Mutual funds in India can be categorized into various types depending on their structures, underlying investments, tax treatment, nature of the scheme management and various invest or goals. Based on these parameters there can be two types of mutual funds:-
- Open ended Funds: Open ended funds can be bought or sold at any time after the launch of the new fund offer (NFO). Some open ended funds (e.g. Equity Linked Savings Schemes) have a lock-in period of 3 years, after which units of these funds can be redeemed at any point in time.
- Close ended Fund: Close ended funds can be bought only during the subscription window, i.e. the new fund offer (NFO) Once the subscription window closes, investors cannot invest in the close ended funds. Close ended Funds have fixed investment period or maturity periods during which the investors cannot redeem units. Post maturity the closing unit value is automatically redeemed and transferred to unit holder’s bank account.
However, some close ended funds can become open ended funds after the maturity date or the AMC might give option to roll over the redemption proceeds to some other fund.
Based on the underlying investments in open and closed ended funds, broadly there are 4 different types of mutual funds in India. But before that, let us see what are Mutual Funds in India
- Equity mutual Funds: Equity mutual funds seek to invest their corpus in equity and equity related securities. Equity funds can further be categorized into large cap funds, diversified or multi-cap funds and mid and small cap funds. Large cap funds invest most of the investments in large cap companies, midcap funds invest mostly in shares of small cap and midcap companies, while multi-cap funds (also known as flexi-cap or diversified equity funds) have substantial exposures to both large cap and midcap stocks and also across various sectors of the economy.
The majority of mutual fund schemes (whether large cap, diversified or mid and small cap) invests across many sectors and therefore can be called diversified equity schemes. Some mutual fund schemes, however, may invest in particular sectors (e.g. banking, FMCG, pharma, technology, infrastructure, automobile or entertainment etc.). These funds are called sector funds and therefore, they are not diversified equity funds.
See how the top performing funds performed historically
- Debt Funds: Debt funds seek to invest their corpus in money market and / or debt market securities. Money market securities include commercial papers, certificates of deposits (CDs), treasury bills etc. Debt market securities include government bonds, PSU bonds, non-convertible debentures etc.
Debt funds can be further categorized into sub-categories depending on the basis of the maturities or durations of the underlying securities in the scheme portfolio. Liquid funds invest in money market securities whose residual maturities are usually less than 90 days. Ultra-short term debt funds invest in money market securities whose residual maturities are in the range of 90 days to a year. Short term debt funds invest in debt securities whose maximum duration is 2 – 3 years, while long term debt funds (popularly known as income funds) invest in debt securities with longer durations.
See how the top performing debt funds performed historically
- Hybrid mutual funds: Hybrid funds invest in both equities as well as debt instruments. The percentage allocation to equity and debt depends on the asset allocation mandates of the respective schemes. There are two types of hybrid funds – equity oriented hybrid funds (popularly known as balanced funds) and debt oriented hybrid funds (popularly known as MIPs). Balanced Funds have at least 65% exposure to equities and balance to debt securities whereas debt oriented hybrid funds or MIPs have majority exposure to debt.
See the list of top performing balanced funds from here and top performing hybrid debt funds from here
- Tax Saving mutual funds: Tax Saver Funds are also known as Equity Linked Savings Schemes (ELSS), or tax saver funds or ELSS funds, are a type of equity funds, which enjoy Section 80C tax saving benefit. Investment of uptoRs 1.5 lakhs in ELSS Funds can be deducted from the investor’s taxable income for income tax computation under Section 80C of The Income Tax Act 1961.
Did you know which are the top ELSS Funds
We have seen what are different types of mutual funds in India, however, from a tax perspective there are only two types of mutual funds in India – equity funds and non-equity funds. Equity funds have at least 65% exposure to equity or equity related securities, whereas non-equity funds have less than 65% exposure to equity. Equity funds enjoy equity tax benefits; the tax treatment of non-equity funds is different from equity funds.
Finally there are mutual funds schemes in India which aim to provide solutions to specific investor goals like retirement planning, children’s higher education or marriage, asset allocation, dynamic funds etc. Examples of these types of funds are retirement plans, children plans, asset allocation funds, dynamic funds and life stage funds etc.
Mutual funds provide customized solutions to a variety of investment goals and have many benefits. But did you know all the benefits of investing in mutual funds in India