Mutual funds are one of the most popular investment options for both beginners and veteran investors. They allow you to invest in a diverse portfolio of assets managed by all professional fund managers, including stocks, bonds and more. However, not all mutual funds are created equally. There are many different types of mutual funds, each serving a unique purpose and meeting the needs of a wide range of investors. In this article, I will introduce you Different types of mutual funds – Includes stocks, debts, hybrids, and more – Helps you choose the best option for your investment goals.
Types of mutual funds explained – fairness, debt, hybrids, etc.
If you’re not used to mutual funds, Beginner’s Guide to Mutual Funds and How mutual funds work It could be your starting point.
#1 – Equity Mutual Fund
Equity mutual funds primarily invest in the stock or stock of a company. These funds are intended to generate high returns by investing in the stock market. Stock funds have a higher level of risk, as stocks can be volatile. However, they also have high reward potential, making them an ideal option for investors with a long-term horizon and higher risk tolerance.
- Risk level: expensive
- Returns potential: high (long term)
- It’s perfect for: Investors who are looking for capital gains and are willing to embrace short-term volatility.
Equity fund subtypes:
- Large funds: These funds invest in large, established companies with market capitalizations of over 20,000 crore. They are relatively stable and less volatile compared to small and medium-sized businesses.
- Midcap fund: Medium-sized funds invest in companies with market capitalizations between 5,000 crores and 20,000 crores. They offer a balance between growth potential and risk.
- Small funds: Small funds are invested in small businesses with market capitalizations of less than £5,000 crore. These funds have the most growth potential, but they have increased volatility.
- Sectoral Fund: These funds focus on specific sectors such as technology, healthcare, and banking. If the sector works well, they can offer high returns, but they are dangerous due to their concentrated nature.
Check out 10 mutual funds with diverse portfolios for 2025
#2 – Debt Mutual Fund
Debt Mutual Funds invest in bonds such as government bonds, headquarters bonds, and Treasury bills. These funds have lower risk compared to equity funds and are ideal for conservative investors looking for a steady return.
Debt funds are suitable for investors who want to generate income through regular interest, rather than capital increase. Not only does it have a lower risk profile, it also offers a lower return potential compared to equity funds.
- Risk level: Low to medium
- Returns potential: Medium (corrected returns)
- It’s perfect for: Conservative investors or those looking for a stable income with relatively low risk.
Debt Fund Subtype:
- Fluid funding: These are short-term funds that invest in very short-term products, such as Treasury bills, and invoke money. They are ideal for parking surplus cash, providing low returns with minimal risk.
- Corporate Bond Fund: These funds are invested in bonds issued by the company. They offer higher returns than government bonds, but at a slightly higher level of risk.
- Gold leaf funds: Gilt Funds invests in government securities only. They are considered a safe investment and are ideal for risk aversion investors seeking a stable return.
- Dynamic Bond Fund: These funds are actively managed to invest in bonds for various periods and take advantage of interest rate changes.
#3 – Hybrid Mutual Fund
Hybrid mutual funds invest in combinations of stocks, liabilities and sometimes other asset classes that provide a balance between risk and return. These funds are ideal for investors who want to diversify their portfolios and reduce risk without waiving their stock growth potential completely.
Hybrid funds are designed to suit investors with moderate risk appetite. They offer a single investment that is exposed to both growth (equities) and stability (debt).
- Risk level: Moderate
- Returns potential: Medium to high
- It’s perfect for: Investors who want a balanced approach to growth and stability.
Hybrid fund subtypes:
- Aggressive hybrid fund: These funds invest most of them in stocks (usually 65%-80%) and the rest in debt certificates. They are suitable for investors with higher risk tolerance, but still want some stability.
- Conservative Hybrid Fund: These funds invest a large portion of their debt (usually 70%-80%) and the rest in stocks. They are ideal for investors who want a stable income but are willing to undertake some equity exposure for potential growth.
- A well-balanced hybrid fund: These funds maintain an equal combination of stocks and debt (50%-50%). They offer a balanced approach to investment with moderate levels of risk and returns.
#4 – Index Fund
An index fund is a type of passive mutual fund that aims to replicate the performance of certain market indexes, such as Nifty 50 and Sensex. These funds invest in the same stocks that make up the index at the same percentage. Index funds follow a passive management style and therefore tend to have lower management fees compared to aggressively managed funds.
- Risk level: Medium (depending on the index)
- Returns potential: Medium (reflects index performance)
- It’s perfect for: Investors who want to invest in the entire market without choosing individual stocks.
#5 – Exchange-Traded Funds (ETFS)
ETFs are similar to index funds, but are traded on stock exchanges like individual stocks. Like stocks, ETF units can be bought and sold at market prices throughout the trading day. ETFs usually have lower cost ratios than actively managed mutual funds and are often used for diversification.
- Risk level: Medium (depending on the underlying asset)
- Returns potential: Moderate
- It’s perfect for: Investors who need low-cost liquid investment options that reflect the performance of a particular index or asset class.
#6 – Fund of Funds (FOF)
A Fund of Funds (FOFs) are mutual funds that invest in other mutual funds rather than directly in stocks or bonds. This approach provides additional diversification for investors by pooling multiple mutual fund investments into one portfolio.
- Risk level: Moderate
- Returns potential: Medium to high (depends on the underlying funds)
- It’s perfect for: Investors who want a diverse portfolio without selecting and managing individual funds.
#7 – Tax-Free Funds (ELS)
Equity-Linked Savings Scheme (ELS) is a type of mutual fund that provides tax benefits under Section 80C of the Income Tax Act. These funds primarily invest in stocks and have a lock-in period of 3 years. ELSS funds offer high revenue and tax savings potential, making them a popular option for investors looking to save tax while increasing their wealth.
- Risk level: high (depending on stock exposure)
- Returns potential: high (long term)
- It’s perfect for: Investors looking for tax-free options combined with stock market exposure.
There are a few ELSS mutual funds that generated 100% to 117% returns over three years.
Conclusion
Mutual funds come in a variety of forms, each offering a variety of investment goals, risk tolerances, and time horizons. Whether you’re looking for a high return through equity funds, stable income from debt funds, or a balanced approach to hybrid funds, there’s something for everyone.
It is important to assess your financial goals, risk profiles, and investment duration before investing in any type of mutual fund. Understanding different types of mutual funds allows you to make informed decisions and build a portfolio that suits your needs.
If you’re not sure which type of mutual fund is right for you, consulting with a financial advisor or checking out mutual fund articles on your blog will help you create a strategy that suits your own situation .
Happy investment!
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