Types of mutual funds in India: Complete guide for investors

Mutual funds allow investors to invest in different asset classes based on their financial goals and risk appetite. The blog explains the various types of mutual funds in India, including equity, debt, hybrid, thematic, and goal-based funds. It also covered important concepts such as NAV, taxation, SIPs, and market-cap classifications. Understanding how different mutual fund schemes work can help investors make more informed investment decisions. Choosing the right type of mutual fund carefully is important for building a balanced and goal-oriented investment portfolio over time.

A mutual fund is an investment vehicle that pools money from multiple investors and invests it in assets such as stocks, bonds, or other securities through professional fund management.

Mutual funds have emerged as one of the most popular investment choices in India. Although it offers a plethora of advantages for investors, one of the biggest benefits is that you can invest across multiple types according to your risk appetite, investment horizon, and financial goals. While some mutual fund schemes focus on high growth, others aim to generate stable returns or regular income over time.

But with so many types of mutual funds in India available today, investing in the right one can sometimes become difficult. This blog explains the different types of mutual fund schemes in detail, how each one works, and which funds might be the best choice for your financial needs and risk tolerance. Keep reading.

Also Read – Multi-asset funds explained

What are mutual funds, and how do they work?

Mutual funds are investment vehicles that pool money from multiple investors with common investment objectives. This money is then invested in different asset classes, including stocks, bonds, money market instruments, and other securities. Instead of investing directly in individual securities, investors buy units of a mutual fund scheme that invests in these securities.

Professional fund managers manage these funds and make investment decisions on behalf of investors. These managers decide how much of the corpus to allocate to an asset and when to increase or decrease the allocation.

The returns earned from mutual fund investments are distributed among investors according to the number of units they hold in the scheme.

Also Read – What Are Specialized Investment Funds

What is Net Asset Value (NAV) in a mutual fund?

Net Asset Value, commonly known as NAV, is the per-unit value of a mutual fund scheme. In simple terms, it shows the price at which investors buy or sell units of a mutual fund. The NAV is calculated by taking the total value of the fund’s assets, subtracting liabilities, and dividing the result by the total number of outstanding units issued to investors.

For example, if a mutual fund scheme has assets worth Rs. 100 crore and liabilities of Rs. 5 crore, and the total number of outstanding units is 5 crore, the NAV comes out to be Rs. [(100-5) / 5], i.e., Rs. 19 per unit.

NAV helps investors track a mutual fund scheme’s value and performance over time. However, a lower NAV does not automatically mean a fund is cheaper or better than another fund.

Why does investing in a mutual fund matter?

Investing in mutual funds offers multiple benefits. They include:

• Diversification: Mutual funds invest in multiple securities, which helps reduce the impact of poor performance from a single investment.
• Professional management: Experienced fund managers handle investment decisions and portfolio management on behalf of investors.
• Liquidity: Most open-ended mutual fund schemes allow investors to buy or redeem units with ease.
• Convenience: You can start, track, and manage mutual fund investments online in relatively simple steps.
• Affordability: Many mutual fund schemes allow you to start a Systematic Investment Plan with as low as Rs. 100 or invest lump sums.
• Tax benefits: Certain mutual fund schemes offer tax benefits under applicable income tax laws.

What are the types of mutual funds based on asset class?

Mutual funds can be classified in different ways depending on where the money is invested, the investment objective, risk level, or fund structure. One of the most common methods is classification based on asset class. In this classification, mutual fund schemes are grouped according to the main assets they invest in, such as stocks, bonds, or a mix of both. Understanding this classification is important because it helps investors choose funds that align with their financial goals, return expectations, and risk appetite.

Here are the three types of funds in India based on asset class:

1.    Equity mutual funds

When a mutual fund scheme invests a major portion of its corpus in shares of companies listed on the stock market, it is known as an equity mutual fund. These funds are typically chosen by investors seeking long-term capital growth. Since stock market prices can fluctuate, equity funds usually carry higher risk than some other types of mutual funds in India. Equity mutual funds can be further subclassified as large-cap, mid-cap, and small-cap funds, which we will discuss later.

2.    Debt mutual funds

When a mutual fund scheme invests a major portion of its corpus in fixed-income instruments, such as government securities, corporate bonds, treasury bills, and money-market instruments, it is known as a debt mutual fund. These funds are generally considered relatively stable compared to equity funds and are often preferred by conservative investors seeking regular income or lower risk. It means that although returns may usually be lower than those of equity funds, price fluctuations are also comparatively limited.

3.    Hybrid mutual funds

When a mutual fund scheme invests in a mix of equities and fixed-income instruments, it is known as a hybrid mutual fund. The main objective is to achieve a balance between growth and stability. These funds are often chosen by investors looking for moderate risk and diversification within a single scheme. Depending on the fund manager’s strategy, some hybrid funds may have higher equity exposure, while others may focus more on debt investments.

Read More – Best Debt Investment Options in India

What are the types of equity mutual funds by market capitalization?

Market capitalization, often called market cap, refers to the total market value of a company’s outstanding shares. Listed companies are typically grouped into large-cap, mid-cap, and small-cap categories based on their market value. Equity mutual funds are also classified this way because companies of different sizes may offer different levels of growth potential and risk.

Large-cap funds are usually considered relatively stable, while mid-cap and small-cap funds may offer higher growth potential but also carry greater market risk. Some funds also invest across multiple market-cap categories for broader diversification. Here are the 4 types of mutual funds based on market capitalization:

1.    Large-cap funds

Equity mutual funds that mainly invest in shares of well-established companies with strong market presence are known as large-cap funds. These companies are often industry leaders and may offer relatively stable performance compared to smaller companies. Large-cap mutual fund schemes are generally preferred by investors seeking long-term growth with comparatively lower volatility in equity investments.

2.    Mid-cap funds

Equity mutual funds that invest mainly in shares of medium-sized companies that are usually in their growth phases are known as mid-cap funds. These companies may have higher growth potential than large-cap companies, but they can also experience sharper market fluctuations. Mid-cap mutual funds are often chosen by investors willing to take moderate to high risk for potentially better long-term returns.

3.    Small-cap funds

Equity mutual funds that invest mainly in shares of smaller companies with relatively lower capitalizations are known as small-cap funds. These companies may offer strong growth opportunities, especially during favorable market conditions. However, small-cap funds are generally considered riskier because smaller companies can be more sensitive to market changes, business challenges, and economic conditions. These funds are preferred by aggressive investors willing to take on risk in pursuit of high-growth opportunities.

4.    Multi-cap or flexi-cap funds

Multi-cap and flexi-cap funds invest across large-cap, mid-cap, and small-cap companies. The main difference is that flexi-cap funds have greater flexibility to change allocations across market-cap categories depending on market conditions. These funds are often preferred by investors seeking diversification across company sizes within a single mutual fund scheme.

What are the different types of debt mutual funds?

Debt mutual funds are also divided into different sub-categories based on the type of fixed-income securities they invest in and the investment duration they follow. This classification helps investors choose funds according to their liquidity needs, risk appetite, and investment horizon. Some debt funds are designed for very short-term parking of money, while others focus on generating relatively stable long-term returns by investing in government or institutional securities.

1.    Liquid and overnight funds

Liquid and overnight funds invest in very short-term debt instruments with low maturity periods. These funds are generally used to park surplus funds for a short duration while maintaining relatively high liquidity. Overnight funds usually invest in securities with one-day maturity, whereas liquid funds invest in instruments with slightly longer short-term maturities. They are often considered among the relatively lower-risk debt mutual fund categories.

2.    Money market funds

Money market funds mainly invest in short-term money market instruments such as treasury bills, commercial papers, and certificates of deposit. The maturity periods of these instruments may range from a few days to a year. Money market funds aim to provide liquidity along with relatively stable returns over shorter investment periods. Investors seeking an alternative to traditional savings or short-term fixed deposits may consider investing in these funds.

3.    Gilt and PSU funds

Gilt funds primarily invest in government securities (G-Secs) issued by the central or state government, while PSU funds invest mainly in debt securities issued by Public Sector Undertakings (PSUs) and government-backed institutions. Gilt funds are generally considered to have lower credit risk because they are linked to the government. However, interest rate movements can still affect returns. PSU funds may offer a balance between stability and return potential within debt mutual funds.

What are the mutual fund categories based on structure?

Mutual funds can also be classified based on their structure. This structure decides how an investor can enter or exit a mutual fund scheme. For instance, some mutual fund schemes allow investors to buy or redeem units at any time, while others permit these transactions only under specified conditions. Understanding the various types of mutual funds in this category is crucial, as they affect liquidity, investment flexibility, lock-in conditions, and withdrawal options.

1.    Open-ended mutual funds

Open-ended mutual funds allow investors to buy or redeem units at any time directly from the fund house at the prevailing NAV. There is no fixed maturity period in these schemes, which makes them relatively flexible and liquid. Most mutual fund schemes available in India fall under this category because investors can start SIPs, withdraw money, or make additional investments whenever required.

2.    Closed-ended mutual funds

Closed-ended mutual funds have a fixed maturity period, and investors can usually invest only during the scheme’s initial launch period. After the subscription window closes, fresh investments may not be allowed directly through the fund house. These mutual fund schemes are often listed on stock exchanges, where investors can buy or sell units before maturity, depending on market availability and demand.

What are mutual funds categorized by investment goals?

Some mutual fund schemes are also categorized based on specific investment goals. These funds are designed to help investors work toward a specific financial objective rather than focusing solely on general returns. This approach is commonly known as goal-based investing, in which investments are planned to meet future needs, such as retirement, children’s education, or wealth creation, over a fixed period.

In goal-based investing, the fund strategy, asset allocation, and investment horizon are usually aligned with the financial objective the scheme is targeting. This helps investors choose mutual fund schemes that better align with their long-term plans and expected time horizons.

1.    Retirement-oriented funds

Retirement-oriented mutual funds are designed for long-term retirement planning. These funds usually invest in a mix of equity and debt instruments to balance growth and stability over time. Many retirement funds also come with a lock-in period to encourage disciplined investing for future financial security. Investors often use these mutual fund schemes to build a retirement corpus gradually through regular investments.

2.    Children’s investment funds

Children’s investment funds are typically designed to help investors create a corpus for their children’s future expenses. For instance, they can use it to save for their child’s wedding or higher education. These mutual fund schemes may invest in equity, debt, or a combination of both, depending on the investment strategy. Some funds also include lock-in periods and other built-in features to support long-term investing and wealth generation.

What are the types of mutual funds in India based on risk levels?

Mutual funds in India are also classified into distinct categories based on their risk levels. Under this classification, there are six subtypes: low, low to moderate, moderate, moderately high, high, and very high. Here, “low” means a mutual fund scheme with very low risk, whereas “very high” means a scheme carrying the highest risk.

Since every investor has a different financial situation and investment objective, risk-based categorization makes fund selection more practical and personalized. Understanding risk-based categorization is also important because investing in the wrong category may lead to unnecessary stress or unsuitable returns.

What are specialized and thematic mutual funds?

Specialized and thematic mutual funds focus on specific sectors, industries, themes, or investment ideas, rather than investing broadly across the market. These mutual fund schemes are designed for investors seeking targeted exposure to specific areas of the economy or market trends. Since the investments are concentrated in selected segments, these funds can be more volatile than diversified mutual funds.

1. Sectoral mutual funds

Sectoral mutual funds invest primarily in companies in a specific sector, such as banking, IT, healthcare, infrastructure, or energy. The performance of these funds depends heavily on how that particular sector performs in the market. While sectoral funds may offer strong returns during favorable market conditions, they can also carry higher risk because of limited diversification.

2. Thematic mutual funds

Thematic mutual funds invest based on a broader investment theme rather than a single sector. For example, a fund may focus on themes such as digital growth, manufacturing, consumption, ESG, or rural development. These funds can invest across multiple sectors connected to the selected theme. The performance depends on how successfully the overall theme grows over time.

Taxation rules for different types of mutual funds in India

When we talk about mutual funds and their types, we must also discuss the tax rules. In mutual funds, profits earned on redemption are known as capital gains. If the investment is held for a shorter duration, the gains may be classified as Short-Term Capital Gains (STCG). If the holding period crosses the specified limit, the gains are classified as Long-Term Capital Gains (LTCG).

Returns from different types of mutual funds in India are taxed differently, depending on the asset class and the investment holding period. The tax rules are designed to distinguish between short-term and long-term investments and to align taxation with the nature of the underlying assets.

1.    Tax on equity funds

If equity mutual funds are held for less than 12 months, the returns are treated as STCG and taxed at a flat 20% rate. However, if these funds are held for 12 months or more, returns are treated as LTCG and taxed at a flat rate of 12.5%, provided the total returns exceed Rs. 1.25 lakh. LTCG up to Rs. 1.25 lakh in a year is tax-free.

2.    Tax on debt funds

In the case of debt mutual funds, all capital gains during a financial year are added to your taxable income and attract tax as per the applicable income tax slab rate. There is no classification for LTCG or STCG. There are no indexation benefits either.

3.    Tax on hybrid and other funds

Hybrid mutual funds are taxed depending on their allocation towards equity and debt instruments. If the equity exposure crosses the prescribed threshold, the fund may be taxed similarly to equity mutual funds. Otherwise, debt-oriented tax rules may apply. Because hybrid funds combine different asset classes, their taxation can vary from one mutual fund scheme to another.

How to choose the right mutual fund type?

Many investors ask, “Which type of mutual fund is the best?” There can be no clear answer to this question. A fund that works well for one investor may not always suit another. Here are a few tips that can help you choose the right mutual fund type:

• Invest according to your financial goal: Be clear about why you are investing. If you are investing for long-term goals, equity mutual funds are a better choice. For short-term goals, debt funds are often a good option.
• Understand your risk appetite: It’s crucial to invest in line with your risk-taking capacity. You should invest in equity funds only if you can tolerate market ups and downs. If you want stable returns, consider debt funds.
• Check your market knowledge: Investing in sectoral or thematic funds requires a fair bit of market knowledge. If you are new to investing, it’s better to start with relatively stable large-cap equity funds.
• Compare returns: Different types of funds deliver varying returns. If you are looking for double-digit returns, you must invest in equity or sectoral funds. If you are looking for stable FD-like returns, consider investing in Gilt and money market debt funds.

What are the key factors to consider before investing in mutual funds?

Different types of mutual funds carry different levels of risk, return potential, liquidity, and costs. Here are a few key factors that every investor should evaluate before investing in a mutual fund scheme:

• Risk: Check whether the mutual fund matches your risk appetite and investment comfort level.
• Investment objective: Understand the purpose of the fund, such as growth, income generation, tax saving, or stability.
• Expected returns: Compare return expectations realistically by analyzing a fund’s past performance.
• Expense ratio & charges: Review management fees, exit loads, and other costs linked to the mutual fund scheme.
• Diversification: Check how diversified the portfolio is across sectors, companies, or asset classes.
• Fund manager & AMC: Experienced fund managers and reliable asset management companies can influence fund performance and consistency.

What are the different ways to invest in mutual funds in India?

Asset Management Companies (AMCs) in India offer investors various ways to invest in mutual funds, based on their financial situation and investment style. Some investors prefer to invest a large amount at once, while others may choose smaller, regular investments over time. These options help make mutual fund investing more flexible and accessible for people with different income levels and financial goals.

Here are the two ways through which you can invest in mutual funds in India:

1.    Lump sum investment

Lump sum investments refer to large, one-time investments into a single mutual fund scheme. Investors who already have surplus funds available for investment prefer to invest via this method. It may allow investors to buy more units during bearish market conditions or invest large amounts in one go. However, the returns can be affected by short-term market fluctuations immediately after investing.

2.    Systematic Investment Plan (SIP)

An SIP allows investors to invest fixed amounts regularly in a mutual fund scheme of their choice. The investment frequency can be monthly, quarterly, or semi-annually. This method helps build investment discipline and reduces the pressure of timing the market perfectly. Salaried individuals and those looking to build a long-term corpus gradually usually prefer to invest in mutual funds via the SIP route.

What is the step-by-step process to start investing in mutual funds?

Investing in mutual funds has become much simpler today. Most AMCs and investment platforms allow you to complete your KYC registration online and start investing on the go. Here’s the complete process you need to follow:

Step 1 – Complete KYC verification

The first step is to complete your KYC verification with the AMC or the investment platform. All you need for this is a PAN card, an Aadhaar card, and a digital signature.

Step 2 – Choose the investment platform

You can invest in mutual funds directly through the AMC’s websites, distributors, or online investment platforms.

Step 3 – Select the mutual fund type and scheme

Now, search for the mutual fund type and/or scheme in which you want to invest. The decision must be based on your financial goals, risk appetite, and investment horizon.

Step 4 – Select the investment method

Determine whether you want to invest a lump sum or start an SIP.

Step 5 – Make the investment

Complete the investment using any of the available online payment methods. You may need to provide a NACH mandate for SIP investing.

Step 6 – Track and review your investments

Once the payment is successful, you will be allotted mutual fund units at the prevailing NAV. Monitor the performance of your mutual fund investments regularly and review whether the scheme still aligns with your financial goals.

What are the top-performing mutual fund categories to explore?

Certain mutual fund categories often attract greater investor interest due to their growth potential, diversification benefits, or suitability for long-term financial goals. However, the performance of mutual fund schemes can change depending on market conditions, interest rates, economic trends, and sector performance. Instead of focusing only on short-term returns, investors should understand the purpose and risk level of each category before investing. Here are the top-performing categories you can explore:

• Large-cap equity funds
• Flexi-cap and multi-cap funds
• Hybrid mutual funds
• ELSS (tax-saving) funds
• Liquid funds
• Sectoral and thematic funds

Key takeaways for mutual fund investors

• Different types of mutual funds are designed for different financial goals and risk levels.
• Equity funds may offer higher growth potential, while debt funds are generally considered relatively stable.
• Hybrid funds invest in a mix of equity and debt instruments to achieve a balance between growth and stability.
• Mutual funds can also be categorized based on structure, investment goals, market capitalization, and risk appetite.
• Lump sums refer to large, one-time investments, while SIPs allow you to make fixed investments at periodic intervals.
• Choosing the right mutual fund scheme depends on your financial goals, risk tolerance, and investment duration.
• Past performance alone should not be the only factor while selecting mutual funds in India.

Conclusion

Mutual funds offer investors many options to suit their financial goals, budgets, and risk tolerance. Some funds focus on long-term growth, while others aim for stability or regular income. That is why understanding the different types of mutual funds is important before investing. A fund that works for one person may not always suit another investor.

Before choosing any mutual fund scheme, it is always better to check your financial goals, investment horizon, and comfort with risk. Investing with proper understanding can help build a better portfolio and achieve greater satisfaction.