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Types of Mutual Funds in India

 Deepak Singh  12-11-2017   02-12-2017

 Here, we bring you a brief introduction to a variety of mutual funds and how they are used. 

Mutual fund, one of the most popular investment vehicles, is being used by a large number of investors in India. It is especially easy and convenient to use for investors who have lesser knowledge about investment. The benefits of this medium are immense, and its features make it safe and simple to use. When looking for making an investment in mutual funds for the very first time, it is recommended to seek help from experts in the field.

Here, we bring you a brief introduction to a variety of mutual funds and how they are used.

Liquid Funds

As per financial wizards, instead of parking your hard-earned money in savings, it is better to invest somewhere where it can fetch higher returns. Liquid Funds are a debt mutual fund scheme which is used especially when you have excess cash, and you will need it only in a few weeks or months. If you are planning to vouch for a huge sum for investment but stagger it over a period, it is better to invest the money in the liquid fund. As the name suggests they are highly liquid in nature. If one is looking to invest a huge amount at a single time for short term or ultra short term can invest into Liquid schemes. Expense ratio plays an important role in liquid funds. As we know expense ratio have their effects on returns so we should give a special attention at the time of choosing liquid fund. Liquid fund mainly invests in T-Bills, Commercial papers, certificate of deposits & Money market instruments.

Short-Term Bond funds

If you want to invest your hard-earned money only for short-term, short-term bond funds are the best option for you. In this mutual fund scheme, income is generated by investing in instruments that are of short-term. Usually, such investments are made in commercial paper and bonds, certificate of deposits and more with less than a year to maturity. High credit rating securities are chosen by the fund managers to ensure safety to investor’s capital assets, the possibility of default by issuers is minimum in this case.

Income Fund

Another type of mutual fund, income fund focuses on current income instead of capital appreciation. Such funds hold different kinds of municipal, corporate and government debt obligations, money market instruments, preferred stock and dividend-paying stocks. Preservation of capital in these funds is assured by investing in investment-grade securities or others with sufficient credit quality. There are high-risk funds as well in this category. These are bank loan funds and high-yield bond funds wherein investment is made in floating-rate loans that are issued by financial institutions besides banks.


Monthly Income Plan or MIP is a non-risky and a kind of assured product that delivers monthly income to the investors without interruption. If an investor has cash which he wishes to park somewhere expecting better returns than FD or fixed deposit, MIP or Monthly Income Plan is a perfect option for him. It is of low risk and offers decent returns. This is a debt-oriented MF that gives income in the form of dividends. In this case, investment is made in corporate bonds, debentures, government securities and more. 80 percent of the money is invested in debt and rest in cash and equity. The income from this Mutual Fund can also be availed monthly, annually or semi-annually.

Large Cap Equity fund

Large Cap Equity funds are those funds which invest in Large Market Capitalization Companies. These companies are well-established, reliable & have a good track record. Investment into these companies is safe & gives stable returns. Companies like TCS, ONGC & Reliance are some examples of Large Cap companies.

Mid Cap Equity fund

Mid Cap Equity funds exist in between Large Cap & Small Cap Equity fund. These funds invest into Mid Cap companies & have slightly higher risk & higher returns than Large Cap equity funds.  Bajaj Finserv, Apollo Hospital & HPCL are some examples of Mid Cap equity funds.

Small Cap Equity fund

The term small cap is used to denote companies that enjoy market capitalization that is relatively smaller than other companies. The market capitalization of a company refers to the market value of its shares.. Investing in small-cap equity allow more room for growth but at the same time has higher risk and greater volatility. If the performance of small cap stocks is to be considered it would be found that it has been successful in outperforming larger cap stocks most of the times. Alembic Ltd., Apollo tyres & Bajaj electricals Ltd. Are some examples of Small Cap Equity funds.

Arbitrage fund

In arbitrage, buying and selling of an asset to profit from a price differential occur simultaneously. In this trade, the advantage of the price differential is taken wherein the price is exploited as per differences of similar or identical financial instruments on different markets and forms. Market inefficiencies give rise to arbitrage. There is a mechanism where the substantial deviation in prices from fair value for longer time periods is ensured. With technology advancing at a consistent pace, it is becoming difficult to make a profit due to pricing errors in the market. Computerized trading systems set up by the traders monitor any fluctuations occurring in similar financial instruments.

Balanced Mutual Funds

Investors who are looking for an eclectic blend of decent income, the safety of their investment and modest capital appreciation can go for balanced mutual funds. This fund portfolio comprises of a mix of a bond, stock and sometimes a money market element. These funds are availed by investors who have dual investment objectives. The first objective fulfilled by the fund is low risk and the second objective is decent returns on the investment. This fund has a bond component that results in the creation of an income stream while at the same time tempering portfolio volatility.

Index fund

Index funds are considered a perfect for those who neither have knowledge nor time for investing. Conversely, funds that are actively managed may not be suitable for them if they do not have the necessary information about investing in stocks and time to understand the same. In these funds, there is no need to have a lot of cash on hand as it works with low operating expenses. It is known to provide a broader market exposure and a low portfolio turnover. It can also be referred to as passive investing. This investment type allows even non-investor become an investor in just a matter of a couple of days.

Sector fund

Sector funds are funds that allow investment in a specific economic sector. For example, it can be Technology, Banking, Pharmaceutical etc. Available in many types, these funds vary regarding investment objective, securities class within a portfolio and market capitalization. There are IT funds wherein investment can be made in information technology companies. Usually, long-term growth investors find it suitable for investment purpose. Sector funds have high risk as well as high return.  

Thematic fund

Thematic funds are considered as an extension of sector funds wherein a particular theme makes stock investment. The objective of these funds is to ensure delivery of optimal returns by making investments in stocks that are qualified to be a part of a specific theme. These funds differ from sector funds with the former having lesser bandwidth and spectrum to operate. These funds are less prone to volatility and risk as compare to sector funds.. The fund performance is greatly dependent on the performance of the theme or the sector which makes it different from a diversified fund that moves in tandem with broader markets.

Gold Fund

As the name suggests, the gold fund allows investors to invest in gold and its various forms. This can be in the form of gold stocks or physical gold. Thus, investors are allowed the convenience of buying low-cost pure gold. These units can be sold anytime at market-linked prices. The possibility of theft is not there, so a sense of safety and security is there for the investors. A variety of gold funds is available. Some of them are gold mining funds, Gold Fund of Fund and Gold ETFs. Investment and returns on the same depend on gold mining companies and their performance. Gold has always been considered as an asset and a haven for investors when equity markets are uncertain.

Funds of Fund (FOF)

A popular investment strategy, FOF or Fund of Funds holds a portfolio of a variety of investment funds rather than making direct investments in bonds, stocks, and securities. Also referred to as a multi-manager investment, this fund may be fettered, or investment in funds managed by one investment company, or unfettered meaning investment can be done in external funds managed by other managers. FOF is of different types wherein each type invests in a collective investment scheme. Investing in FOF increases diversity which is not possible for a smaller investor who holds a small range of securities directly.

Asset Allocation fund

In asset allocation funds, there is a spread of portfolio in the fund amidst a variety of investment option which can include domestic as well as foreign bonds and stocks, bullion, government securities and real estate stocks. Some proportions of the funds are kept constant as allocated between different sectors while some are mixed as the market conditions change. People who have some reservation about active investment and stay away from it can consider asset allocation as it is relatively safe and offer decent results. These funds have been designed to make adjustments in the equity-debt allocation by changing market conditions as perceived by the fund manager.

“Mutual fund investments are Subject to Market Risks, Read all scheme related documents carefully.” So, if you are looking for investments in Mutual funds Kindly choose Mutual fund scheme for you as per your Risk taking Capacity & your financial goals.

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