Home > Topics > Mutual Funds & SIPs > Types of Mutual Funds

Types of Mutual Funds

Mutual funds are like ice cream flavors. There's something for everyone, but you need to know what you're ordering. Let's decode the menu.

Broad Categories

  1. Equity Funds: Invest in Stocks (High Risk, High Return).
  2. Debt Funds: Invest in Bonds/Loans (Low Risk, Low Return).
  3. Hybrid Funds: Mix of both (Medium Risk, Medium Return).

1. Equity Mutual Funds (The Wealth Builders)

Best for: Long-term goals (>5 years).

A. Based on Market Cap (Size of Company)

  • Large Cap Funds: Invest in Top 100 companies (Reliance, TCS, HDFC).

    • Risk: Low (within equity).
    • Return: Stable (10-12%).

  • Mid Cap Funds: Invest in 101st to 250th companies.

    • Risk: High.
    • Return: High potential (12-15%).

  • Small Cap Funds: Invest in companies beyond 250th rank.

    • Risk: Very High (Volatile).
    • Return: Very High potential (15-20%+).

B. Based on Strategy

  • Flexi Cap / Multi Cap: Fund manager can invest in ANY size company.

    • Verdict: Best for most investors. Let the manager decide.

  • ELSS (Equity Linked Savings Scheme): Tax-saving funds.

    • Lock-in: 3 years.
    • Benefit: Saves tax under Section 80C.

  • Sector Funds: Invest in one sector (e.g., Pharma Fund, Tech Fund).

    • Verdict: Avoid. Too risky for beginners.

2. Debt Mutual Funds (The Safe Harbors)

Best for: Short-term goals (Less than 3 years) or Emergency Fund.

  • Liquid Funds: Invest in 91-day bonds.

    • Safety: Highest.
    • Return: 5-6%.
    • Use: Alternative to Savings Account.

  • Overnight Funds: Invest for 1 day.

    • Safety: Safest mutual fund type.
    • Return: 4-5%.

  • Corporate Bond Funds: Lend to companies.

    • Risk: Moderate (Credit risk).
    • Return: 7-8%.

3. Hybrid Mutual Funds (The All-Rounders)

Best for: Medium-term goals (3-5 years) or Conservative investors.

  • Aggressive Hybrid: 65-80% Equity, rest Debt.

    • Taxation: Like Equity funds (Better).

  • Conservative Hybrid: 10-25% Equity, rest Debt.

    • Safety: Higher.

  • Balanced Advantage Funds (BAF): Dynamically changes equity % based on market.

    • Verdict: Great for retirees or low-risk investors.

4. Index Funds (The Passive Kings)

These don't try to beat the market; they are the market.

  • Nifty 50 Index Fund: Buys the 50 stocks of Nifty in same weightage.
  • Sensex Index Fund: Buys 30 stocks of Sensex.

Why Index Funds?

  1. Low Cost: Expense ratio is tiny (0.1% vs 2% for active funds).
  2. No Human Bias: Fund manager can't make mistakes.
  3. Performance: Beats 80% of active funds over long term.

Recommendation: For beginners, Nifty 50 Index Fund is the best starting point.

How to Choose? (The Cheat Sheet)

Goal DurationRecommended Fund Type
1 day - 6 monthsLiquid Fund
6 months - 1 yearUltra Short Duration Fund
1 year - 3 yearsShort Duration Fund / Arbitrage Fund
3 years - 5 yearsHybrid Fund (Balanced Advantage)
5 years - 7 yearsLarge Cap / Flexi Cap Fund
7 years +Flexi Cap / Index Fund / Mid Cap

Direct vs Regular Plans

Every mutual fund has two versions:

  1. Regular Plan: Sold by agents/distributors.

    • Cost: Higher (Commission included).
    • NAV: Lower.

  2. Direct Plan: Sold directly by AMC or platforms like Zerodha/Groww.

    • Cost: Lower (No commission).
    • NAV: Higher.
    • Returns: ~1% EXTRA every year.

Golden Rule: ALWAYS buy Direct Plans. Look for "Direct" in the fund name.

Growth vs Dividend (IDCW)

  1. Growth Option: Profits are reinvested. NAV goes up.

    • Tax: Only when you sell.
    • Best For: Wealth creation.

  2. Dividend (IDCW) Option: Profits paid out to you.

    • Tax: Taxed immediately as per slab.
    • Best For: Regular income (Inefficient).

Golden Rule: ALWAYS choose Growth Option.

7-Day Action Plan

Day 1: Check your existing funds. Are they "Regular" or "Direct"?
Day 2: If Regular, plan to switch to Direct (watch out for taxes/exit load).
Day 3: Check if you have "Dividend" option funds. Switch to "Growth".
Day 4: Analyze your portfolio. Do you have too many funds? (Over-diversification).
Day 5: Identify a Liquid Fund for your Emergency Fund.
Day 6: Research one Nifty 50 Index Fund (compare expense ratios).
Day 7: Create a "Core & Satellite" portfolio strategy (Core = Index/Flexi Cap, Satellite = Mid/Small Cap).

Quiz

Test Your Knowledge

Question 1 of 5

1. Which fund is best for a goal 10 years away?

Liquid Fund
Equity Fund (Mid/Small Cap)
Overnight Fund
Corporate Bond Fund

💡 Final Wisdom: Complexity kills returns. A simple portfolio of 1 Index Fund + 1 Flexi Cap Fund beats a cluttered portfolio of 20 funds. Keep it simple, keep it Direct.

← PreviousNext →