Different Types of Mutual Funds and Their Benefit

Posted on Wednesday, April 2nd, 2025 | By IndusInd Bank

Investing for the first time can feel overwhelming, especially with so many investment options available. Mutual funds are a popular choice but understanding the different types and how they function can take time.

Each mutual fund is structured to meet specific financial goals and risk levels. Knowing these distinctions helps in making informed decisions and selecting a fund that aligns with your needs.

This guide simplifies the different categories of mutual funds so you can explore your options with confidence. Please note that this is not investment advice, but just a clear breakdown to help you explore your options with confidence.

Different Mutual Fund Categories at a Glance

To simplify things, here’s an infographic that visually represents the different types of mutual funds and how they are classified.

How Mutual Fund Structures Impact Your Investment Options

The way a mutual fund is structured affects when you can invest and withdraw funds. Some funds offer complete flexibility, while others have specific rules for entry and exit. Here are the three main types.

1. Open-Ended Funds – Flexible and Always Available

Open-ended funds let investors enter or exit, without a fixed lock-in period. You can invest whenever you choose and redeem your units based on the fund’s Net Asset Value (NAV).

Since these funds provide easy access to your money, those who value flexibility in their investments often choose them.

2. Close-Ended Funds – Limited Time Access

Close-ended funds have a fixed launch period during which investors can purchase units. Once this window closes, new investments are not allowed.

These funds have a set maturity period, and investors can only exit by selling their units on the stock exchange, where prices may fluctuate based on demand and supply.

3. Interval Funds – The Middle Ground

Interval funds allow investors to buy or sell units only at specific time intervals. Outside these windows, transactions are restricted.

These types of funds, blends features of both open-ended and close-ended funds, providing periodic liquidity while maintaining investment stability.

Also Read: The Ultimate Guide to Multi Cap Mutual Funds: Everything You Need to Know!

Understanding Mutual Funds by Asset Class

Mutual funds invest in different asset types, such as stocks, bonds, or commodities. The choice of asset class plays a major role in determining the fund’s risk and return potential.

1. Equity Funds – Focused on Growth

Equity funds put money into company shares with the goal of growing wealth over time. Since stock markets fluctuate, these funds involve some level of risk.

Different types of equity funds include:

• Large-Cap Funds: Invest in well-established companies with a solid reputation.
• Mid-Cap & Small-Cap Funds: Target growing companies, offering the potential for higher returns but with added risk.
• Sectoral & Thematic Funds: Focus on specific industries like technology, healthcare, or finance.

2. Debt Funds – Stability Over Growth

Debt funds invest in government bonds, treasury bills, and corporate debt, aiming for steady returns. Since they don’t rely on stock market movements, they tend to be more stable.

3. Hybrid Funds – A Balanced Approach

Hybrid funds mix equity and debt to provide a blend of growth and stability. They create a balance between risk and returns.

4. Money Market Funds – For Short-Term Needs

Money market funds invest in short-term debt instruments, making them an option for parking surplus cash temporarily. They serve as an alternative to a savings account.

5. Commodity and Real Estate Funds – Beyond Stocks and Bonds

These funds invest in assets like gold, silver, or real estate, offering diversification for those looking to hedge against market fluctuations.

Portfolio Management Styles in Mutual Funds

The way a mutual fund is managed can impact returns, costs, and investment strategy. Some funds involve expert decision-making, while others follow a market-based approach.

1. Active Funds – Managed by Experts

With active funds, fund managers make investment decisions with an aim to outperform the market. These funds require ongoing management, which often results in higher fees.

2. Passive Funds – Following the Market

Passive funds, such as index funds and ETFs, aim to match market performance rather than outperform it. They follow a benchmark index like the Nifty 50 or Sensex, keeping costs low.

Choosing a Mutual Fund Based on Investment Goals

Each mutual fund is structured to meet different financial needs. Whether you’re looking for long-term growth or short-term stability, there’s a fund suited to your goals.

1. Growth-Oriented Funds – Ideal for Long-Term Goals

These funds aim to grow in value over time, making them suitable for long-term financial objectives. They are often equity-based.

2. Income Funds – Regular Returns

Income funds invest in fixed-income securities and focus on providing steady payouts. They are commonly chosen by those looking for predictable earnings.

3. Liquid Funds – Quick Access to Cash

Liquid funds invest in ultra-short-term instruments and offer quick access to money, making them a convenient alternative to traditional savings.

4. Tax-Saving Funds (ELSS) – For Tax Benefit

Equity Linked Savings Schemes (ELSS) allow tax deductions of up to ₹1.5 Lakhs under Section 80C of the Income Tax Act. However, they come with a mandatory three-year lock-in period.

Matching Mutual Funds to Your Risk Tolerance

Mutual funds come with varying levels of risk, suited to different comfort levels.

1. Low-Risk Funds – Safety First

Debt funds and liquid funds focus on capital preservation and provide stability with minimal fluctuations.

2. Medium-Risk Funds – A Balance Between Safety and Growth

Hybrid funds combine stocks and bonds to offer a balanced approach to risk and returns.

3. High-Risk Funds – Higher Returns

Examples for this category includes, equity funds, sectoral funds, and thematic funds fall. These funds involve higher market risks but also offer the potential for significant growth.

Also Read: Here’s Everything You Need to Know About Small Cap Mutual Funds

Specialised Mutual Funds for Unique Investment Strategies

Certain mutual funds follow specific themes, catering to niche markets.

1. Sectoral Funds – Industry-Specific Investments

Sectoral funds concentrate on a single industry, such as banking or technology. Their performance depends on how the sector performs.

2. Thematic Funds – Investing in Broader Trends

Unlike sectoral funds, thematic funds focus on broader trends, such as sustainability or infrastructure development.

3. International Funds – Exposure to Global Markets

These funds invest in foreign markets, offering opportunities to benefit from international economies.

4. Fund of Funds – Investing in Multiple Mutual Funds

Instead of investing directly in stocks or bonds, these funds invest in other mutual funds, providing an extra layer of diversification.

Wrapping Up!

Mutual funds come in different types, each designed to meet specific financial needs. Whether someone is looking for growth, stability, or a combination of both, understanding these categories helps in making informed choices.

Like any market-linked investment, mutual funds carry risks, so it’s essential to research thoroughly and seek professional guidance when necessary. Want to learn more about mutual fund options and start your investment journey? Visit the IndusInd Bank’s Wealth portal to check different mutual funds, analyse them, and set up SIPs for your preferred funds.