What are the different types of mutual funds in India
When we talk about types of mutual funds in India there are actually many depending on their structures, nature of investment, asset type, tax benefits, nature of the scheme management and investor goals. Based on these categories there can be two types of mutual funds in India:-
- Open ended Funds: These types of mutual funds in India can be bought and sold any time after the launch of the new fund offer (NFO). Some open ended funds e.g. Equity Linked Savings Schemes (ELSS) come with a lock-in period of 3 years, after which units of these funds can be redeemed at any point in time.
- Close ended Fund: These types of mutual funds in India funds can be bought only during the new fund offer (NFO). Once the NFO closes, investors cannot invest in the close ended funds. Close ended Funds come with fixed investment period or maturity periods during which the investors cannot redeem units. Post maturity the closing unit value is automatically redeemed and the redemption proceeds are transferred to unit holder’s bank account.
However, some close ended funds can become open ended funds after the maturity date. The AMC might also give option to rollover 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 know what are Mutual Funds in India
- Equity mutual Funds: These types of mutual funds in India align underlying investments in equity and equity related securities. Equity mutual funds can further be categorized into large cap funds, diversified or multi-cap funds and mid and small cap funds. Large cap funds invest or align most of their investments into large cap companies. Midcap funds align their investments in shares of small cap and midcap companies, while multi-cap funds, also known as flexi-cap or diversified equity mutual funds, have investments in both large cap and midcap stocks and also across various sectors.
The majority of mutual fund schemes invest across many sectors and therefore can be called diversified equity schemes. Some types of mutual funds in India align their investments in particular sectors e.g. banking, FMCG, pharma, technology, infrastructure, automobile or entertainment and so on. Such types of mutual funds in India are known as sector funds.
See how the top performing sectoral funds performed in the past
- Debt mutual Funds: These types of mutual funds in India have money market and / or debt market securities as their underlying investments. Money market securities include commercial papers (CPs), certificates of deposits (CDs), treasury bills etc. Debt market securities include government bonds, PSU bonds, non-convertible debentures etc.
Debt mutual funds can be further categorized into sub-categories depending on the nature of the investment and their respective maturity period. Liquid funds invest in money market securities which has a maturity period of less than 90 days. Ultra-short term debt funds invest in money market securities which has a maturity range of 90 days to a year. Short term debt funds invest in debt securities which has a maximum duration of 2 – 3 years. Long term debt funds, also known as income funds, invest in debt securities with longer durations.
Read what are debt mutual funds in India and their types
- Hybrid mutual funds: These types of mutual funds in India invest in both equities as well as debt instruments. The percentage allocation to equity and debt varies depending on whether they are equity oriented hybrid funds(also known as balanced funds) or debt oriented hybrid funds(also known as MIPs). Balanced mutual 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 market related instruments.
See the list of top performing balanced mutual funds in India and top performing hybrid debt funds (MIPs) in India in our mutual fund research section.
- Tax Saving mutual funds (ELSS funds): These types of mutual funds in India are popularly known as Equity Linked Savings Schemes (ELSS)or tax saver mutual funds or ELSS funds. These types of mutual funds in India are a type of equity fund which enjoys Section 80C tax saving benefit. Investment of upto Rs 1.5 lakhs in ELSS Funds can be deducted from the investor’s taxable income in a financial year under Section 80C of The Income Tax Act 1961.
Read what are ELSS mutual funds in India and which are the top ELSS mutual funds in India
We have seen what different types of mutual funds in India are, 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.
Read more on taxation of mutual funds in India
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