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Did You Know? Individual investors like you are driving the growth of mutual funds in India. According to AMFI’s latest report categories like equity, hybrid and solution oriented schemes are booming due to increased participation from retail investors. It’s exciting to see how individuals are shaping the mutual fund landscape, isn’t it?
But question you ask: What types of mutual funds are people investing in these days?
If you’re curious or looking to start your own investment journey, this guide is here to help. We’ll break down the 4 types of mutual funds in India, making it easy for you to understand and choose the ones that align with your financial goals. So, let’s dive in and explore your options.
- Equity Oriented Mutual Funds
Equity oriented mutual funds are all about investing in company’s stocks across a mix of sectors. Think of them as your ticket to ride the waves of the equity market aiming for high returns by tapping into its growth potential. These funds are perfect for those who have their eyes set on long term wealth building and are comfortable with a bit of risk along the way.
Did you know? In FY24, equity oriented mutual funds experienced a whopping 55% growth in assets, reaching at ₹23.50 lakh crore. That’s some serious growth, isn’t it?
But here’s the best part within this broad category, there’s something for everyone. Different types of equity mutual funds cater to diverse investor goals so you’re bound to find one that fits your needs like a glove.
| Fund Category | Composition | Purpose | Risk Level |
|---|---|---|---|
|
Multi Cap Fund
|
Minimum 75% in equity & equity related instruments
|
Diversified investment across large, mid and small caps to manage risk and reward |
Very High |
|
Flexi Cap Fund
|
Minimum 65% in equity & equity related instruments
|
Flexible allocation among large, mid and small caps based on market conditions
|
Very High |
|
Large Cap Fund |
Minimum 80% in large cap stocks
|
Investment in established companies for stability and steady returns
|
Very High |
|
Large & Mid Cap Fund
|
At least 35% in large caps and 35% in mid caps
|
Balanced exposure to the stability of large caps and the growth potential of mid caps
|
Very High |
|
Mid Cap Fund
|
Minimum 65% in mid cap stocks
|
Focus on mid sized companies with higher growth potential
|
Very High |
|
Small Cap Fund
|
Minimum 65% in small cap stocks
|
Investment in small companies with high growth potential but higher volatility
|
Very High |
|
Dividend Yield Fund |
Primarily in dividend-yielding stocks with at least 65% in equities
|
Aims for regular income through dividends and capital appreciation
|
Very High |
|
Value Fund
|
At least 65% in equities following a value investment strategy
|
Investment in undervalued companies with significant growth potential
|
Very High |
|
Contra Fund
|
At least 65% in equities following a contrarian strategy |
Invests in out of favor stocks with potential for future growth
|
Very High |
|
Focused Fund
|
Up to 30 stocks with at least 65% in equity & equity related instruments
|
Concentrated investments in high conviction stocks for potentially higher returns
|
Very High |
|
Sectoral or Thematic Fund
|
Minimum 80% in a specific sector or theme such as Infrastructure, Banking, Pharma or FMCG
|
Investment focused on specific sectors or themes expected to outperform the broader market
|
Very High |
|
ELSS
|
Minimum 80% in equities as per ELSS guidelines
|
Offers tax benefits under Section 80C with a 3year lock in period
|
Very High |
- Debt Mutual Funds
Debt mutual funds are like the calm waters of the investment world. They focus on fixed income securities such as bonds, treasury bills and other debt instruments. To offer you a steady income and preserve your capital, all while keeping risks lower compared to equity funds. If you’re someone who values stability and regular income over chasing high returns, debt mutual funds could be just the thing for you.
Now, let’s talk numbers. In fiscal 2024, debt mutual funds saw a decent growth rate of about 7% wrapping up the year with assets totaling ₹12.62 lakh crore. Among the different categories Money Market and Liquid Funds stole the spotlight with significant asset growth.
| Fund Category | Composition | Purpose | Risk Level |
|---|---|---|---|
|
Overnight Fund
|
Invests in overnight securities maturing in 1 day
|
Ultra short term investments with high liquidity
|
Low |
|
Liquid Fund
|
Invests in debt and money market securities maturing within 91 days
|
Ensures short term liquidity with minimal risk
|
Moderate |
|
Ultra Short Duration Fund
|
Holds debt and money market instruments with a portfolio duration of 3–6 months
|
Suitable for short term investments with slightly better returns than liquid funds
|
Moderate |
|
Low Duration Fund
|
Invests in debt and money market instruments with a portfolio duration of 6–12 months
|
Balances liquidity and returns with lower risk
|
Low to Moderate |
|
Money Market Fund |
Invests in money market instruments maturing within a year
|
Ideal for short term parking of funds with low risk
|
Low to Moderate |
|
Short Duration Fund |
Holds debt and money market instruments with a portfolio duration of 1–3 years
|
Designed for short term investments with moderate returns
|
Moderate |
|
Medium Duration Fund
|
Invests in debt and money market instruments with a portfolio duration of 3–4 years
|
Suited for medium term goals with balanced risk and return |
Moderate |
|
Medium to Long Duration Fund |
Contains debt and money market instruments with a portfolio duration of 4–7 years
|
Suitable for medium to long term investments aiming for higher returns
|
Moderate |
|
Long Duration Fund
|
Invests in debt and money market instruments with a portfolio duration over 7 years
|
Best for long term investments targeting higher returns
|
Moderate |
|
Dynamic Bond Fund
|
Adjusts investment duration dynamically based on market conditions
|
Offers flexibility to adapt to interest rate changes |
Moderate |
|
Corporate Bond Fund
|
At least 80% invested in high quality corporate bonds (rated AA+ and above)
|
Provides steady returns with lower risk |
Moderate |
|
Credit Risk Fund
|
Minimum 65% invested in lower rated corporate bonds (rated AA and below)
|
Higher potential returns with increased risk
|
High |
|
Banking and PSU Fund
|
At least 80% invested in debt securities issued by banks, PSUs and financial institutions
|
Ensures safe returns with low risk
|
Moderate |
|
Gilt Fund |
At least 80% invested in government securities (G-secs)
|
Secure investments with moderate returns
|
Moderate |
|
Gilt Fund with 10 Year Duration
|
Minimum 80% invested in government securities with a portfolio duration of 10 years |
Longterm investments with stable returns |
Moderate |
|
Floater Fund
|
At least 65% invested in floating rate instruments
|
Shields against interest rate fluctuations
|
Low to Moderate |
How do Index Funds work?
When you invest in an index fund, you’re essentially putting your money into a basket of stocks that mirrors a specific index like NIFTY 50. The idea? To match the performance of that index, plain and simple.
Take a NIFTY Index Fund, for example, it invests in the same companies that make up NIFTY 50 and it does so in the same proportions. Let’s say Reliance has a 10.3% weight in NIFTY 50. The fund manager will allocate 10.3% of the fund’s money to Reliance shares. The same logic applies to the other companies in the index it’s all about replicating, not picking and choosing.
Now, here’s where it gets interesting. If the weight of a stock in the index changes or if one company is swapped out for another, the fund manager makes adjustments to keep things aligned. But unlike other types of funds the manager isn’t constantly buying or selling stocks to chase returns. This hands-off approach means lower management costs, which is why index funds are some of the cheapest mutual funds you can invest in.
If you’re someone who’s perfectly fine with matching the market’s performance, index funds are a no brainer. These funds are designed to mirror the ups and downs of market indices, making them a reliable choice for steady and predictable returns. Think of them as your gateway to tracking the broader market’s performance without the extra effort. By investing in index funds, you’re not chasing extraordinary gains or worrying about missing out you’re simply aligning your returns with the market. It’s consistent, straightforward and perfect for those who value stability.
When it comes to investing, even the most seasoned fund managers in actively managed funds can be influenced by human bias. Whether it’s personal opinions or gut feelings, these biases can sometimes blur their decision making and lead to poor outcomes. That’s where index funds stand out. They completely remove human emotion from the process.
Instead of making subjective choices, fund managers of index funds strictly adhere to the rules of a specific index. No overthinking, no personal preferences just a clear, straightforward approach. For anyone who values transparency and a hassle free investment strategy, index funds are an excellent choice.
Stepping into the stock market for the first time? It can feel a bit overwhelming with all the jargon, trends, and stock picking decisions. That’s why index funds are like a friendly guide for beginners. These funds mirror well known indices that generally show steady growth over time. With an index fund, you get a chance to ride the market’s long term growth trends without worrying about choosing the right stock. It’s a simple, stress free way to ease into investing and get comfortable with how markets work no prior experience is required!
Ready to dip your toes into the market? Index funds might just be the perfect place to start.
Managing an Index Fund doesn’t require a team of analysts constantly brainstorming about which stocks to pick or when to buy and sell. Why? Because these funds don’t try to beat the market they simply follow it. This no frills approach keeps management costs super low compared to actively managed mutual funds.
Plus, in India, Index Funds don’t actively trade stocks, which means fewer transactions and you guessed it, lower costs. As a result expense ratio or a fancy term for the fund’s annual fees is much lower than what you’d pay for an actively managed fund. And who doesn’t love saving money?
- 2. Built In Diversification:
When you invest in an Index Fund, you’re automatically putting your money into a wide variety of sectors. Why? Because indices like NIFTY 50 or Sensex are built with stocks from different industries and they have rules to ensure no single stock dominates the portfolio.
This means you get a well diversified portfolio with a single investment. Compare this to actively managed funds which may focus on specific stocks or sectors and often come with a higher price tag for less diversification.
- 3. Transparent and Trustworthy:
One of the coolest things about Index Funds is their transparency. Since these funds simply replicate a particular index, you can easily check the list of holdings and compare it to the index itself. This leaves little room for any behind the scenes manipulation. What you see is what you get and that’s a big win for investors who value trust.
- 4. No Fund Manager Bias:
Index Funds don’t rely on a fund manager’s gut feeling or personal stock picking skills. They’re all about automation. For example, if a fund tracks NIFTY Next 50 Index, it will invest in exactly those 50 stocks, weighted just like they are in the index.
This set it and forget it strategy eliminates the risk of human bias or emotional decision making. It’s like having a reliable auto pilot that sticks to the plan, no matter what.
So, if you’re looking for a low cost, transparent and diversified way to invest, Index Funds might just be your new best friend!
Drawbacks of index funds
Index funds are a great way to invest but let’s be honest they’re not perfect. They’re designed to track the index not beat it. So, if you’re looking for jaw dropping returns that outpace the market, index funds won’t cut it.
When market goes down, so do index funds. There’s no magic buffer to protect your investments.
Another downside? They aren’t actively managed. That means no one’s making strategic moves to adjust for changing market conditions. Index funds just follow the script which can feel a bit boring.
No matter how a company is doing financially, the fund manager sticks to replicating the stocks in the index. Why? Because they trust that the index owner has already done their homework and carefully selected the stocks.
This approach doesn’t always guarantee a perfect balance. Sometimes, it can include stocks that are overvalued while others remain undervalued.
How do I invest in index funds?
Investing in index funds is just as easy as investing in any mutual fund. Whether you’re a beginner or a seasoned investor, it’s a straightforward process. A mutual fund distributor, banker, or even an online broker can help you invest in the right index funds for your goals.
You can choose funds that align with your interests and investment outlook. Want to bet on the overall market? Go for blue chip indices like Nifty or Sensex. Interested in specific sectors? There are index funds for everything from technology and infrastructure to healthcare and more.
Once you’re ready, all you need to do is complete your Know Your Customer or KYC requirements. After that, you can start investing either through a Systematic Investment Plan or SIP to build wealth steadily or by making a one time lumpsum investment.
Frequently Asked Questions
1. Can you lose money in index funds?
Yes, you can lose money in an index fund because it mirrors the market's ups and downs. If the market falls, so will your investment. However, history shows that if you stay invested for the long term, the chances of losing money in index funds are very low.
2. How much should I invest in index funds?
This really depends on you. Start by considering your financial goals, risk tolerance and how much you can comfortably invest without impacting your daily life. Your age, income, investment timeline and financial obligations also play a role.
3. How long should I stay invested in index funds?
Think long term we're talking five to ten years or even more. Index funds follow the stock market and markets take time to grow and deliver strong returns. Staying invested for a longer duration helps you ride out short term volatility and benefit from the market’s overall growth. And don’t forget to check in on your investments regularly and consult a financial advisor to ensure you’re still on track to meet your goals.
4. What are the disadvantages of index funds?
Index funds come with some downsides:
- Since they simply track an index, they can’t beat it.
- If the market falls, your index fund falls too.
- There’s no active management to adjust strategies during market fluctuations or seize new opportunities.
5. What is the cost of investing in index funds?
Index funds come with an expense ratio, the cost of managing the fund. This varies across asset management companies (AMCs), so it’s always smart to check the latest details on mutual fund websites. You can also chat with a mutual fund distributor, banker, or broker to get a clear picture before investing.
6. What is meant by tracking error?
Tracking error is the difference between the returns of the index fund and the index it’s trying to replicate. Ideally, this difference should be close to zero but minor variations can happen due to factors like fees or timing. A fund with lower tracking error is considered better at closely mirroring its benchmark index.
Happy investing and thank you for reading!
Disclaimer:
This website content is only for educational purposes, not investment advice. Before making any investment, it’s important to do your own research and be fully informed. Investing in the stock market includes risks, and you should carefully read the Risk Disclosure documents before proceeding. Please remember that past performance doesn’t guarantee future results, and due to market fluctuations, your investment goals may not always be achieved.
