Mutual funds offer a simple way to invest across markets without picking stocks directly.
With so many fund types available, choosing the right one can feel confusing.
Knowing how each category works helps you invest with clarity and confidence.
Types of Mutual Funds Based on Investment Objective
Based on the SEBI guidelines, mutual funds in India are categorized into five major categories which are equity, debt, hybrid, solution-oriented, and other schemes (ETFs, Index Funds, Fund of Funds (FoF). Asset Management Companies (AMCs) classify funds by investment objective, asset allocation, and risk profile.
Equity Mutual Funds
An equity scheme is a type of mutual fund which invests primarily in equities and equity-related instruments. These are suitable for investors who have a higher risk tolerance and a longer investment horizon. These mutual funds seem long-term growth but can be volatile in the short-term.
Debt Mutual Funds
Also referred to as income fund this type of invests in short and long-term securities which are issued by government, public financial institutions and companies.The objective for this fund is to provide a stable growth and regular income to investors. Debt mutual funds carry low-to-moderate risk and are suitable for those who have a short to medium term investment horizon. As per SEBI, there are 16 sub-categories of debt funds:
Read More: Three Reasons to Switch to a 3 in 1 Account Today
- Overnight Fund
- Ultra-short duration Fund
- Low Duration Fund
- Money Market Fund
- Short duration Fund
- Liquid Fund
- Medium to Long Duration
- Medium duration Fund
- Long Duration Fund
- Dynamic Bond Fund
- Corporate Bond Fund
- Credit Risk Fund
- Banking and PSU Fund
- Gilt Fund
- Gilt Fund with 10-year constant duration
- Floater Fund
Hybrid Mutual Funds
These mutual funds invest in both equity and debt instruments to create balanced portfolio with the aim to grow funds. There are seven types of hybrid funds based on asset allocation recognized by SEBI:
- Conservative Hybrid Fund: Allocates about 10% to 25% to equities and equity-linked instruments, with the remaining 75% to 90% invested in debt securities.
- Balanced Hybrid Fund: Invests roughly 40% to 60% in equities and equity-related instruments, and 40% to 60% in debt instruments.
- Aggressive Hybrid Fund: 65% to 80% investment in equity and equity-related instruments, and 20% to 35% in Debt instruments.
- Dynamic Asset Allocation/ Balanced Advantage Fund:Investment in equity/debt that is managed dynamically.
- Multi Asset Allocation Fund: Investment in at least 3 asset classes with a minimum allocation of at least 10% in each asset class.
- Arbitrage Fund: Scheme following arbitrage strategy, with minimum 65% investment in equity and equity-related instruments.
- Equity Savings: Invests at least 65% in equities and equity-linked instruments, along with a minimum of 10% in debt securities and derivatives.
Solution-Oriented Mutual Funds
These mutual funds help investors in achieving a specific financial goal such as retirement, education, or marriage. Solution-Oriented Mutual Funds (SOMFs) generally have a lock-period and investment is done in a mix of equity and debt instruments. Some of the common types of SOMFs are:
Read More: Self-financing: the advantages and risks linked to this method of financing
- Retirement Fund
- Children’s Fund
Open-Ended Mutual Funds
These fundsallow investors to continuously buy and sell of units at the current Net Asset value (NAV) on any business day.
Close-Ended Mutual Funds
Ideal for investors seeking for a specific, long-term investment horizon.These schemes come with a defined tenure and a limited number of units issued.
Interval Mutual Funds
These funds combine the characteristics of both open-ended and closed-ended structures. It allows buying and selling of units during specific, pre-determined periods.
Index Funds
Passively replicate a market index such as Nifty 50 or Sensex, these funds offer low expense ratio making them a preferable choice if you are a beginner or looking for a cost-effective way to build long-term wealth.
ELSS Funds
Equity-Linked Savings Scheme (ELSS) funds come with a mandatory 3-year lock-in period. The earnings from this fund are eligible for tax deductions up to INR 1.5 lakh under Section 80C of the Income Tax Act. These fundsprimarily invest in equities making it an ideal choice for investors looking for funds with growth potential and tax benefits.
Sectoral/Thematic Funds
These mutual funds focus their investment on specific sectors (e.g., IT, banking, pharma) or themes (e.g., PSU, infrastructure) based on economic trends. The objective of these funds is to capitalize on the returns when these sectors are performing well. It is ideal for investors who have sector knowledge and high-risk appetite.
How to Choose the Right Type of Mutual Fund
Choosing the right mutual fund depends on your financial goals, time horizon, and risk tolerance. Here is a step-by-step guide on choosing mutual funds:
Step 1: Set a financial goal
Decide what you are investing for, such as a buying a home, funding your child’s education or building an emergency or retirement fund.
Step 2: Check Your Investment Horizon
Estimate when you will need the money if it is less than 3 years consider a liquid or short-term debt fund.If it is between 3 and 5 years, consider hybrid or balanced funds. For long-term investments one can consider equity or equity-related funds.
Step 3: Assess Your Risk Tolerance
If you have a more conservative approach towards investing a debt or conservative hybrid fund would be better suited for you. If you can stay invested through market fluctuations, equity funds such as large-cap or flexi-cap may be a preferred option.
Step 4: Review key fund details and diversify
Check past performance consistency, expense ratio, and how the fund fits within your existing investment account. Spread investments across a few fund categories instead of relying on one.
Conclusion
By matching fund categories to your goals, time horizon, and risk comfort, you can build a more balanced portfolio. Alongside this, a premium savings account supports liquidity management, short-term needs, and disciplined investing, helping you manage both growth and stability within your overall financial plan.