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Types Of Mutual Funds - Based On Allocation, Risk, Investment Type, & More!

We’ve listed down mutual funds of all types by risk level, structure, timeframe, and asset class so that you can become a more informed investor!
May 10, 2022

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A good investment must grow consistently, produce recurring income, and be fairly priced . Mutual funds can tick all these boxes. That said, “mutual fund” is an umbrella term. 

It represents several investment options for various risk profiles, investment goals, and more. Being able to choose the right mutual funds out of the lot can set you up for success.

Why? Because there are over thousands of mutual fund scheme variations in India! Join us as we help you uncover the inner workings of popular types of mutual funds.  

Mutual Funds Based On Risk 

The ability to take risks is crucial in determining the type of mutual funds you should or shouldn’t invest in. It is often defined by factors that matter the most like age, source of income, and more.

Consider these two scenarios to understand why risk profiles are important:

Mr Chip is an investor who’s hell bent on conserving capital, even if it means missing out on big returns. Mr Chip isn’t being overcautious - he’s 65 years old and doesn’t have a regular source of income. 

On the other hand, Mr Dale is an investor who likes taking risks and wants to earn the highest possible returns. Mr Dale has his reasons - he’s 35 years old and has a solid paycheck coming his way every month.

Would Mr Chip benefit from investing in high-risk stocks? Most likely not. Would Mr Dale prefer it if you asked him to invest in fixed yield bonds? Definitely not.  

That’s why it’s important to know how much risk you can take before investing in any type of mutual fund. We’ll tell you how to do this later on. 

Meanwhile, here are the types of mutual funds sorted by risk. 

1. Aggressive

An aggressive mutual fund is one that invests in potentially high risk, high reward assets. This includes the likes of small-cap stocks, mid-cap stocks, and international stocks. 

Aggressive funds thus have the potential to generate lucrative returns, sometimes as high as 38% over a one year period. But the aggressive type of mutual funds come at a cost - they are high-risk investments. 

That’s why aggressive funds are known to be suitable for investors with a high-risk appetite, much like Mr Dale. 

Here are some of the top aggressive mutual funds in India according to Cube Wealth's expert mutual fund advisor.

Fund Name

3-Year Returns

5-Year Returns

Axis Small Cap Fund

28.08%

20.32%

Kotak Emerging Equity Fund

21.52%

15.18%

Motilal Oswal Midcap 30 Fund

19.96%

12.85%

2. Moderate

What if an investor doesn’t want to buy aggressive or conservative mutual funds? Moderate mutual funds are the answer. Mutual funds from this category generally invest in relatively stable stocks. 

At the same time, these stocks have the potential to generate solid returns. For example, midcap stocks. They sit in the sweet spot between high-risk small-cap stocks and consistent large-cap stocks. 

This means that moderate mutual funds can generate 14%-16% returns over the long term. But, they still carry a certain degree of risk and are only suitable for those with a moderately high/aggressive risk profile.   

Here are some of the top moderate mutual funds in India according to Cube Wealth's expert mutual fund advisor.

Fund Name

3-Year Returns

5-Year Returns

Axis Focused 25 Fund

15.52 %

14.75%

Kotak Equity Opportunities Fund

15.93 %

12.93%

Canara Robeco Emerging Equities Fund

17.40 %

14.67%

3. Conservative

Mutual funds that invest in large-cap stocks or debt securities like treasury bills, bonds, commercial paper, and others fall under the category of conservative mutual funds. 

These mutual funds are known for their predictable returns as the assets they invest in are either consistent stocks or fixed income securities. The returns thus vary from 6% to 12% over the long term. 

Here are some of the top conservative mutual funds in India according to Cube Wealth's expert mutual fund advisor.

Fund Name

3-Year Returns

5-Year Returns

Motilal Oswal Focused 25 Fund

15.52 %

14.75%

Mirae Asset Large Cap Fund

15.93 %

12.93%

IDFC Banking & PSU Debt Fund

7.96%

7.51%

ICICI Prudential Corporate Bond Fund

7.57%

7.22%

A common way to identify your risk profile is to fill out a “Risk Analysis Form”. Speak to a trained financial professional to know more.

Mutual Funds Based On Asset Class

“Asset class” is a fancy term for grouping investments that behave the same way and are subject to the same laws. Separating mutual funds by asset class is quite straightforward.

It’s done to simplify the way investors look at mutual funds, or any investment for that matter, and plan their portfolio. Here are examples of the asset class grouping in action. 

1. Debt Funds

Bonds, treasury bills, commercial paper, and other debt securities fall into a category known as fixed-income investments. If a mutual fund primarily invests in such securities, it’s classified as a debt fund. 

Debt funds themselves include a bunch of other categories that you may have heard of. These include:

  • Banking & PSU funds
  • Corporate bond funds
  • Dynamic bond funds
  • Liquid funds
  • Money market funds
  • Ultra short duration funds

Since debt funds invest in fixed income securities, they’re known to generate predictable returns in the range of 6% to 8%. At the same time, they’re also known to carry relatively low risk. 

Here are some of the best debt funds in India according to Cube Wealth's expert mutual fund advisor. 

Fund Name

3-Year Returns

5-Year Returns

IDFC Banking & PSU Debt Fund

7.96%

7.51%

ICICI Prudential Corporate Bond Fund

7.57%

7.22%

Nippon India Liquid Fund

4.50%

5.53%

2. Equity Funds

If a mutual fund invests 65% or more of its money in equity and equity related securities, it’s known as an equity fund. The hallmark of this type of mutual fund is the potential for lucrative returns at high risk.   

This stems from the nature of equity securities which are generally more volatile than fixed income securities but have the potential to generate substantially better returns. 

To that end, equity funds are known to generate 12-16% returns over the long term. Here are some of the best equity funds in India according to Cube Wealth's expert mutual fund advisor.

Fund Name

3-Year Returns

5-Year Returns

Motilal Oswal Focused 25 Fund

15.52 %

14.75%

Axis Focused 25 Fund

15.52 %

14.75%

Kotak Emerging Equity Fund

21.52%

15.18%

3. Hybrid Funds

A hybrid mutual fund has the liberty to invest in multiple asset classes like equity, debt, and gold. This blend of assets allows hybrid funds to deliver solid returns while being less risky than equity funds.

However, hybrid funds are riskier than debt funds and are generally suitable for 3+ years. The returns can range from 6% to 8% over the long term. 

Here are some of the best hybrid funds in India according to Cube Wealth's expert mutual fund advisor.

Fund Name

3-Year Returns

5-Year Returns

SBI Arbitrage Opportunities Fund

IDFC Arbitrage Fund

4.49%

5.05%

IDFC Arbitrage Fund

4.41%

5.04%

4. Fund Of Funds

So far, we’ve seen how mutual funds can invest in equity, debt, gold, or all three. But did you know that mutual funds can also invest in other mutual funds? These are known as Fund of Fund (FoF) schemes.

Mutual funds in this category can invest in one or more mutual funds. Most international funds make use of the FoF principle to invest in a parent fund abroad. 

Take a look at some of the best FoFs in India according to Cube Wealth's expert mutual fund advisor.

Fund Name

3-Year Returns

5-Year Returns

Motilal Oswal Nasdaq 100 Fund of Fund

27.28%

-

Edelweiss Greater China Equity Off-shore Fund

14.64 %

14.19%

Mutual Funds Based On Investment Goals

At the end of the day, investing is about hitting goals and working towards milestones like buying a house or retirement. But not all financial goals can be achieved in the same timeframe. 

Retirement is a classic example. Unless you’ve come upon a healthy windfall overnight, retiring takes years if not decades to achieve. Thus, choosing mutual funds based on your financial goals is important.  

Here, we’ll break down mutual funds according to how suitable they are for short term, medium term, and long term goals.  

1. Short Term

Buying a new gadget, saving up for a weekend getaway, and more are goals for the near future (3 years or less) also known as short term goals. Debt funds are generally suitable for such goals. 

Equity funds are out of the picture for short term goals. The reason is volatility. Equity funds are generally known to deliver to their potential over the long term, that is, 5+ years. 

2. Medium Term

Goals like doing an MBA, buying a new car, and more fall in the 3-5 year category, also known as medium term goals. Debt funds, ELSS funds, and large-cap funds are known to be suitable for this timeframe. 

Small-cap, mid-cap, and international funds are out of the picture for the same reason they’re not suitable for short term goals - relatively high volatility. 

3. Long Term

Retirement, financial freedom, and more are goals that are for the distant future (5+ years), also known as long term goals. Equity funds are known to be suitable for long term goals. Debt funds are not.

The reason is the potential. Debt funds are not known to match the returns generated by equity funds over the long term. In fact, you’ll notice that some equity funds can generate 2x returns of debt funds.   

Mutual Funds Based On Structure

There are only two types of mutual fund categories based on structure. Let’s explore them in greater detail. 

1. Open-ended

A mutual fund that you can invest in and exit at any time is known as an open-ended fund. This includes a majority of mutual funds that you know and may have heard of. 

2. Closed-ended

Mutual funds that you can invest in during an NFO and not exit until a specific duration of time are known as closed-ended funds. Unlike open-ended funds, closed-ended funds are listed on a stock exchange.

Watch this video to know more about handpicked mutual funds.

Note: Facts & figures are true as of 04-05-2022. None of the information shared here is to be construed as investment advice. Exercise caution when investing in assets like stocks, mutual funds, alternative investments, and others.

Shriram Shekhar
Shriram is a Content Marketer at Cube Wealth, the Financial Freedom App with a smart Perfect Portfolio Planner. He has developed cutting edge IT products for over 2 years before turning to his passion for the written word. Shriram’s love for philosophy, product development, and empowering people through quality content is what got him to Cube Wealth.

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