Types of Mutual Funds

These funds invest primarily in stocks of companies and are suited for long-term capital appreciation. They are volatile but have high growth potential.

Types of Equity Funds:

• Large Cap Funds: Invest in top 100 companies by market cap. Example: SBI Bluechip Fund. Suitable for moderate risk takers.
• Mid Cap Funds: Invest in mid-sized companies (101–250 by market cap). More growth potential but higher risk.
• Small Cap Funds: Invest in companies ranked 251 and beyond. High risk, high return potential.
• Multi Cap Funds: Invest across large, mid, and small cap companies.
• Flexi Cap Funds: Similar to multi cap but with no minimum investment limits in any category.
• ELSS (Equity Linked Saving Scheme): Tax-saving under Section 80C, with 3-year lock-in. Invests in equity.
• Dividend Yield Funds: Focus on stocks that regularly pay high dividends.

These funds invest in fixed income instruments like bonds, government securities, treasury bills, and commercial paper. They are less volatile than equity funds.

Types of Debt Funds:

• Liquid Funds: Invest in securities with maturity up to 91 days. Suitable for parking surplus money.
• Ultra Short Duration Funds: Maturity of 3–6 months.
• Short Duration Funds: Maturity of 1–3 years.
• Corporate Bond Funds: At least 80% in top-rated corporate bonds.
• Credit Risk Funds: Invest in lower-rated bonds for higher yield. Higher risk.
• Gilt Funds: Invest in government securities only. No credit risk.
• Dynamic Bond Funds: Fund manager changes portfolio duration based on interest rate outlook.
• Overnight Funds: Invest in 1-day maturity papers. Very low risk.

These combine both equity and debt instruments to balance risk and return.

Types of Hybrid Funds:

• Aggressive Hybrid Funds: 65–80% equity, rest debt. Higher risk and return.
• Conservative Hybrid Funds: 75–90% debt, rest equity. Lower risk.
• Balanced Hybrid Funds: 40–60% in both equity and debt.
• Dynamic Asset Allocation / Balanced Advantage Funds: Asset allocation is actively changed based on market conditions.
• Multi Asset Funds: Invest in at least 3 asset classes (e.g., equity, debt, gold).

These funds invest in specific sectors or investment themes. High risk due to lack of diversification.

Sectoral Funds:

• Technology Fund
• Pharma Fund
• Banking & Financial Services Fund

Thematic Funds:

• ESG (Environmental, Social, Governance)
• Rural Consumption
• Infrastructure
• Global Innovation

Note: These funds perform well when the sector or theme is in favor but may underperform in downturns.

Index Funds: Passive funds that replicate a specific index (like Nifty 50, Sensex). Low expense ratio.

ETFs (Exchange Traded Funds): Like index funds but traded on the stock exchange. Intraday liquidity. Popular examples include Nifty ETF, Gold ETF.

Use Case: Good for long-term passive investors who want to match market performance.

These funds aim to profit from price differences in cash and derivatives markets. They buy in the spot market and sell in the futures market simultaneously.

Risk: Very low, as both buy and sell happen together. Taxation: Treated like equity funds if held for more than 1 year. Suitable for: Conservative investors who want equity-like tax treatment with lower risk.

Instead of investing in stocks or bonds directly, FoFs invest in other mutual funds. They may include:

• Domestic FoFs (e.g., multiple AMCs)
• International FoFs (e.g., global mutual funds)

Caution: Double layer of expense ratio — one for the FoF and one for the underlying fund.

These invest in global markets and companies (e.g., Apple, Tesla, Amazon). They are either direct or via FoFs.

Currency Risk: Returns affected by INR-USD movement. Diversification: Helps hedge against Indian market volatility.

These are passive debt funds with a defined maturity date. They invest in government bonds or PSU debt maturing around the same time.

Use Case: Ideal for investors with a clear time horizon who want predictable returns. Taxation: Post 2023 changes, taxed as per income slab (no LTCG benefit).

Open-ended Funds: Can be bought/sold anytime. Most common.

Closed-ended Funds: Have a fixed maturity. Invest only during NFO. Listed on stock exchange.

Interval Funds: Redemption allowed only during specific periods.

Suitability: Open-ended funds offer flexibility. Closed-ended and interval funds may be less liquid.

Low Risk: Liquid Funds, Overnight Funds, Arbitrage Funds

Moderate Risk: Debt Funds, Conservative Hybrid Funds, Large Cap Equity Funds

High Risk: Small Cap Funds, Sector Funds, Thematic Funds, Credit Risk Funds

Understanding fund types is essential before investing. Your choice should depend on your financial goal, risk appetite, and time horizon. In the next lesson, we’ll learn how to select the right mutual fund based on these factors.