Mutual Fund Categories
Bob and Tag enumerate different mutual funds and provide explanations for each category
There are different types of mutual funds you can invest in to grow your money. And mutual funds are categorized based on a variety of investment objectives and the risks associated with investing in them.
These categories are defined by SEBI (Securities and Exchange Board of India) for easier understanding and comparison by investors. The standardization of the categories, fund names, and limits of only one fund per category for all mutual fund providers has been introduced to reduce investor confusion and help you invest in the right mutual fund.
Here is a comprehensive list of mutual funds categorized based on different objectives and risks.
1) Equity Mutual Funds
In simple terms, equity refers to the ownership of assets. Therefore, an equity mutual fund invests in equities and equity-related instruments.
These mutual funds are those that can offer long-term growth but in the short term, they could prove to be volatile. And so, these funds are preferred by investors with higher risk tolerance and look at investments from a long to a very long-term perspective.
Large Cap Equity Funds - The majority of its investment is in large-cap equities; companies with a market capitalization value of Rs 20,000 crore or more.
Mid Cap Equity Funds - Invest majorly in mid-cap companies where market capitalization is above Rs 5,000 crore but less than Rs 20,000 crore.
Small Cap Equity Funds - These funds invest in small-cap companies with a market capitalization of less than Rs 5,000 crore.
Multi-Cap Equity Funds - These funds invest across stocks of many different sectors of the market and are also called Diversified Equity Funds. This is one of the more popular funds where investors choose to take advantage of the Mutual Fund House/Managers' expertise in identifying and increasing the value of money and giving them flexibility.
Dividend Yield Equity Funds - Dividend Yield funds or Systematic Withdrawal Plan (SWP) is a fund for investors who look for regular withdrawals and dividends. These funds can be combined with long-term plans to balance the risks.
Contra Equity Funds - A contra fund follows a contrarian investment strategy by betting against the market. The manager of a contra fund usually buys assets that underperform or decline at that point.
Focused Equity Funds - This fund chooses to focus only on a limited number of stocks in a limited number of sectors. They choose a maximum of 30 stocks instead of diversifying into many assets.
Thematic / Sectoral Equity Funds - These are funds that invest only in a particular theme, industry, or sector like pharmaceuticals or banking as a sector/industry, with a theme or goal along that sector. Note - These funds can be high-risk.
ELSS Equity Funds - Equity Linked Savings Schemes (ELSS) invest majorly in equity assets and are tax-saving instruments. These funds offer tax exemptions under Section 80C of India’s Income Tax Act.
2) Debt Mutual Funds
Debt Funds invest in corporate and government bonds, corporate debt securities, and other money market instruments that can appreciate over time. Debt funds are very useful for making year-based investment planning, and to cover short-term volatility and planned big-ticket expenses.
Here is a list of funds that come under debt mutual funds:
Overnight Debt Funds
Liquid Debt Funds
Short / Medium / Long Duration Debt Funds
Money Market Debt Funds
Corporate Bond Funds
Gilt Funds
3) Hybrid Mutual Funds
Hybrid Mutual Funds are those that contain assets in equities, bonds, securities, and more. These mutual funds invest in more than one asset class to diversify the fund and minimize the risk involved. Hybrid funds are useful for goal-based financial planning and protection from major risks.
Below are the categories of hybrid mutual funds:
Conservative Funds
Balanced Funds
Aggressive Funds [High-Risk Fund]
Dynamic Funds
Multi-Asset Funds
Arbitrage Funds
4) Solution-Oriented Mutual Funds
Solution Oriented Funds are mutual funds meant to achieve a specific goal like retirement planning, a child's education planning, etc.,
Index / ETFs*
Fund of Funds
Children's Fund
Retirement fund
*Index funds are those that invest in assets from a specific market index. Index funds and ETFs are easily the best for diversified holdings with minimal expense ratios.
Use Mutual Funds to Your Advantage
Today, both SEBI and AMFI (Association of Mutual Funds in India) have played an important part in the growth of mutual funds as investing instruments. More public campaigns, providing investment education materials, and increasing transparency have encouraged new investors and the development of the financial service industry as a whole.
With that being said, investors need to remain vigilant, always be updated on the new rules, and only look for trusted sources for information on the latest in the world of investing.
Check out the AMFI link below to find details on all the different types of mutual funds you are interested in: