Types of Mutual Funds
Equity Mutual Funds
Hybrid Mutual Funds
Debt Mutual Funds
Solution Oriented Funds
Other Mutual Funds
What Are The Types of Mutual Funds in India?
Mutual funds in India are mainly classified based on the type of assets they invest in and their investment objective. According to the framework introduced by the Securities and Exchange Board of India (SEBI), mutual fund schemes are broadly grouped into five categories: equity funds, debt funds, hybrid funds, solution-oriented funds, and other funds. Each category follows specific asset allocation rules, helping investors understand the risk level and investment strategy of a scheme before investing.
SEBI's Categorisation of Mutual Fund Schemes
The Securities and Exchange Board of India (SEBI) is the market regulator of India's securities market. In a 2017 circular on mutual fund categorisation, SEBI classified all current and upcoming mutual fund schemes into five main groups: equity funds, debt funds, hybrid funds, solution-oriented funds, and other funds, including ETFs and FOFs. These groups are further divided into 36 mutual fund scheme categories available in the market.
Reasons Behind the Mutual Fund Recategorisation
SEBI aims to standardise the functioning of Asset Management Companies (AMCs) by introducing mutual fund categorisation rules. The move seeks to eliminate confusion caused by misleading scheme names. The new regulations require AMCs to define names clearly based on fund objectives and asset allocation. This ensures transparency for investors, facilitating easier product comparison and selection. Additionally, the rules establish a framework for fund managers to maintain focus on specific objectives, discouraging frequent changes.
What Are the Rules for Mutual Fund Recategorisation?
SEBI has implemented changes in mutual fund categorisation to provide investors with clearer options. The new rules include:
- Enhanced Classification: SEBI now clearly defines asset allocation, investment mandate, and risk profiles for mutual fund schemes. Categories include Equity, Debt, Hybrid, Solution-Oriented, and Others.
- Scheme Renaming: Schemes must be renamed to reflect their risk profiles, removing misleading adjectives like "opportunity" or "advantage" that may attract investors without a thorough risk analysis.
- Introduction of Lock-in Period: Certain solution-oriented schemes, like retirement and children's funds, may have a lock-in period introduced by SEBI to align with their objectives. Existing investors may not be affected by this change.
- Changes to Scheme Attributes: Fund houses are mandated to redefine the investment mandate, strategy, and benchmark against which fund performance will be evaluated.
These new SEBI rules necessitate Asset Management Companies (AMCs) to realign their offerings in line with the updated norms, providing investors with increased transparency and clarity.
Types of Mutual Fund Schemes
Equity Schemes
Equity schemes primarily invest in company shares and equity-related securities. These funds aim for long-term capital growth and are generally considered higher risk compared to other mutual fund categories.
| Scheme Category | Key Features |
|---|---|
| Large-cap Fund | Invest 80% in large-cap firms' equity and related securities |
| Mid-cap Fund | Invest 65% in mid-cap firms' equity and related securities |
| Small-cap Fund | Invest 65% in small-cap firms' equity and related securities |
| Multi-cap Fund* | Invest 75% in equity and related securities across market caps |
| Large and Mid-cap Fund | Invest 35% in large-cap and 35% in mid-cap firms' equity |
| Flexi Cap Fund | Invest at least 65% in equity & equity-related instruments |
| Dividend Yield Fund | Majorly invest in dividend-yielding stocks and at least 65% in equity |
| Value Fund | Follow a value investment strategy, investing 65% in equity |
| Contra Fund | Follow a contrarian strategy, investing 65% in equity |
| Sectoral/Thematic Fund | Invest at least 80% in a specific theme or sector |
| Focused Fund | Invest 65% in equity, focusing on a maximum of 30 stocks |
| ELSS (Equity Linked Savings Scheme) | Invest 80% in equity and related securities |
Note: Multi-cap Fund is also referred to as Diversified Equity Funds.
Debt Schemes
Debt schemes invest in fixed-income instruments such as treasury bills, government securities, corporate bonds, and money market instruments. These funds are generally chosen for relatively stable returns and lower volatility compared to equity funds.
| Scheme Category | Key Features |
|---|---|
| Low-duration Fund | Invests in money market and debt securities with a portfolio Macaulay duration of 6 to 12 months. |
| Ultra-short Duration Fund | Invests in money market and debt securities with a portfolio Macaulay duration of 3 to 6 months. |
| Liquid Fund | Invests in money market and debt securities with a maturity of up to 91 days only. |
| Overnight Fund | Invests in overnight securities with a 1-day maturity. |
| Short-duration Fund | Invests in money market and debt securities with a portfolio Macaulay duration of 1 to 3 years. |
| Medium Duration Fund | Invests in money market and debt securities with a portfolio Macaulay duration of 3 to 4 years. |
| Money Market Fund | Invests in money market securities with a maturity of up to 1 year. |
| Medium- to Long-duration Fund | Invests in money market and debt securities with a portfolio Macaulay duration of 4 to 7 years. |
| Long-duration Fund | Invests in money market and debt securities with a portfolio Macaulay duration of more than seven years. |
| Corporate Bond Fund | Invests 80% of its total assets in the highest-rated corporate bonds. |
| Dynamic Bond Fund | Invests across different durations. |
| Banking & PSU Fund | Invests 80% of total assets in debt securities of banks, public sector undertakings, and public financial institutions. |
| Credit Risk Fund | Invests 65% of total assets in corporate bonds with an AA rating or lower. |
| Floater Fund | Invests 65% of total assets in floating rate instruments |
| Gilt Fund | Invests 80% of total assets in government securities. |
| Gilt Fund with 10-year Constant Duration | Invests 80% of total assets in government securities, maintaining a constant portfolio Macaulay duration of 10 years. |
Hybrid Schemes
Hybrid schemes invest in a mix of equity and debt instruments. The objective is to balance potential growth from equities with relatively stable returns from debt securities.
| Scheme Category | Key Features |
|---|---|
| Balanced Hybrid Fund | Invests 40-60% in equity and related securities; 40-60% in debt securities. No arbitrage allowed. |
| Aggressive Hybrid Fund | Allocates 65-80% in equity and related securities; and 20-35% in debt securities. |
| Conservative Hybrid Fund | Invests 10-25% in equity and related securities; 75-90% in debt securities. |
| Dynamic Asset Allocation/Balanced Advantage Fund | Flexible management of equity and debt securities. |
| Multi-Asset Allocation Fund | Invests in a minimum of three asset classes, with a minimum 10% allocation in each. |
| Equity Savings | Puts at least 65% in equity and 10% in debt securities. |
| Arbitrage Fund | Follows an arbitrage strategy, with at least 65% in equity and related securities. |
Solution-Oriented Schemes
Solution-oriented schemes are designed to meet specific long-term financial goals such as retirement or a child's future. These schemes generally have a mandatory lock-in period.
However, it's important to note that these schemes have been discontinued as of March 2026. The old schemes are being merged or rationalised into other schemes with similar asset allocation or risk profile. Additionally, these schemes are being replaced by Life Cycle Funds.
| Scheme Category | Key Features |
|---|---|
| Children's Fund | Lock-in period: Minimum 5 years or until the child reaches majority age, whichever is earlier. |
| Retirement Fund | Lock-in period: Minimum 5 years or until retirement age, whichever is earlier. |
Other Schemes
Other schemes include mutual funds that follow specific investment structures or strategies. These may track a market index, invest in other mutual funds, or be grouped based on the level of investment risk.
| Scheme Category | Key Features |
|---|---|
| Index Funds/ETFs | Mirrors the performance of the underlying market index |
| Fund of Funds | Allocates at least 95% of assets into underlying funds |
| Low Risk Funds | Focus on stable debt or money market instruments with lower volatility. |
| Moderate Risk Funds | Invest in a mix of equity and debt instruments. |
| High Risk Funds | Invest mainly in equities or sector-focused strategies with higher volatility. |
FAQs
Which type of mutual fund is best?
There is no single mutual fund type that is best for everyone. The right option depends on an investor's financial goals, investment horizon, and risk tolerance. For example, equity funds may suit long-term growth goals, while debt funds may be preferred for relatively stable returns.
Which type of mutual fund is safest?
Debt mutual funds are generally considered safer than equity funds because they invest in fixed-income instruments such as government securities and corporate bonds. However, they are not completely risk-free, as factors like interest rate changes and credit risk can affect returns.
What are the 4 types of mutual funds?
Mutual funds are commonly grouped into four major categories: equity funds, debt funds, hybrid funds, and life cycle funds. Each category differs based on the type of assets it invests in and the investment objective of the scheme.
How do I start a mutual fund?
To start investing in mutual funds, an investor must first complete the required KYC process and choose a suitable mutual fund scheme. Investments can then be made either as a lump sum amount or through a systematic investment plan (SIP) based on financial goals and risk appetite.
