Types of Mutual Funds: Categories, Sub-Categories, Taxation, & Who to Invest?
Mutual funds offer a way to grow your money by investing in a professionally managed and diversified portfolio. With options across equity, debt, and hybrid funds, you can choose investments that match your goals, risk appetite, and investment timeline. Here we will understand in detail ways, types, categories and taxation of mutual fund.
Key Takeaways:
- SEBI classifies mutual funds into five broad categories based on their investment objectives and asset allocation.
- SEBI has defined 36 official mutual fund sub-categories to standardise schemes across AMC's.
- Equity funds primarily invest in stocks and are suitable for long-term wealth creation.
- Debt funds invest in fixed-income securities to provide relatively stable returns with lower risk.
- Hybrid funds invest in both equity and debt instruments to balance growth and stability.
What are Mutual Funds?
A mutual fund is an investment vehicle that an asset management company (AMC) uses to pool money from investors and buy stocks, bonds, and other securities. Professional fund managers manage investments, and investors receive units in proportion to their contributions. These units can be bought or sold at the current net asset value (NAV).
Types of Mutual Funds
Before you choose a mutual fund, it is important to know that every mutual fund, be it equity, debt, or hybrid, is available in two investment options: Direct Plans and Regular Plans.
A direct plan involves investing directly with the fund house, so you get lower costs whereas a regular plan is when you have a distributor or an advisor who guides you and supports you with your portfolio for a fee.
There are different types of Mutual fund based on asset class equity, debt, and hybrid each suited to different risk levels and financial goals. Let's see each in detail who should invest and what are its considerations and categories of different funds.
Categories and Sub-Categories of Mutual Funds
Beyond the broad categories of equity, debt, and hybrid funds, mutual funds are further divided into several sub-categories, each designed to meet specific investment goals, risk levels, and time horizons.
Fund Type | Investment Focus | Key Features |
| Equity Mutual Funds | Invest primarily in equity and equity-related securities | Suitable for long-term wealth creation with relatively higher risk and return potential. |
| Large-Cap Funds | Large-cap companies | Invest at least 80% in large-cap stocks, offering relatively stable returns with lower volatility. |
| Mid-Cap Funds | Mid-cap companies | Invest at least 65% in mid-cap stocks, providing higher growth potential with higher risk. |
| Small-Cap Funds | Small-cap companies | Invest at least 65% in small-cap stocks and can generate high long-term returns with significant volatility. |
| Multi-Cap Funds | Large-, mid-, and small-cap stocks | Invest at least 25% each in large-, mid-, and small-cap stocks, ensuring diversified equity exposure. |
| Flexi-Cap Funds | Companies across all market capitalisations | Invest at least 65% in equities with the flexibility to allocate across market caps. |
| Focused Funds | Concentrated equity portfolio | Invest in a maximum of 30 stocks with at least 65% in equities. |
| Value Funds | Undervalued companies | Invest at least 65% in equities, focusing on fundamentally strong stocks trading below their intrinsic value. |
| Contra Funds | Contrarian investment opportunities | Invest at least 65% in equities by taking positions opposite prevailing market trends. |
| Dividend Yield Funds | Dividend-paying companies | Invest at least 65% in stocks with relatively high dividend yields, aiming for income and capital appreciation. |
| Sectoral/Thematic Funds | Specific sectors or investment themes | Invest at least 80% in a particular sector or theme, offering higher return potential with higher concentration risk. |
| ELSS (Equity Linked Savings Scheme) | Equity investments | Invest at least 80% in equities and provide tax benefits under Section 80C, subject to a 3-year lock-in period. |
Debt Mutual Funds
Fund Type | Investment Focus | Key Features |
| Debt Mutual Funds | Bonds and fixed-income securities | Aim to provide relatively stable returns with lower volatility than equity funds. |
| Overnight Funds | Overnight securities | Invest in securities with a maturity of one day, offering very low interest-rate and credit risk. |
| Liquid Funds | Money market instruments | Invest in securities with maturity of up to 91 days, providing high liquidity for short-term investments. |
| Ultra-Short Duration Funds | Very short-term debt | Maintain a Macaulay duration of 3–6 months, balancing liquidity with slightly higher return potential. |
| Low Duration Funds | Short-term debt | Maintain a Macaulay duration of 6–12 months. |
| Money Market Funds | Money market instruments | Invest in money market securities with maturities up to one year. |
| Short Duration Funds | Short-term debt | Maintain a Macaulay duration of 1–3 years. |
| Medium Duration Funds | Medium-term debt | Maintain a Macaulay duration of 3–4 years. |
| Medium to Long Duration Funds | Medium- to long-term debt | Maintain a Macaulay duration of 4–7 years. |
| Long Duration Funds | Long-term debt securities | Maintain a Macaulay duration of more than 7 years, suitable for long-term investors. |
| Dynamic Bond Funds | Debt securities across maturities | Actively change portfolio duration based on interest-rate expectations. |
| Corporate Bond Funds | High-rated corporate bonds | Invest at least 80% in highest-rated corporate bonds. |
| Credit Risk Funds | Lower-rated corporate bonds | Invest at least 65% in corporate bonds rated AA and below, aiming for higher yields. |
| Banking & PSU Funds | Bank and PSU debt securities | Invest at least 80% in debt issued by banks, PSUs, and public financial institutions. |
| Gilt Funds | Government securities | Invest at least 80% in government securities, offering negligible credit risk. |
| Gilt Funds with 10-Year Constant Duration | Government securities | Maintain a constant duration of around 10 years, making them sensitive to interest-rate changes. |
| Floater Funds | Floating-rate debt instruments | Invest at least 65% in floating-rate instruments to reduce interest-rate risk. |
Hybrid Mutual Funds
Fund Type | Investment Focus | Key Features |
| Hybrid Mutual Funds | Combination of equity and debt | Seek a balance between capital appreciation and income generation. |
| Conservative Hybrid Funds | Predominantly debt with some equity | Invest 75–90% in debt and 10–25% in equities to provide relatively stable returns. |
| Balanced Hybrid Funds | Balanced equity and debt allocation | Invest 40–60% each in equity and debt to balance growth and stability. |
| Aggressive Hybrid Funds | Predominantly equity with some debt | Invest 65–80% in equities and 20–35% in debt for long-term growth. |
| Dynamic Asset Allocation/Balanced Advantage Funds | Flexible asset allocation | Dynamically shift between equity and debt based on market conditions. |
| Multi-Asset Allocation Funds | Equity, debt, gold and other asset classes | Invest in at least three asset classes, with a minimum 10% allocation to each. |
| Arbitrage Funds | Cash and derivatives | Generate relatively low-risk returns by exploiting price differences across markets. |
| Equity Savings Funds | Equity, arbitrage and debt | Combine equity, arbitrage opportunities, and debt to provide relatively stable returns with equity taxation. |
Solution-Oriented Mutual Funds
Fund Type | Investment Focus | Key Features |
| Solution-Oriented Funds | Goal-based investing | Designed to help investors achieve long-term financial goals. |
| Retirement Funds | Retirement corpus | Help investors accumulate wealth for retirement and generally have a lock-in period of 5 years or until retirement age, whichever is earlier. |
| Children's Funds | Child's future goals | Help build a corpus for a child's education or other long-term needs and generally have a lock-in period of 5 years or until the child reaches adulthood, whichever is earlier. |
Other Mutual Funds
Fund Type | Investment Focus | Key Features |
| Index Funds | Stocks forming a benchmark index such as Nifty 50 or Sensex | Passively track an index, offering low-cost investing with returns that closely match the benchmark. |
| Fund of Funds (FoF) | Portfolio of mutual fund schemes | Invest in other mutual funds instead of directly investing in stocks or bonds, providing broader diversification. |
| International Funds | Overseas equities and global markets | Invest in foreign markets to provide geographical diversification and exposure to global companies. |
Who Should Invest in Which Mutual Fund?
Your financial goals, your comfort with risk, and how long you plan to invest all play a role in choosing the right mutual fund. This is a full guide to help you make the right choice:
Who Should Invest in Equity Mutual Funds?
Equity mutual funds are for investors willing to take higher risks for long-term capital growth. These funds primarily invest in stocks and are ideal for investors with a time horizon of 5 to 7 years or more.
Key Considerations:
- Risk Consideration: The stock market's ups and downs affect equity funds. Investors should be prepared for their portfolio values to fluctuate in the short term.
- Investment Timeline: A longer horizon (5 years or more) helps keep the market stable and provides more room to grow.
- Financial Goals: Great for long-term goals like saving for retirement, buying a house, or paying for your kids' college education, where you want to build up a lot of wealth.
In the past, equity mutual funds have delivered higher long-term returns than other investments, which is why they are a popular choice for building wealth.
Who Should Invest in Debt Mutual Funds?
Debt mutual funds are for cautious investors with a relatively safe investment horizon in the short- to medium-term, who wish to protect their capital and seek relatively predictable returns.
Considerations:
- Risk Tolerance: These funds are a good choice for investors who don't want to deal with the stock market's ups and downs. But they do come with some risks, like changes in inflation, credit, and interest rates.
- Investment Horizon: Short-term goals, such as saving money for emergencies or buying a car, are better suited.
- Liquidity Needs: Debt funds are more liquid than fixed deposits, which makes it easier to make regular withdrawals.
Debt mutual funds can deliver better returns than traditional fixed-income options, such as fixed deposits, especially for investors in higher tax brackets.
Who Should Invest in Hybrid Mutual Funds?
For investors seeking a well-balanced combination of income and growth, hybrid mutual funds are considered the best. To balance stability and potential profits, they invest in both debt and equity.
Considerations:
- Risk Acceptance Level: This is a good choice for investors who are okay with some risk. Debt gives you stability, while equity gives you growth.
- Investment Timeframe: Good for goals that will take three to five years to reach.
- Diversification: By distributing assets across several asset classes, one can reduce total risk.
Hybrid funds offer the best of both worlds, the benefits of both equity and debt. They aim for capital growth while maintaining some stability.
Best Mutual Funds Based on Your Age and Financial Goals
Choosing a mutual fund based on your life stage can help you achieve your financial goals more effectively, here we will see in detail which fund to choose and why:
| Investor Age | Recommended Mutual Funds | Why It Works? |
| 18–30 Years | Equity Funds, Small-Cap Funds | Higher growth potential for long-term wealth creation |
| 30–50 Years | Multi-Cap Funds, Hybrid Funds | Balance of growth and stability |
| 50–60 Years | Debt Funds, Conservative Hybrid Funds | Focus on preserving wealth with moderate returns |
| 60+ Years | Liquid Funds, Gilt Funds | Prioritizes liquidity and lower risk |
Young Investors (18-30):
- Risk Appetite: High.
- Best Funds: Large-cap, mid-cap, small-cap, multi-cap, and aggressive hybrid funds.
- Why: With a long investment horizon, young investors can handle market ups and downs and benefit from compounding. ELSS also provides tax benefits.
Middle-Aged Investors (30-50):
- Risk Appetite: Moderate to high.
- Best Funds: Multi-cap, balanced hybrid, dynamic asset allocation funds.
- Why: At this stage, balancing growth and stability is important, especially with responsibilities like mortgages or children’s education.
Pre-Retirees (50-60):
- Risk Appetite: Moderate to low.
- Best Funds: Debt funds (short duration, corporate bond), conservative hybrid funds, retirement-focused funds.
- Why: The focus is on protecting your money while making a little steady profit.
Retirees (60 and above):
- Risk Appetite: Low.
- Best Funds: Liquid funds, gilt funds, conservative hybrid funds.
- Why: Easy access to money and small, steady earnings matter more than big growth.
Goal-Based Investors:
- Short-Term (1–3 Years): Liquid, very short-term funds that are low-risk and easy to get to.
- Medium-Term (3–5 Years): Short-term debt funds and balanced hybrid funds that offer moderate growth and safety.
- Long-Term (5+ Years): Equity funds, ELSS, and retirement funds that help you grow the most.
Tax-Saving Investors:
- Best Funds: ELSS.
- Why: Offers tax deductions up to ₹1,50,000 under Section 80C with 80% equity exposure.
- Risk-Averse Investors
- Low-Risk Funds: Liquid funds, gilt funds, arbitrage funds.
- Why: Safety and predictable returns outweigh the need for high growth.
Taxation of Mutual Funds
Taxation in mutual funds is the same across all slabs but differs based on holding periods.
| Category | STCG (Short-Term) | LTCG (Long-Term) |
| Equity Funds (≥65% equity) | 20% (flat) | 12.5% on gains above ₹1.25 lakh (no indexation) |
| Hybrid Funds (Equity-oriented, ≥65% equity) | 20% (flat) | 12.5% on gains above ₹1.25 lakh (no indexation) |
| Debt / Specified Funds (Post 1 Apr 2023) | Taxed at slab rates (any period) | No LTCG benefit – taxed at slab rates |
| Debt Funds (Pre-1 Apr 2023) | ≤ 24 months: Taxed at slab rates | > 24 months: 12.5% (no indexation) |
| ELSS Funds | Not applicable (3-year lock-in) | > 36 months: 12.5% on gains above ₹1.25 lakh (no indexation) |
| Gold ETFs / Silver ETFs (Listed) | ≤ 12 months: Taxed at slab rates | > 12 months: 12.5% (no indexation) |
| Gold Mutual Funds / Gold FoFs | ≤ 24 months: Taxed at slab rates | > 24 months: 12.5% (no indexation) |
| International Funds / FoFs | ≤ 24 months: Taxed at slab rates | > 24 months: 12.5% (no indexation) |
Conclusion
Mutual funds make it easy to grow your money by investing in three broad categories: equity funds for growth, debt funds for stability, and hybrid funds for a balanced approach. By choosing the right fund based on your goals, risk comfort, and investment timeline, and staying invested consistently, you can build wealth and achieve your financial goals over time.
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