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Having to choose a single investment from over 1000 competing mutual funds can lead to confusion in the investor’s mind. To reduce the confusion and help investors easily determine which type of mutual fund best suits their investment need, various types of mutual fund classification have been developed.
Some of the methods by which different types of mutual funds are classified in India include:
There are multiple sub-categories among the above classifications too. In fact, the different types of mutual funds can be further classified based on how they can be redeemed, market cap of fund investments and type of investment and more. At present mutual fund types in India are primarily based on the SEBI classification of mutual funds introduced in 2017.
The Securities Exchange Board of India (SEBI) is responsible for managing and developing the mutual fund industry in India. As part of this ongoing activity, SEBI introduced a circular titled “Categorization and Rationalization of Mutual Fund Schemes”. In this SEBI circular introduced an updated classification of the various types of mutual funds in India across 5 key mutual fund scheme types.
The five broad types of mutual fund schemes and fund categories as per SEBI categorization of mutual funds are as listed below:
Types of Mutual Funds (SEBI Classification) | Key Fund Categories |
Equity Schemes | · ELSS Funds |
Debt Schemes | · Liquid Funds |
Hybrid Schemes | · Balance Hybrid Funds |
Solution Oriented Schemes | · Retirement Fund |
Other Schemes | · Index Funds |
This list above is not exhaustive and for illustrative purposes only. There are currently a total of 36 types of mutual funds across the 5 key scheme categories. Each fund house can operate only 1 fund for each type of mutual fund mentioned in SEBI’s mutual fund classification circular.
Based on its structure, there are 3 key types of mutual funds in India. These are:
1. Open-ended Funds: This is one of the most flexible structures of mutual funds. In this, the investor is allowed to invest as well as withdraw as per their convenience. There is no maturity period for the redemption or withdrawal. Since there is no fixed tenure of the scheme. The only exception is tax-saving ELSS mutual funds. While ELSS investments in open-ended funds can be made at any time, redemption of investment is subject to a 3-year lock-in period.
2. Closed-ended Fund: Contrary to open-ended, close-ended schemes have pre-defined time period allowing entry into and exit from the investment. Apart from these specified intervals, investors are not allowed to invest in or redeem their investments at other times. In case, an investor needs to redeem units of a close-ended scheme before maturity, it can be done through the stock-exchange. As a result, SEBI has mandated that all close-ended mutual funds are mandatorily required to get listed on domestic exchanges.
3. Interval Schemes: These are a type of closed-ended mutual funds with a unique feature. As the name suggests, there are intervals where the investor is allowed to exit from or invest into the scheme. During these periods, that occur at specific intervals of time, the scheme operates similar to open-ended scheme. Interval mutual funds are therefore a more flexible investment option than standard closed-end mutual funds.
As per SEBI, mutual fund schemes are divided based on the type of investments the fund makes. Here are the key types of mutual funds divided based on the asset classes they invest in:
1. Equity Mutual Funds: Equity mutual funds are those types of mutual funds that invest 65% or more of their portfolio in equities or equity-linked securities. This type of mutual fund is considered to be ideal for the purpose of long-term investment. These mutual funds are further divided into multiple sub-categories, including:
a. Large-cap funds: In this category of mutual funds at least 80% of the portfolio is invested in equities or equity-linked instruments of large-cap companies. As per Association of Mutual Funds in India (AMFI), the 1st to 100th largest companies listed on the stock market, are called large-cap companies.
b. Mid-cap funds: These equity funds must invest 65% or more of their portfolio in equities or equity-linked instruments of mid-cap companies. As per AMFI, the 101st to 250th largest stock market listed companies are designated as mid-cap companies.
c. Small-cap funds: In the case of this type of equity scheme, at least 65% of the portfolio is invested in equities and/or equity-linked investments of small-cap companies. The 251st stock market listed company and onwards, depending on the capitalization of the market, are called small-cap companies as per AMFI.
Other types of mutual funds included in the Equity Fund category include:4. Solution-oriented Mutual Funds: These are mutual funds that are designed to generate wealth to fulfill specific long-term goals like retirement or children’s education. Solution-oriented mutual funds in India are currently divided into two categories:
a) Retirement funds
b) Children’s fund
All mutual funds in India are offered as two key variants - growth and dividend. Investors have the invest in either of the two options of mutual fund schemes. The key features of these two types of mutual funds is as follows:
1. Growth Option: In the case of the growth option, profits from earlier investments are re-invested to grow the wealth of the investor. This, in return increases the Net Asset Value of the mutual fund, which grows the size of the investment with time.
2. Dividend Option: As the name suggests, the profit made in the investment is periodically distributed to investors in the form of dividends. Distribution of dividend however leads to a decrease in the NAV of the scheme. Currently dividend option of mutual funds has been renamed as IDCW (Income Distribution cum Capital Withdrawal) option.
Every investment carries a certain risk. It varies from investment to investment. For instance, government bonds carry less risk as compared to small cap stocks. The different levels of risks involved in mutual fund investments are:
a) Aggressive: Potentially high risk and high return investment
b) Moderate: Strikes a balance between risk and potential returns
c) Conservative: Focus on capital protection with limited focus on growth
There are market risks involved in every type of mutual fund investment. Common examples include volatility risk, liquidity risk, credit risk, and concentration risk. No investor can avoid all the risks attached to an investment, but a well-chosen investment can help an investor strike a balance between potential risk and returns.
The categorization was done by SEBI in 2017 to make it easier for investors to compare the funds. There are different types of mutual funds available in the market have helped young individuals meet their goals. An investor now has choices to find a mutual fund as per the amount they want to invest in, period of time and even the risk involved in it.
ARN: Sept22/Bg/23A
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