Types of mutual funds: Equity, debt, hybrid, sector-specific

Types of mutual funds Equity, debt, hybrid, sector-specific

If you’re considering investing in mutual funds, it’s essential to understand the different types available for you to pick from. The Securities and Exchange Board of India (SEBI) has a categorisation of mutual funds to streamline the mutual fund industry. This framework provides clarity and transparency to you as an investor and helps pick the right mutual fund according to your financial goals, investment horizon, and risk tolerance. Let’s delve into the various types of mutual funds in India in mind so that you can confidently add the right types of funds to your investment portfolio. 

  1. Equity funds

Equity funds are ideal for those seeking long-term capital appreciation. These funds primarily invest in stocks of companies listed on the stock market. The SEBI categorization includes large-cap funds, mid-cap funds, small-cap funds, multi-cap funds, sectoral/thematic funds, and focused funds. Depending on your risk tolerance and investment horizon, you can choose from these categories to align with your financial goals.

  1. Debt funds

If you prefer stable income generation and have a lower risk tolerance, debt funds can be a suitable choice. These funds invest in fixed-income instruments such as government securities, corporate bonds, treasury bills, and money market instruments. Debt funds are further classified based on their maturity profile and investment strategy. Debt fund categories include liquid funds, short-term funds, medium-term funds, dynamic bond funds, and credit opportunity funds. 

  1. Hybrid funds

For a balanced approach, hybrid funds combine investments in both equity and debt instruments. They aim to diversify across asset classes, providing more moderate risk profile. Aggressive hybrid funds conservative hybrid funds, and balanced advantage funds are some of the categories available under hybrid mutual funds. 

  1. Solution-oriented funds

SEBI’s categorisation also includes solution-oriented funds designed for specific investment objectives or goals. These funds tend to come with a lock-in period of five years and primarily include retirement funds and children’s education funds. By investing in certain solution-oriented funds, you can enjoy potential tax benefits under the Income Tax Act, 1961. 

  1. Other categories

In addition to these main categories, there are other types of mutual funds such as:

  • Index funds: These funds aim to replicate the performance of a specific stock market index, such as Nifty 50 or Sensex. They provide investors with an opportunity to invest passively in the broader market at a lower expense ratio.
  • Fund-of-Funds (FoFs): FoFs invest in other mutual funds, offering investors a diversified portfolio in a single investment. These funds are suitable for those looking to access a range of mutual funds without directly managing multiple portfolios.
  • Sector-specific funds: Sector-specific or thematic funds are a type of equity mutual fund that tend to invest in the stocks of companies belonging to a specific industry such as tech or pharma. 
  • International funds: These mutual funds invest in stocks of companies that are listed on the stock exchange of a country outside of India. These funds help add international exposure to your portfolio and helps you diversify across geographies. 

Wrapping up

As you can tell, for every type of investor and their needs, there is a type of mutual fund out there. So, before you begin investing in mutual funds, take some time to understand these different types of mutual fund schemes and assess which one is the best suited for your financial goals and needs.