Types of Mutual Funds in India

Mutual Funds are of many types and if you want to invest then so many options can confuse you. But don’t worry, to invest in Mutual Funds you just need to know about some types, and here you will get information about all these categories. Most mutual funds invest in two broad categories of asset classes - Equity and Debt.

Equity: These Funds directly buy or invest in shares/ stocks of companies.
Debt: These funds giving money to companies as loan and generate returns.

So keeping this in mind, let us take a look at the different types of mutual funds now.

Low Risk Funds:

Yes, there are some mutual funds that are low risk funds. And these funds are falls under debt category. They gives loan only to Top-evaluated companies, that too for a short period. And that’s why the two risks debt funds face "credit risk and interest rate" risks are minimal for them. These assets are perfect in the event that you are hoping to set aside cash for a time of 1 day to 3 years. There are 3 sorts of funds under this class: 
  • Liquid Funds: These funds buy bonds whose maturity is within the next 91 days. 
  • Ultra Short Duration Funds: These funds purchase securities/ bonds that mature in next 3 to 6 months.
  • Low Duration Funds: These funds purchase securities/ bonds that mature in next 6 to 12 months.
In all these cases, the borrower gives the money back at the time of securities/ bond maturity and till that time, gives interest on the money lent to them.

Tax-saving Funds:

These funds are also Known as  ELSS or Equity Linked Savings Scheme mutual funds,Tax Saving Mutual Funds let you save tax while giving you a chance to grow your money. By investing in these funds you can every year save tax under Section 80C. ELSS fund’s has 3-year lock-in period is the shortest among all tax-saving options. And returns of these funds are also tax-efficient. These funds are typically multi-cap diversified mutual funds that invest money in all sizes/ sectors of companies, giving growth potential to your money while you save tax. Check best tax saving funds.

Types of Mutual Funds

Moderate Risk Funds :

Some debt funds fall into this category, but if you are willing to take moderate risks, Hybrid funds may be a better category to look at. Hybrid funds are invest in both equity and debt and falls under Hybrid category of funds. Here are some categories you can consider:
  • Aggressive Hybrid Funds: These funds allocate more in equity and try to grow their money, and put a little money in debt to provide stability.If you want downside protection along with growth, then these funds are ideal for you.
  • Dynamic Asset Allocation Funds: Dynamic Asset Allocation Funds  are different from other Hybrid Funds because they don’t have a limit on equity and debt portions These funds use financial models to decide which equity-debt combinations will give optimal returns in the current market conditions, and then allocate money according to it. Dynamic funds are great if you want to put your investments on auto-pilot and take unbiased asset allocation decisions. Hybrid mutual funds are perfect for goals which are 3 to 5 years away. 

High risk Funds:

From debt funds to hybrid funds and now lastly to unmixed equity funds. While we are giving them a high risk classification, don’t get scared of them, this just means that you need to invest for at least 5 years in them With this minimum tenure, you are giving your investments enough time to ride through the ups and downs and show real growth potential. If you want to invest in true equity funds then you can also evaluate below categories:
  • Multi cap Funds: These funds invest in all sizes and sectors of companies and on that account having a diversified portfolio. They are  flexile enough to change the portfolio structure as per the market situations and therefore they are better equipped to take advantage of emerging option. If you want to have only one true equity mutual fund in your account, then pick a fund from multi cap category.
  • Large cap Funds: These mutual funds invest the major part of their cash in large cap companies of India. These are Top 100 organizations in the India. These are biggest brands in our country and are typically market leaders. In this category you can get kind of non-volatile returns. Check out best large cap funds.
  • Large and Mid Cap Funds: This mutual fund category invests their money in a mixture of large and mid sized companies of India. So what you get is a portfolio of leaders of today and the potential leaders of tomorrow. 

Very High Risk Funds:

These mutual funds, due to their investment style, or where they invest, lean to have very high risk. If you are a fresher these mutual funds may not be for you, and even if you are an experienced investor, you should only have a little portion of your portfolio invested in them.
  • Mid Cap Funds: These mutual funds invest the major part of their cash in mid-size companies of India. These companies are some of the rapid growing companies. So these mutual funds lean to out perform other categories over the long term, but because of their mid-size, they tend to get affected more by bad  market conditions and so the returns of these mutual funds can be volatile.Check out best mid cap funds.
  • Small Cap Funds: These mutual funds invest the major part of their cash in the small-sized companies of India. These companies are beyond the Top 250 companies by market capitalization but can grow to even become mid caps and large caps in the future. Therefore, these funds give you the chance to invest in the potential future stars of India early and benefit from their growth. However, not every company succeeds, and for this reason, the risk and volatility is high in this category.
  • Sectoral Funds: This category of funds invest their money in one specific sector like IT, Pharma, Banking and so on. These funds are aimed to give you a chance to benefit from the growth of a specific sector. As these funds are not diversified, any down turn in the sector they invest in can lead to massive losses, so weigh your options well before investing in these funds.

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