Mutual funds pool money from several investors and invest it across a portfolio of securities. This gives investors access to diversification and professional fund management without requiring them to select and track every investment individually.
However, not all mutual funds are alike. There are several types of mutual funds, including equity funds, debt funds and hybrid funds. These categories differ in what they invest in, the risks they carry and the purposes they may serve.
Understanding the different mutual fund types can help investors identify schemes that are more closely aligned with their goals, investment horizon and risk appetite.
Table of Contents
Mutual fund types
Mutual funds in India can be classified in several ways:
- Based on asset classes
- Based on structure
- Based on investment objectives
- Based on portfolio management style
These classifications help understand the different types of mutual funds available and their investment strategies.
Types of mutual funds based on asset class
Mutual funds can be categorised based on the types of assets they invest in. Under this classification, the main types are also follows:
Equity schemes
Equity funds invest predominantly in equity and equity-related instruments. They offer the higher potential for long-term growth, but can experience sharp fluctuations, particularly over shorter periods. They are generally more suitable for investors with a very high risk appetite and a longer investment horizon.
Equity funds include several sub-types based on the market segment in which they invest or the investment strategy they follow.
- Large Cap Fund: Invests at least 80% of its assets in equity and equity-related instruments of large cap companies.
- Large & Mid Cap Fund: Invests at least 35% each in large cap and mid cap companies.
- Mid Cap Fund: Invests at least 65% of its assets in equity and equity-related instruments of mid cap companies.
- Small Cap Fund: Invests at least 65% of its assets in equity and equity-related instruments of small cap companies.
- Flexi Cap Fund: Invests at least 65% in equities and can allocate across large cap, mid cap and small cap companies without a fixed allocation to each segment.
- Multi Cap Fund: Invests at least 75% in equities, with a minimum allocation of 25% each to large cap, mid cap and small cap companies.
- Dividend Yield Fund: Invests at least 80% in equities and focuses mainly on dividend-yielding stocks
- Value Fund: Invests at least 80% in equities and follows a value strategy, seeking companies whose shares appear to be priced below their intrinsic value.
- Contra Fund: Invests at least 80% in equities and follows a contrarian strategy, taking positions that may differ from prevailing market sentiment.
- Focused Fund: Invests at least 80% in equities and holds a concentrated portfolio of no more than 30 stocks.
- Sectoral Fund: Invests at least 80% in companies belonging to a particular sector, such as banking or healthcare.
- Thematic Fund: Invests at least 80% in companies connected with a stated theme, which may span multiple sectors.
- ELSS Tax Saver Fund: Invests at least 80% in equities and comes with a statutory lock-in period of three years. It provides tax benefits to investors under the old tax regime under Section 123 of the Income Tax Act, 2025, subject to prevailing tax laws.
Debt schemes
Debt funds invest predominantly in debt and money market instruments. They tend to be relatively stable and are less volatile than equities, but still fact some risk owing to interest rate movements, changes in credit quality and the liquidity of the securities held. Here are their sub-types:
- Overnight Fund: Invests in securities with a maturity of one day.
- Liquid Fund: Invests in debt and money market securities with maturities of up to 91 days.
- Ultra Short Term Fund: Maintains a portfolio Macaulay duration of three to six months.
- Ultra Short to Short Term Fund: Maintains a portfolio Macaulay duration of six to 12 months.
- Money Market Fund: Invests in money market instruments with maturities of up to one year.
- Short Term Fund: Maintains a portfolio Macaulay duration of one to three years.
- Medium Term Fund: Generally maintains a portfolio Macaulay duration of three to four years. It may reduce this to between one and four years under anticipated adverse conditions.
- Medium to Long Term Fund: Generally maintains a portfolio Macaulay duration of four to seven years. It may reduce this to between one and seven years under anticipated adverse conditions.
- Long Term Fund: Maintains a portfolio Macaulay duration of more than seven years.
- Dynamic Term Fund: Invests across maturities and can adjust the portfolio’s duration as conditions change.
- Corporate Bond Fund: Invests at least 80% of its assets in corporate bonds rated AA+ and above.
- Credit Risk Fund: Invests at least 65% of its assets in corporate bonds rated AA and below.
- Banking and PSU Debt Fund: Invests at least 80% in debt instruments issued by banks, public-sector undertakings, public financial institutions and municipalities.
- Gilt Fund: Invests at least 80% in government securities across maturities.
- 10-year Constant Maturity Gilt Fund: Invests at least 80% in government securities while maintaining a portfolio Macaulay duration of 10 years.
- Floating Interest Rates Fund: Invests at least 65% in floating-rate instruments, including fixed-rate securities converted to floating-rate exposure through permitted derivatives.
- Sectoral Fund: Invests at least 80% in AA+ and above rated debt instruments from one permitted sector. These sectors are financial services, energy, infrastructure, housing and real estate.
Hybrid schemes
Hybrid schemes invest across more than one asset class for a more diversified portfolio and a more balanced risk-return profile. Depending on the category, the portfolio may combine equity, debt, arbitrage positions, InvITs or permitted commodity-related instruments.
The level of risk can differ considerably between each hybrid fund category. Generally, the higher the equity exposure, the greater the risk level.
The categories are:
- Conservative Hybrid Fund: Invests chiefly in debt instruments (75% to 90% of the portfolio) and 10% to 25% in equity and equity-related instruments.
- Balanced Hybrid Fund: Invests between 40% and 60% each in equity and debt instruments.
- Aggressive Hybrid Fund: Invests mainly in equities (65% to 80%) and 20% to 35% in debt instruments.
- Dynamic Asset Allocation Fund: Adjusts its equity and debt allocations dynamically according to the scheme’s investment approach.
- Multi Asset Allocation Fund: Invests in at least three asset classes, such as equity, debt, and commodities, with a minimum allocation of 10% to each.
- Arbitrage Fund: Follows an arbitrage strategy, investing at least 65% in equity and equity-related instruments. Its debt exposure is restricted to government securities with maturities of less than a year and repos of government bonds.
- Equity Savings Fund: Invests at least 65% in equity and equity-related instruments, including arbitrage, and at least 10% in debt. Its net equity exposure must remain between 15% and 40%.
Life Cycle Funds
Life Cycle Funds are open-ended schemes with a predetermined maturity and a glide path. Their asset allocation changes as the target maturity approaches, generally reducing equity exposure and increasing exposure to debt.
These schemes may invest across equity, debt, InvITs, permitted commodity derivatives, and gold or silver ETFs. SEBI permits maturities ranging from five to 30 years in multiples of five years.
Other schemes
This group includes:
- Index funds and ETFs, which must invest at least 95% of their assets in securities forming part of the index being tracked.
- Domestic and overseas funds of funds, which must invest at least 95% of their assets in the underlying fund or funds.
Source: SEBI’s Categorization and Rationalization of Mutual Fund Schemes, February 2026
Reasons for the re-categorisation of mutual funds
SEBI introduced a standard categorisation framework in 2017 to make mutual fund schemes easier to understand and compare. The aim was to ensure that schemes offered by the same fund house were meaningfully different, while similar schemes across fund houses followed broadly uniform characteristics. This helped investors compare like-for-like options based on factors such as asset allocation and investment strategy.
On February 26, 2026, SEBI revised this framework to account for the evolving mutual fund landscape and new investment opportunities across asset classes. The updated rules refine scheme categories and their characteristics, standardise scheme names and descriptions, and seek to ensure that funds remain true to their labels. They also introduce portfolio-overlap limits and disclosure requirements to make it easier for investors to identify schemes that may follow similar portfolios.
Sources: SEBI’s Categorization and Rationalization of Mutual Fund Schemes, 2017 & 2026.
Types of mutual funds based on structure
Mutual funds can also be classified into different types depending on the level of liquidity and access they offer.
Open-ended funds
Open-ended funds generally allow investors to make apply for investment or redemption on any business day. The request is processed at the applicable NAV, and redemption proceeds are credited within a few business days, subject to cut-off timings, exit loads, lock-ins and other terms.
Close-ended funds
Close-ended funds have a fixed maturity period. Investors can purchase units directly from the scheme only during the NFO and redeem them only at maturity. After the NFO, listed units may be bought or sold on a stock exchange, subject to market liquidity.
Interval funds
Interval funds allow investors to purchase or redeem units only during specific periods announced by the fund house. Outside these transaction windows, investors generally cannot buy units from or redeem units with the scheme.
Types of mutual funds based on portfolio management style
Mutual funds can also be classified by how their portfolios are managed, either through active investment decisions or by tracking an index:
Active funds
In an actively managed fund, the fund manager decides which securities to buy, hold, or sell and adjusts the portfolio according to the scheme’s investment strategy. The aim is usually to generate higher returns than the fund’s benchmark over time, although this is not guaranteed.
Passive funds
A passive fund follows a market index, such as the Nifty 50, by investing in the same securities in similar proportions. Instead of actively selecting investments to outperform the index, the fund manager aims to replicate its composition and returns. The fund’s returns may differ slightly from those of the index because of expenses, portfolio rebalancing and cash holdings. This difference is known as tracking err
Types of mutual funds based on investment objectives
Mutual funds can also be grouped according to the financial objective they are designed to support. These are broad, practical groupings rather than SEBI scheme categories:
Growth-oriented funds
These schemes primarily seek long-term capital appreciation and usually have substantial exposure to equities. They may experience significant volatility and do not guarantee capital growth.
Income-oriented funds
These schemes generally invest in debt and money market instruments and seek returns through interest accrual and changes in security prices. They do not guarantee regular income or protection from losses.
Liquidity-oriented funds
These schemes focus on short-term debt and money market instruments. Liquid, overnight and money market funds may provide relatively easy access to money, but they are market-linked investments rather than bank deposits.
Mutual funds based on risk
Different mutual fund schemes can have different risk levels. The asset management company that introduces the scheme is required to mention the risk profile (in the form of a risk-o-meter) in all important scheme-related communication, including the Scheme Information Document. Broadly, schemes can fall under the following risk categories:
- Low risk
- Low to moderate risk
- Moderate risk
- Moderately high risk
- High risk
- Very high risk
Generally, most debt-oriented funds fall under the low risk to moderately high risk range whereas equity-oriented mutual funds fall under the very high risk category.
Choosing the of fund
Choosing a suitable mutual fund involves aligning the fund category with your financial goals, time horizon, and risk appetite. The common steps are:
- Define your financial goal: Start by identifying the purpose of your investment. Goals may include potential wealth creation over time, income generation, or relative stability of capital. Clear goals may help narrow down suitable mutual fund categories.
- Assess your risk appetite: Understanding your comfort with risk is essential. Choose categories that align with your ability to handle market fluctuations.
- Consider your investment horizon: Time horizon plays a key role in fund selection. Equity funds may be suitable for long-term horizons. Debt funds may be considered for shorter durations.
- Evaluate fund categories, not just schemes: Focus on selecting a suitable category first. Understanding categories may help in better alignment with goals.
- Review costs and expense ratios: Costs may impact overall return potential over time. Compare expense ratios within the same category. Lower costs may support better net outcomes over the long term.
Points to consider before investing
With several fund categories to choose from, selecting a scheme requires investors to evaluate several factors.
Investment goal and time horizon: Choose a fund based on the goal you are investing for and when the money will be needed. Equity-oriented funds are generally suited to longer horizons, while certain debt funds may be considered for shorter-term requirements.
Risk level: Review the scheme’s Riskometer and understand the risks associated with its underlying investments. Funds within the same broad category can carry different levels of volatility, credit risk or concentration.
Portfolio diversification: Spread investments across suitable asset classes and avoid excessive exposure to one fund, sector or market segment. Also check for overlapping holdings across schemes, as owning several funds does not always provide greater diversification.
Costs and redemption terms: Compare the expense ratios and exit load terms of different schemes. Check if there is a lock-in period. These factors can affect the cost of investing and access to your money.
Tax treatment: Taxation depends on the scheme’s portfolio composition, the purchase date and the holding period. Check the current rules for the specific fund category, as taxes can affect the amount retained after redemption.
Scheme documents: Mutual funds are regulated by SEBI, while AMFI supports industry standards and investor awareness. Before investing, review the Scheme Information Document, Key Information Memorandum, factsheet and portfolio disclosures.
Read also: Understanding Mutual Fund Taxation
Conclusion
Mutual funds offer a convenient and diversified way to invest in the stock market, bond market, or a mix of both. Understanding the different types of mutual funds based on asset class, investment objective, and structure can help investors choose the right mutual fund that aligns with their investment goals, risk appetite, and investment horizon. It’s equally crucial to align your goals with the scheme’s investment objectives. If you are new to investing or unsure about investing in mutual funds, you may want to consider consulting a financial advisor or doing further research before making any decisions.
FAQs
What type of mutual fund is best?
No mutual fund category is best for every investor. A suitable category depends on the investor’s goal, investment horizon, risk appetite and existing portfolio.
How do I start investing in a mutual fund?
Choose a scheme after reviewing its objective, Riskometer, portfolio, costs and investment horizon. Complete KYC, select a Direct or Regular Plan and invest through an AMC, an authorised platform or a distributor.
Which type of mutual fund is the safest?
No mutual fund is risk-free. Overnight and some liquid funds generally have lower market risk than equity-oriented schemes, but investors should check the current Riskometer of the specific scheme.
Is it safe to invest in mutual funds?
Mutual funds are market-linked and can lose value. The level and type of risk depend on the scheme’s assets, duration, credit quality, concentration and investment strategy.
What are two important things to consider before investing in mutual funds?
Consider the goal and time horizon for the investment, along with your ability and willingness to bear losses. These factors help narrow down the categories that may be suitable.
Which type of mutual fund gives the highest return?
No category consistently provides the highest return. Equity-oriented schemes may offer greater long-term return potential than debt schemes, but they also carry higher volatility and loss risk.
Which mutual funds may be suitable for a five-year horizon?
The answer depends on the investor’s goal and risk appetite. Some investors may consider equity or hybrid schemes for a five-year horizon, while others may require lower-volatility options if the goal date cannot be postponed.
How many types of mutual funds are there?
SEBI’s current framework has five broad groups: equity schemes, debt schemes, hybrid schemes, Life Cycle Funds and other schemes. Each group contains several individual categories.
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