Types of Mutual Funds

Mutual Funds are undoubtedly the simplest of the products when it comes to investing in financial products. Also true is the fact that the majority of the people have little knowledge about the characteristics of mutual funds. The onus of this error lies not on the investors but the advisors. Advisors are more focused on the closure of the sale, missing the point that the sale isn't closed just by picking the cheque but also by explaining the client of the characteristics of the fund and telling the client as to how does the fund mingle with the investor's risk-return profile.

In this post, we shall talk about the types of mutual funds:

Equity Funds

Equity or stocks or shares represent ownership in a company. In an equity fund, the money is invested in shares of different companies and the fund manager buys and sells shares regularly to generate a return. Equity funds are of different types, based on the kind of shares a particular fund buys (large-cap, mid-cap, etc.) regarding which we will talk about in a separate post.

Equity funds are high-risk investments with no surety of return whatsoever. The returns of an equity fund can be positive by 50% in one year and negative by 50% in the next year. However, the mantra for returns in equity funds is a long term view, patience and periodic review to book profits and cover losses by switching funds.

Debt Funds

Debt Funds aim to provide a range-bound return to the investor. A debt fund typically provides a return that is almost equal to or slightly more than the returns offered by bank FDs. These funds invest in corporate bonds, government securities and other instruments offering fixed return. However, debt funds are not entirely risk-free and are subject to credit risk and fluctuations in return with changes in interest rates. Debt funds are suited for conservative investors who want a tax-efficient return which  beats the FD rate of return.

Hybrid Funds

In a hybrid fund, the fund manager allocates money to equity as well as debt instruments. Its risk category lies between equity funds and debt funds. Different hybrid funds have different levels of exposure to equity and debt. As normal practice funds maintain at least 65% exposure in equity and related products for the fund to qualify as equity fund and pass on the advantage of the lower tax on equity fund profits.

Liquid Funds

These funds invest money in short term and secure instruments like T bills, Commercial papers, etc. These are meant for investors who want to park their money for shorter durations (1 day to 1 year) and would want to earn a rate of interest which is near to the bank FD rate. These funds have the least risk when it comes to investing in mutual funds.

Thematic Funds

Thematic funds choose a theme and then invest money in stocks related to the theme. A banking and financial services fund will put money in banking and NBFC stocks. Similarly, a pharma fund will invest in pharmaceutical and healthcare stocks. Thematic funds are highly risky as their performance depends on the performance of a sector.


The above mentioned are the basic types of mutual funds that are available. There are several sub-classifications under each category which are based on the risk-return profile of the client. Also, different types have different tax treatments about which we will talk about in a separate post. There are specific funds the aim of which is to provide deduction to the investor U/S 80C. We will discuss all this in our future posts. Till then happy reading!

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