%||14.93%|
|9||UTI Regular Savings Fund Regular Plan Growth||2.36%||7.84%||10.60%|
|10||Aditya Birla Sun Life Digital India Fund Growth||17.67%||10.59%||14.18%|
Types of Mutual Funds as per Structure
If one wants to classify mutual funds as per the structure, then he/she is trying to categorize the funds as per the units of that mutual fund purchased or redeemed. Therefore, it provides an idea about liquidity. We can divide mutual funds based on the structure in three categories:
The funds that can be purchased or redeemed throughout the year come under this category. All the redemptions and purchases can be done at prevailing NAVs. Basically, an investor is allowed to invest in these funds as long as he/she wants. Moreover, there is no limit on the amount of investment also. These funds are actively managed by the fund managers. Therefore, a fee is also charged and it is higher than the fee of passively managed funds because these funds are very actively managed. Investing in these funds is recommended and beneficial for those who want to invest as well as want liquidity without any limitation of the maturity period. This means an investor is allowed to withdraw his/her open-ended funds at any time.
An investor can purchase the units only during the initial period of the offer and can redeem the purchased units at the specific maturity date. The close-ended schemes are most of the times listed under trade on the stock exchange. They are quite different than open-ended funds as the brought units or stocks cannot be sold to the mutual funds rather they are sold via the stock market at the existing price of the shares.
The mutual funds that have the quality of both open-ended funds and close-ended funds are known as interval funds. In this way, these funds are open for shares’ repurchase of different intervals of the tenure of the fund. The company that manages the funds offers repurchases of the units from the existing holders of units during this interval. Moreover, if the holders of units want they can offload the shares in the favor of the fund.
Types of Mutual Funds as per Asset Class
Every mutual fund assigns an authority to invest in a specific type of financial assets such as gold, corporate bonds, equity, etc. or any combination of these. In this way, one most of the times find the classification of the mutual funds as per the class of the asset they invest in. There are four types of mutual funds in this category:
It is the largest category of mutual funds, wherein the investment is done in the stock market. The main objective of investing in equity funds is for the long-term growth of the capital. Since there are different types of equity, thus there are various kinds of equity funds available.
Money Market Funds or Liquid Funds
The short-term debt instruments that are risk-free and most of the times treasury bills of the government are considered in the money market. This is one of the safest places to invest money. Though one does not get substantial returns in this kind of fund, the invested money is always in the risk-free zone and one can never think of losing the principal amount. The returns that one gets in this type of investment is little more than that one gets in a normal savings account, but it is little less than the approximate certificate of deposit.
This type of mutual fund predominantly invests in fixed income securities and debt instruments such as debentures, corporate bonds, commercial papers, government securities, etc. Debt funds are suitable for investors who want to invest for medium to long-term without any risk and want steady regular income. These funds are less risky than equity funds.
Balanced Or Hybrid Funds
As the name of these funds suggest, the balanced or hybrid funds balance the return and risk by investing in both debt and equity. Depending upon the ratio of equity to the debt, balanced funds can further be divided into three categories:
Balanced Mutual Funds
In this type of mutual funds, it is mandated to allocate at least 65% of the corpus to equity while the remaining is allocated in debt. This is to attain the taxation rule of equity according to which the long-term capital gained tax becomes ZERO, i.e. if one holds his/her investment in Balanced Mutual Funds for one year under this scheme, then the returns will be free of tax.
Equity Savings Funds
This type of fund as well as equity allocation of at least 65% for maintaining the equity taxation rule. However, the allocation of equity is further divided into.
- Naked Equity Allocation that hovers around 30 to 35%
- Matching Sale Position in Future Segment in stock. This is also around 30 to 35%.
Monthly Income Plans
Under these mutual funds approximately 15 to 20% is invested in equity and the rest of the amount goes in debt. One important point to understand here is that these funds are treated as debt when taxation is concerned, which suggests that long-term capital gain tax is 20% after the indexation.
Types of Mutual Funds as per Investment Objective
The classification of mutual funds based on the investment objective is given below:
The objective behind this mutual fund is to grow the capital that means to get the higher returns. Therefore, these type funds mainly invest in the equity stock and can also be called as equity mutual funds. However, these funds are ideal for the investors who want to invest for long term.
The main investment objective behind this fund is to help the investors to plan for their retirement. Here, the investment is made on both equity and debt and the duration of investment is very long.
As per its name – the income funds provide current income regularly. These funds primarily invest in high-quality corporate and government debt. If one holds these funds until maturity, then they provide interest streams. The main objective of these funds is to offer regular cash flow to the investors.
These are the debt mutual funds wherein one can invest money for a short duration on market instruments such as government securities, treasury bills, and call money. These mutual funds hold the least amount of risk. The minimum number of days for which one can invest in liquid funds is 91 days.
Tax Saving Funds (ELSS)
The type of mutual funds that provide a tax rebate to the investors as per the section 80C of the Income Tax Act, 1961 is known as Tax Saving Mutual Funds. These funds are ideal for long-term investors but are risky in nature.
Fixed Maturity Funds
The debt funds that are closed-ended come under fixed maturity funds. This means one can make an investment only when the new fund is offered. As the name of these funds suggests, they have a fixed maturity period and provides investment throughout debt instruments such as corporate bonds and highly rated securities.
Capital Protection Funds
It is a type of closed-end hybrid fund that safeguards the capital of the investor when the market goes down. However, the capital protection funds do not have any guarantee in India. The portfolio of these funds is a mix of debt and equity, which is the typical nature of the hybrid fund, but the percentage of debt is higher than equity’s percentage.
Types of Mutual Funds as per Specialty
The mutual funds that fall in the specialty category are:
These are passively managed funds that replicate the performance of the broad market index, for example, Dow Jones Industrial Average (DJIA) or S&P 500. One of the biggest benefits of index funds is its low fees.
Fund of Funds
These are the funds that provide investment in other mutual funds. The return of these funds depends on the performance of the target fund. They can also be denoted as multi-manager funds and are considered relatively safer.
These are sector-specific funds which invest in the companies that belong to some particular sector. Since these funds invest in the particular sector, thus their performance is directly proportional to the performance of the sector.
Exchange Traded Funds
In these type of mutual funds a commodity, an index, or basket of assets is tracked as minutely as possible and are traded on the stock exchange same as shares. Just like shares and share market, you can buy and sell these funds throughout the day. So, to hold these funds, one needs to have a demat account.
Organizations of any exchange are classified in different categories as per their market capitalization. The common categories in this type of fund are:
- Mid Cap Mutual Funds
- Micro Cap Mutual Funds
- Large Cap Mutual Funds
- Small Cap Mutual Funds
Emerging Market Funds
These are the funds that invest the majority of their assets in the securities from the nations that are classified as emerging. Generally, these nations are in their emerging phase of development and hence they offer high potential returns. However, these funds have a higher risk than the funds of developed countries.
An investment tool that enables an investor to invest in the international market is considered as global funds. In this way, global funds allow investing in the enterprises that are spread across the globe. This is the best option of investment for those who are looking out for diversified and long-term investment portfolio.
A fund that invests in the companies that are located outside from the country of the investor is known as the international fund. The international funds are different than global funds, which allow investment in any country across the world.
Real Estate Funds
A mutual fund that allows investing in the stocks of the companies that buys real estate. A major part of real estate funds goes in investing in corporate and commercial properties, agricultural lands, and residential properties. These funds can invest in properties directly or indirectly through Real Estate Investment Trusts (REITS).
Market Neutral Funds
This is a type of fund that requires profit in downward or upward trending environments. These funds are not suitable for all types of investors as they are of high risk and fairly complex.
Commodity Focused Stock Funds
These funds give a chance to investors to invest in the commodities market. History shows that commodities have a low correlation with traditional equity markets. This means that they do not fluctuate with the movements of the market.
A type of mutual fund wherein the investment is done in the government securities for a longer duration is known as gilt funds. Since the investment is made in government securities, thus they are risk-free and hence are an ideal investment for those who do not want to take any risk.
Leveraged / Inverse Funds
As per their name, they are inverse of traditional mutual funds. These funds give returns when the market goes down, and when the market does well, these funds go down or get into the loss.
Asset Allocation Funds
There are two variants of these funds available in the market – the target date fund and the target allocation fund. In order to achieve the results, the portfolio managers adjust the assets.
Types of Mutual Funds as per Risks
One of the recommended ways to make money is through investments in mutual funds. However, every investment has risks and so does the mutual funds. As per the risk factor, mutual funds can be divided into three categories:
- Low-Risk Mutual Funds: The investment in low-risk mutual funds is made in the areas like the debt market. Those who do not want to take a risk with their money should invest in the low-risk mutual funds wherein the investment is made for a long term. With low risk, this fund comes with lower returns.
- Medium Risk Mutual Funds: The investor has a medium amount of risk while investing in these funds. These funds are considered as wealth builders in the long run as they offer high returns if one invests in them for a long time.
- High-Risk Mutual Funds: The investors who want to take higher risks are suggested to take these types of mutual funds. An example of high-risk mutual funds is inverse funds wherein the returns are higher with high risk.