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Understanding Mutual Funds: A Comprehensive Guide to Different Types

At this point, we know (we think) we’ve already convinced you to start investing in mutual funds in India.

So, we won’t tell you this again today.

(But please look into mutual fund investing, especially if you’re a young investor!)

Okay. Now, we won’t tell you this again.

But, what we want to talk about today, is some of the different types of mutual funds in India that you can opt to invest in. Please keep in mind that this is a baseline-level list – and if you really get into it and decide to look it up, you will find that there are a lot of different types of mutual funds to invest in.

Let’s not dilly-dally, folks! Straight to it!

Types of Mutual Funds – Based on Market Capitalization

(How big is the fund you are investing in?)

The market capitalization of a company represents its worth in the market. There are three categorizations of mutual funds based on their market capitalization –

  1. Small-Cap Mutual Funds: Small-cap funds will primarily invest your money in stocks of small-cap companies, i.e., companies with a market capitalization of less than a billion dollars. Small-cap funds are usually known for their high growth potential but come with higher risk.

  2. Mid-Cap Mutual Funds: Mid-cap mutual funds can be used to invest in stocks of mid-sized companies, i.e., companies with a market capitalization ranging from a few hundred million to a few billion dollars. Mid-cap funds are perceived as having moderate growth potential and moderate risk.

  3. Large-Cap Mutual Funds: These funds invest primarily in stocks of large-cap companies, i.e., companies with a market capitalization of several billion dollars. They are known for their stability and relatively lower growth potential. These funds are considered less risky and are often the primary recommendation for newbie investors!

Types of Mutual Funds – Based on Investment Objectives

(Why are you investing to begin with?)

It is important that your mutual fund investments align with your financial and personal goals. No two investors will have the same investment goals – so, remember that you have to pinpoint the right investment for yourself, rather than following the herd!

  1. Growth Funds: These are a type of mutual fund that invest in high-performing stocks, and are aimed at capital appreciation over time. (Time is the operative word here!) Growth funds are perfect for you, if you are seeking to create wealth over a long period of time. (So, stay invested!)

  2. Tax-Saving Funds: There are certain types of mutual funds that offer tax-saving benefits. These are classified as Equity Linked Saving Scheme (ELSS) funds, and you can avail up to ₹1.5 lakhs of tax deductions under Section 80C of the Income Tax Act of India, when you opt for these funds.

  3. Liquidity-Based Funds: Some funds are classified based on how liquid they are. These can also be classified as having ultra-short terms. These are a good option to explore for a quick turnaround on capital appreciation – allowing you to meet short-term goals. But, you have to practice caution when anything promises quick returns!

  4. Income Funds: There are some types of mutual funds that will allow you to set up regular streams of income from them, by opting for periodic dividends. This could be a good way to set up subsidiary incomes that can support the financial growth of a young investor like yourself!

Types of Mutual Funds – Based on Asset Classes

(Where is your money getting invested?)

There are two main types of mutual funds that are categorized based on what kind of assets your money is getting invested in.

  1. Equity Funds: This type of mutual fund invests your money in shares, securities, and bonds. Equity funds are an incredibly popular choice for long-term wealth creation.

  2. Debt Funds: This type of mutual fund invests your money in debt securities like corporate and government debt, or treasury bills. Debt funds are usually looked at for capital preservation, and investors are hoping for a shorter investment period when they invest in this particular asset class.

Bonus – Hybrid Funds – These types of mutual funds are a combination of equity and debt funds. These types of mutual funds leverage the power of diversification, by investing your money in both kinds of asset classes.

Types of Mutual Funds – Based on the Risk Profile

(How risky are these investments?)

Risk is probably the most important thing associated with investing. And no, there is no such thing as risk-free investing! It is important to understand this classification of mutual funds and find the right investment choice for yourself, based on your risk capacity. We’ll keep this simple!

  1. High-Risk Funds: This type of mutual fund is highly volatile, and poses a high risk. Small-cap funds, and even some sector-specific funds are typically classified as high-risk.

  2. Medium-Risk Funds: These funds are aiming for a balance between growth potential and risk exposure. So mid-cap funds and some diversified equity funds, for instance, can offer you gains while also capitalizing on some funds that offer high-risk-high-reward benefits.
  3. Low-Risk Funds: Debt funds, liquid funds, and large-cap funds – these types of mutual funds are usually classified as low-risk, and they prioritize stability (and big gains!) over a longer period of time, making them suitable for wealth creation.

And with that, this comprehensive guide for different types of mutual funds in India comes to a close.

So, now you definitely know you have to invest in mutual funds (we established this straight off the bat!), and you have some insight into what options are out there. Now, it’s time to start doing your own due diligence and finding the best investment option to create a financial plan that can help you achieve your goals.

Get cracking!

FAQs

  1. How many types of mutual funds are there in India?
    There is no fixed number. But, you will find several types of mutual funds in India, classified based on market capitalization, investment goal, risk, and asset classes.

  2. What are the popular types of mutual fund schemes?
    Equity mutual funds, low-risk funds, small and mid-cap funds, and growth funds are some of the popular types of mutual fund schemes in India.

  3. What are hybrid mutual funds?
    Hybrid mutual funds, also known as balanced funds are funds that have a two-pronged focus – on growth, as well as income generation.

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