Types of Mutual Funds in India

The Mutual Fund landscape in India is quite extensive. There are several categories such as equity funds, debt funds, hybrid funds, sectoral funds, index funds and many more. Let’s break down the major types of mutual funds in India in a simple, practical way, especially for students preparing for careers in finance.

1. Equity Mutual Funds 

Equity mutual funds invest primarily in stocks. They aim to create long-term wealth by participating in the growth of companies. These funds also tend to be volatile, but historically, over longer periods, equities have beaten most other asset classes.

Key Types

• Large-Cap Funds: 80%+ in top 100 companies.
  
• Mid-Cap Funds: 65%+ in companies ranked 101–250.
  
• Small-Cap Funds: 65%+ in companies below the top 250.
  
• Multi-Cap Funds: Mandatory spread across large, mid and small caps.
  
• Flexi-Cap Funds: No mandatory allocation. Fund Managers can decide the allocation.
  
• Value / Contra Funds: Invest in undervalued or contrarian opportunities.
  
• Focused Funds: Invest in a maximum of 30 stocks.
  
• Sector / Thematic Funds: IT, pharma, infrastructure, ESG, etc.
  
• Dividend Yield Funds: Invest in companies with high dividend payouts.
  
• ELSS (Tax Saving): 3-year lock-in, tax benefit under Sec 80C.
  

Who should invest

• Investors with a 5+ year horizon
  
• People who can handle volatility
  
• Anyone focused on long-term wealth creation
  
• Those wanting tax benefits (ELSS)
  

2. Debt Mutual Funds 

Debt funds invest in instruments like government bonds, corporate bonds, treasury bills, and money market instruments. Returns are more stable but also lower compared to equity.

Key Types

• Overnight Funds: 1-day maturity.
  
• Liquid Funds: Up to 91 days maturity.
  
• Short Duration Funds: 1–3 year maturity.
  
• Corporate Bond Funds: 80% in high-rated corporate debt.
  
• Credit Risk Funds: Invest in lower-rated corporates bonds for higher yields.
  
• Gilt Funds: 100% govt securities
• Dynamic Bond Funds: Manager adjusts duration based on interest rate conditions.
  

Who should invest

• Conservative investors
  
• People with short or medium-term goals
  
• Those needing stability or liquidity
  
• Professionals who want predictable, low volatility returns

3. Hybrid Mutual Funds 

Hybrid funds mix equity and debt to balance risk and reward.

Key Types

• Conservative Hybrid: 10–25% equity
  
• Balanced Hybrid: 40–60% in each (Debt and Equity)
  
• Aggressive Hybrid: 65–80% equity
  
• Dynamic Asset Allocation / BAF: Equity–debt mix that changes dynamically
  
• Multi-Asset Allocation: Invests in at least three asset classes
  
• Arbitrage Funds: Low-risk equity strategies

Who should invest

• Investors who want a “middle ground”
  
• Beginners who prefer simplicity
  
• Anyone with a 3–5 year horizon
  

4. Other Important Fund Categories

Index Funds & ETFs

Passive, low-cost funds that track indices like the Nifty 50 or  the Sensex.
Ideal for investors who:

• Don’t want active fund manager risk
  
• Want lower fees
  
• Believe in long-term index investing
  

Solution Oriented Funds

These consists of retirement funds, children’s education funds etc. They usually have long term lock in periods.

Fund of Funds (FoFs)

Funds that invest in other funds (domestic or international). A convenient option but have slightly higher expense ratios.

Mutual Fund Taxation in India 

Equity-Oriented Funds (65%+ equity)

• STCG (<12 months): 20% + cess
  
• LTCG (>12 months): 12.5% on gains above ₹1.25 lakh
  

Debt Funds & Hybrid Funds (<65% equity)

• Gains are taxed as per your income tax slab
  
• No indexation benefit for newer investments
  
• Applies after April 1, 2023
  

This taxation shift has made choosing the right category even more important.

How to Choose the Right Type of Mutual Fund

1. Based on Your Time Horizon

• < 3 years: Liquid, ultra-short, short-duration debt funds
  
• 3–5 years: Hybrid funds
  
• 5+ years: Equity funds
  

2. Based on Risk Appetite

• High Risk : Small-cap, mid-cap, aggressive hybrid
  
• Moderate Risk : Flexi-cap, multi-cap, BAF
  
• Low Risk : Debt funds, conservative hybrid
  

3. Based on Tax Efficiency

• Want LTCG benefits? Choose equity-oriented funds
  
• Want predictable taxation? Debt or hybrid (<65% equity)
  

4. Based on Diversification Style

A simple, balanced portfolio might look like:

• 50% Equity
  
• 30% Hybrid
  
• 20% Debt (liquid / short-term)
  

5. Based on Costs

• Passive funds charge much lower fees and returns may beat certain active funds
• Active funds charge higher fees, but returns may not beat some passive funds
  

Common Mistakes to Avoid

• Investing based only on past returns
  
• Ignoring the fund’s actual mandate
  
• Keeping a large portion invested in long-duration funds when you need liquidity
  
• Ignoring the tax impact when redeeming
  

Ideal Investor Profile