Types of Mutual Funds?

Types of Mutual Funds (1)

Types of Mutual Funds:

This considering investing in Mutual Funds? It is essential that you understand the mutual fund types and features. The mutual fund types can be based on the following characteristics:


types of mutual funds


Open-Ended Funds:

Open-ended Mutual fund shares buy and sell units continuously and hence allow investors to enter and exit as per their convenience. The open every mutual fund is launched through a New Fund Offer (NFO). An open-ended fund is a fund that is officially launched after the NFO ends. Which is based on the value of the funds understanding securities is generally calculated at the close of every trading day. The investors buy shares directly from a fund. A fund that does not allow entry and exit of investors after the NFO period until maturity. These mutual funds in open-ended are broadly classified into four categories on their investment traits and risk involved. They understand all mutual fund types and analyze them to check if your requirements would be saved by investing in a particular kind of mutual fund. Following are the types of open-ended funds:

1. Equity Funds

2. Hybrid funds

3. Debt funds

4. Money Market funds

Close-Ended Funds: 

It is a portfolio of pooled assets that raises a fixed amount of capital through an Initial Public Offering (IPO). The closed-ended fund is unique in that after its IPO, the fund’s parent company issues no additional shares. These closed-ended funds, which are lesser-known but more than a century old, have a fixed number of shares and are traded among investors on an exchange. Unlike in the open-ended funds,’ investors cannot buy the units of a closed-ended fund after its NFO period is over. Following are the types of closed-ended funds:

1. Capital Protection

2. Fixed Maturity

Equity Funds :

equity fund

An equity fund is a type of open-ended fund in a Mutual fund or private investment fund such as a hedge fund. That bought ownership in businesses hence the term “equity fund” most often in the form of publicly traded common stock. These aimed to generate high returns by investing in the shares of companies of different market capitalization. First, let us clear up the world equity for our purposes; it is merely another word for stocks. An equity fund is one that invests in stocks. They produce higher returns than debt funds and fixed deposits. These performances of the company decide the investors’ returns. The investor should look for a longer investment horizon of at least five to 10 years to invest in these schemes.

As opposed to a bond fund or fixed income fund which uses shareholder money to make loans to companies or governments collecting interest income Mutual funds.

The equity fund predominantly invests its assets inequities that are listed in stock market securities. As per the SEBI (Securities and Exchange Board of India) mutual fund guidelines, an equity fund is mandatorily required to invest at least 65% of its assets in equities and equity-related instruments. These invest the balance of 0-35% in debt or money market securities. Equity funds can be managed actively or passively. While most equity schemes in India actively managed, examples of passively managed equity funds include Exchange Traded Funds (ETF) and index funds.

How do Equity Funds Work?

The equity mutual fund invests at least 60% of its assets in the equity of companies in varying proportions. The equity mutual fund should be in line with the investment mandate. It might be purely Large-cap, mid-cap, or Small Cap funds or a mixture of market capitalization. The investing style may value-oriented or growth-oriented. How an equity fund works is quite simple. You give money to fund and invests this money in stocks. The profits or losses whatever they may accrue to you. At the least, this is all you need to understand to invest in an equity fund.

What are the types of Equity Funds?

Index Fund:

These index funds, as the name, suggest investing in an index. These funds buy all the stocks in the same proportion as in a particular index. This means the fund will perform in tandem with the index it is tracking save for a small difference known as tracking error. When an investor buys a share of an index fund. We can be buying a share of a portfolio that contains the securities in an underlying index mutual funds. The only time index funds buy or sell a stock is when the index itself changes. These index funds have ticker symbols and traded on all major exchanges. It was available for most index mutual funds. Some index funds reproduce broad market indexes, and some replicate indexes that only contain securities with unique characteristics.

These including minimum financial ratios, geography, or other distinctions. An act of an index fund usually does not exactly match the actual index’s performance.

Large Cap Equity Fund:

An open-ended equity fund invests in companies whose market capitalization is over $ 10 billion. The large-cap equity fund helps you maintain stability in your portfolio as they are less volatile than their mid and small-cap counterparts. It is stock considered to be the least risky investment as far as equity stock picking goes. These mutual funds typically generate relatively lower returns than small-cap and mid-cap equity funds.

Mid Cap Equity Fund:

An open-ended equity fund invests in companies whose market capitalization is between $ 2 billion and $ 10 billion. The funds tend to provide relatively higher returns than large-cap funds but are prone to higher volatility as compared to a large-cap equity fund. These stocks are considered to carry less risk than small-cap stocks but riskier than large-cap Stock.

Small-Cap Equity fund:

It is an open-ended equity fund that invests in companies whose market capitalization is less than $ 2billion. Roughly 95% of all listed companies in India. Small-cap funds are suitable for investors who are willing to embrace higher volatility and risk to earn higher returns. These stocks are considered to be riskier than mid or Large-cap stocks.

Tax saving or ELSS:

These funds offered tax benefits to investors under the Income Tax Act in 1961. ELSS is the only tax-saving investment under section 80C of the Income Tax that gives you equity exposure other than NPS. They are best suited for long investors seeking tax rebates and looking for long term growth. With its shortest lock-in period of three years and high returns potential, ELSS has a good track record. The suitable for investors willing to enjoy tax benefits with equity-linked returns. These are preferred investment duration since there is a lock-in period of 3 years of investment in ELSS funds is made for 3 years or more.

Sector Funds or Thematic Funds :

Sector or Thematic funds invest primarily in equity shares of companies in a particular business sector or industry. Invest in 100% of the assets in industries that are related through some theme. The example, an infrastructure fund invests in power construction cement sectors, etc. While equity mutual funds may give higher returns, they are riskier as compared to diversified funds. These advantages offer higher potential returns than diversified equity funds by taking advantage of the boom in various sectors. Investors need to keep a watch on the performance of those sectors/industries and must exit at a particular purpose time. The Thematic was suitable for aggressive investors. These are the sector funds. They are ideal for aggressive investors.


These equity funds provide you with the benefit of diversification by investing in companies spread across sectors and market capitalization. The investing 100% of the capital in equities spreading across different industries and stocks. They are generally meant for investors who seek submission across the market and do not want to be restricted to any particular sector. These are an advantage in the purely diversified across stocks and sectors. Such funds are known to be less of a substance than sector and thematic funds. The suitable for an equity investor seeking to invest in the moderately aggressive scheme within the category of equity funds. The long term horizon is preferred at least three years.

Hybrid Funds :

hybrid fund

The Hybrid funds invest in both debt instruments and equities to achieve maximum diversification and assured returns. A perfect blend. This is like any other type of mutual fund scheme. The choice of a hybrid fund depends on your risk alternative and investment objective. The attempt to increase the value of your investment through either capital appreciation or establishing a respectable level of returns. It comes about as a solution to the individual drawbacks of equity and debt mutual funds. These are companies that create mutual fund schemes called fund houses or asset management companies (AMCs). This is where the hybrid funds come into play.

The hybrid fund schemes diversify the investment and attempt to get the best of both worlds – capital appreciation through equity investing as well as stability and returns through investment debt instruments. The process by which the scheme invests across asset classes ( Equities, bonds, cash, gold, etc.) is called asset allocation.

The investing in hybrid mutual funds in India is a very popular practice for both risk-taking and risk-averse investors who wish to increase their wealth and also mitigate risk. The hybrid funds evolved from the implementation of modern portfolio theory in fund management. These funds can offer varying levels of risk tolerance ranging from conservative to moderate and aggressive. At the core of the smartest investment philosophy is diversification. Often the best mutual funds are those that have a showing a great deal of verity blend of holdings, and hybrid funds are an excellent example of this category of investment.

How do Hybrid Fund Work:

These hybrid funds aim to achieve appreciation in the long run and generate income in short via a balanced portfolio. The fund manager allocates your money in varying proportions in equity and debt based on the investment objective of the fund. The hybrid fund manager may buy/sell securities to take advantage of market movements. It invests across different asset classes, aiming to minimize risk and establish capital appreciation. A well managed hybrid mutual fund scheme of any kind seeks to generate income in the short term and capital appreciation in the long-time through a well-planned distribution of the investment corpus across different asset classes. For long term capital appreciation, the scheme will invest in equity stock of companies, and for short term income generation, the plan will invest in debt instruments and government bonds.

What are the types of Hybrid Funds:

Balanced Fund:

The balanced hybrid fund is a mutual fund that contains a stock component, a bond component, and sometimes a money market component in a single portfolio; generally, these funds stick to relatively fixed stocks and bonds. They earn the balance a name by keeping the balance between the two asset classes pretty steady, usually placing about 60% of their assets in stocks and 40% in bonds. Their holdings balanced between equity and debt with their objective between growth and income; hence, their name “balanced”. For some in-betweeners through that stock position may be too small. Many balanced funds hold more significant stock positions, however. Review a balanced fund portfolio holdings to finds to find out how large it is a stock position. The rest of the assets goes to debt securities and cash reserves.

Debt Oriented Fund:

The debt component of the fund constitutes the investment in fixed income, a place of safety like government securities debentures, bonds, treasury bills, etc. An asset allocation of 60% or more in debt and rest in equity is called a debt-oriented fund. For the sake of liquidity, some parts of the fund would also invest in cash and cash equivalents. These hybrid invest fund schemes that spend over 75% of their resources in treasury bills, money market instruments, bonds, and other debt instruments called debt-oriented hybrid projects. These are remaining 25%, or less is invested in equity stocks on companies and cash/cash equivalents. These plans offer the possibility of providing the investor with a regular income in the form of dividends. An additional facility offered by these funds is the “growth option,” which reinvests dividends to facilitate capital appreciation.

Equity Oriented Funds:

These also known as balanced funds. Equity oriented hybrid fund allocates over 65% of their investment resources towards purchasing the equity stock of companies. The equity components of the fund comprise equity shares of companies across industries like FMCG, finance, health care, real estate, automobile, etc. The remaining 35% or less is invested in debt securities or other opportunities. These balanced funds allow the investor to explore the possibility of high returns and reduce the risk exposure at the same time.

Arbitrage Fund:

Arbitrage funds work on the misprision of equity shares in the spot and Future market. Essentially it exploits the price difference between current and future securities to generate returns. These funds, at the same time, purchase and sell the same shares in different markets. The fund manager simultaneously buys shares in the cash market and sells in the futures or derivatives market. The difference in the cost price and the selling price is the returns you earn.

Debt Funds:

debt fund

These debt funds are buying a debt instrument is similar to giving a loan to the issuing entity. This debt fund invests in fixed- income-generating securities like bonds, government treasury bills, commercial paper, and other money market instruments. These are Gilt fund monthly income plans (MIPs) short term plans (STPs) liquid funds, and fixed maturity plans(FMPs) some of the investment options in debt funds. The debt funds apart from these categories debt funds include various funds investing in short term medium-term and long-term bonds. The fundamental reason for investing in debt funds is to earn investment income and capital appreciation.

The issuer per decides the interest rate you will receive as well as the maturity period. For this reason, they are also known as “fixed earning” securities. These debt funds preferred by individuals. Who are not willing to invest in a highly volatile equity market.

The debt fund provides a steady but low-income relative to equity. It is relatively less volatile. A debt fund refers to a mutual fund and exchange-traded fund(ETF) or any other pooled investment offerings whose underlying investments chiefly contain fixed-income investments. The fees on debt funds are lower than those associated with equity funds because its management costs are inherently lower. This investor interested in debt fund options can choose between passive and active products. The investing primarily in these opportunities, debt mutual funds reduce the risk factor by a considerable margin. As a result of this, the debt mutual fund scheme also reduces its chances to generate exponential returns like those of successful equity fund schemes. The debt funds are different from equity funds in many ways – the primary of which is the chosen investment instrument or opportunity.

How do Debt Funds Work:

The debt funds invest in different securities based on their credit ratings. These, unlike equity mutual fund schemes that seek to gain capital respecting through investments in the equity stocks of companies. A securities credit rating signifies where the issuer will default in disbursing the returns they promised. The debt mutual funds attempt to deliver stable and low-risk returns that are usually better than fixed deposits. These debt fund manager of a debt fund ensures that he invests in high credit quality instruments. A higher credit rating means that the entity is more likely to pay interest on the debt security regularity as well as pay back the principal amount upon maturity.

The reason that they ate able to do this is that they invest in instruments that provide a fixed rate of returns. Additionally, the timeline also depends on the investment strategy of the fund manager and the overall interest rate regime in the financial system. While this rate of returns is usually quite low risk-averse investors like better this form of investment as it does not place their investment at a great deal of risk. The falling interest rate regime encourages the manager to invest in long term securities. Introducing a statement a rising interest rate regime encourages him to invest in short term securities

What are the types of Debt Funds:

Income Funds:

The income funds take a call on the interest rates and invest predominantly in debt securities with extended maturities. The income funds are mutual debt fund that attempts to provide a stable rate of returns in all market scenarios through active portfolio management. This makes them more stable than dynamic bond funds. The average maturity of the income fund is around 5-6 years. While it is a debt fund. These income funds also run the risk of generating negative returns as many. The income fund scenarios could payout, such as interest rates that may drop extremely, resulting in a drop in the understanding of bond prices. It is even possible that the active fund manager could pick lower-rated instruments that could offer potentially higher returns.

Bond funds:

These bond funds at the name suggest these are Dynamic funds. Through active and bond portfolio management. The fund manager keeps changing portfolio composition according to rising interest are rate authorities. These bond funds have a different average maturity period as these funds take interest rate calls and invest in instruments of longer as well as shorter maturities.

Liquid Funds:

The liquid funds’ securities and instruments that are investing in debt appliance with a maturity of not more than 91 days. The entire point of investing in a liquid fund no maintains a high degree of liquidity in the investment. Usually, only very highly rated instruments are invested in through liquid funds. This makes them almost risk-free. Rarely have liquid funds seen negative returns. Liquid funds the benefit of these funds is primarily felt by those investors. Who have surplus funds to park in an income-generating investment. These funds are better substitutes for savings bank accounts as they provide similar liquidity with higher returns. Many mutual fund companies offer instant redemption on liquid fund investments through unique debt cards.

Gilt Funds:

These funds invest primarily in government-issued securities. This brings a very low level of risk and is generally rated quite high the default rate is very low and sometimes non-existent. The government rarely defaults on the loan it takes in the form of debt instruments. Gilt funds are an ideal choice for risk-averse fixed-income investors. The golden fund preferred investment duration depends on factors like the outlook for interest rate investor’s investment horizon etc.

Short term and Ultra short term Funds:

These funds are accessible among new investors who want a short term investment with minimal risk exposure. These securities, instruments, papers, etc. These are debt funds that invest in instruments with short maturities ranging from 1 to 3 years. These Short term funds are ideal for conservative investors as these funds not affected by interest rate movements.

Money Market Funds:

Money Market Fund (1)

These money market can recognize to invest in short term fixed income securities such as Government bonds treasury bills. The banker’s acceptance, commercial paper, and certificates of deposit. Where in lending and borrowing of funds varies from overnight to a year. They are generally a safer investment but with a lower potential return than other types of mutual funds. The money market is an essential part of the financial system that helps in fulfilling the short term and concise term requirements of the companies, banks, financial institutions, government agencies, and so forth. Just like other commodities traded in designated products exchange money that is cash, and cash equivalent instruments traded in a designated exchange termed the “money market”. The money market is a critical component of the national financial market and comprises. The various types of instruments designed to perform specific functions.



Capital Protection Fund:

Capital protection oriented funds are a class of close-ended funds. There is a primary objective to safeguard investor capital in the event of market downturns. While at the same time providing them scope for capital appreciation by participating in upturns of the equity market. The organization of capital protection funds consists of a mix of equity and debt funds. This is closed-ended fresh units of the scheme will available for subscription only during the New Fund Offer (NFO). The major investment is towards debt, particularly zero-coupon debt, and merely. A small fraction of the organizations dedicated to equity funds. The maturity of the debt funds organization and the lock-in period of the funds ate aligned. Which further protects it from volatile interest rate movements.

The chances of the interest rate of a variation related to market to market losses also averted as these debt instruments till the time of maturity. For instance, if the minimum debt exposure will fixe at 80 per cent, then it manages to generate 100 per cent of the principal invested in capital protection. The remaining 20 per cent comprising equity funds should manage to make an upside to the organization. Typically, it invests in the highest grade debt instrument.

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