Different Types of Mutual Fund Schemes in India
Googling “types of mutual funds” and getting lost in the ocean of schemes that exist can be a bit of a bummer.
Yes. There are quite a lot of types of mutual fund schemes. No. Understanding them shouldn’t be a daunting experience. In this article we will explore the various types of mutual fund schemes in India.
Mutual fund schemes can be categorised based on their characteristics such as their asset class, structure, level of risk, etc.
The various types of mutual fund schemes classified based on different aspects are:
Types of Funds Based on Asset Class:
Debt – A debt fund is a mutual fund scheme that invests in fixed income instruments, such as Corporate and Government Bonds, corporate debt securities, and money market instruments etc., that offer capital appreciation. Debt funds are also referred to as Fixed Income Funds or Bond Funds. A few major advantages of investing in debt funds are low-cost structure, relatively stable returns, relatively high liquidity and reasonable safety.
Equity – In contrast to debt funds, equity funds invest in equity stocks (aka shares). Because these funds primarily invest in company stocks, the returns highly depend on the market performance of the underlying stocks and therefore have an inherent risk. Equity funds are ideal investment vehicles for investors that are not as well-versed in financial investing or do not possess a large amount of capital with which to invest. Equity funds are practical investments for most people.
Hybrid – These funds are a mix of both asset classes, i.e., both debt (fixed income) and equity. The debt-equity ratio (and thus the level of risk) can differ for different hybrid funds or, within a fund, be fixed or variable.
Multi-asset – These are funds that must invest in at least three different asset classes with a minimum allocation of 10% in each asset class. These funds typically have a combination of equity, debt, and more asset classes like gold, currency, real estate, etc.
Types of Funds Based on Structure:
Close-ended – Close-ended funds have a fixed maturity period and can only be purchased from mutual fund houses during the initial offer period. If investors wish to exit the fund before maturity, they can sell at the stock exchange if the scheme is listed on stock exchange.
Open-ended – These can be purchased and sold on any business day at NAV as they do not have constraints like no. of units to be traded or maturity period. Open-ended funds are highly liquid.
Types of Funds Based on Management:
Active – These have expert fund managers dedicatedly managing the portfolio aiming to outperform the benchmark using constant market analysis and research.
Passive – Passive funds seek to be at par with the benchmark and so, unlike in active funds, fund managers only make changes to the portfolio when necessary to remain parallel to the benchmark index returns.
Types of Funds Based on Risk Appetite
Low risk – These are usually debt funds with securities that offer stable returns with very low risk. These returns are generally higher and more tax-efficient as compared to traditional investment options like fixed deposits.
Medium risk – Medium risk funds try to balance risk-return by holding debt and equity in varying capacities.
High risk – These include equity shares, debt securities with low ratings, etc. They have the ability to generate great returns but at higher risk and should be chosen by investors with a high-risk tolerance. High-risk funds are volatile and require constant supervision to not incur losses.
Types of Funds Based on Time-Period:
Short-term
Medium-term
Long-term
Apart from those mentioned above, there are also mutual funds categories based on investment objective (income, tax saving, retirement, child welfare, etc.) and speciality (sectoral, index, global, etc.).
Hang on! This is confusing!
Here's the thing, the above categories are based on qualities that a mutual fund could possess. These are not separate and absolute segregations; overlap of qualities is possible. For example, a mutual fund scheme could be described as a large-cap equity fund, low risk, open-ended, and long-term.
SEBI Categorisation of mutual funds
Before the "Categorisation and Rationalisation of Mutual Fund Schemes" circular by SEBI, the mutual fund landscape in India was quite frankly, a mess. An organised mess, but a mess nonetheless. Asset management companies used to have a plethora of schemes with varying investment objectives, risk profiles, strategies, and alluring names, many with minimal differences, known by different names that didn't exactly reflect a true idea of what they offered or the objective they served.
There could be multiple schemes of the same type by an asset management company (AMC). The same category of scheme could be different for different AMCs because of lack of a standard definition across the landscape. For example, the definition of large cap/mid cap/ small cap/ was not defined by SEBI. So, mutual fund companies went by the definitions set by themselves – which could greatly vary from each other.
The lack of standardised categories and overlapping fund offerings created complexity in the market. The result was confusion among investors for whom it got challenging to compare and choose the right fund for their financial goals.
To make things easier for investors, SEBI – the regulatory body for securities – rationalised the scheme names and its investment objectives, furthermore allowing only 1 scheme per category. It categorised various types of mutual fund schemes in India in total 5 broad categories (with 36 sub-categories) mentioned below:
Equity Schemes [10 categories]
Debt Schemes [16 categories]
Hybrid Schemes [6 categories]
Solution Oriented Schemes [2 categories - for Retirement Fund, Children's Fund]
Other Schemes – [2 categories - for Index Funds/Exchange Traded Funds, Fund of Funds (Overseas/Domestic)]
Mutual funds have been the retail investor's choice of vehicle for decades.
The world of mutual funds is vast, and once you venture in, exploring its diversity will be not only informative but also potentially rewarding. By pooling resources, you can take advantage of the economies of scale, mitigate risks, benefit from professional management and access a realm that might have otherwise seemed complex and exclusive.
Mutual funds provide so many variations in portfolios that investors can simply pick the ones that suit them best, i.e., align with their financial goal, risk tolerance and investment horizon, and rest assured that the people behind the screens are working expertly to provide you with the highest returns.
Disclaimer: Mutual fund investments are subject to market risk, read all scheme related documents carefully and consult with your advisor before investing.
