Understanding the Different Types of Mutual Funds
When I first started learning about investing, mutual funds felt like a complicated topic. But as I explored more, I realized that mutual funds are actually one of the simplest ways to invest money and grow wealth over time.
A mutual fund is basically a pool of money collected from people like you and me. This money is then invested by experts in different things like company shares, government bonds, or even gold — depending on the type of fund. What I love about mutual funds is that I don’t need to study the stock market or pick individual stocks. A professional does that for me.
There are different types of mutual funds made for different goals. Some are for high returns, while others are for regular income. Some are good for the short term, and others for long-term wealth building. It all depends on what I need and how comfortable I am with risk.
In this blog, I’ll walk you through all the main types of mutual funds I’ve learned about. I’ll explain them in a simple and easy way so you can choose the right one based on your goals — just like I did.
What Are Mutual Funds?
Honestly, when I first came across the term “mutual fund,” I had no clue what it meant. It sounded like one of those complicated finance things that only experts deal with. But once I sat down and read a little about it, I was surprised at how simple it actually is.
A mutual fund is basically a bunch of people, like you and me, putting in our money together. That collected money is then handled by a professional who knows where and how to invest it — whether it’s in company shares, bonds, or other things that can grow over time.
I like to imagine it like this: instead of me buying just one stock and taking all the risk, I get a small share in many different investments. It’s a smarter and safer way to invest, especially for someone like me who isn’t glued to market news every day.
What I really like is that you don’t need a huge amount to start. I began with just ₹500. It’s simple, it’s flexible, and it made me feel like I was finally doing something good with my savings — without feeling overwhelmed.
Types of Mutual Funds in India
When I first started investing, I didn’t know there were so many types of mutual funds. I thought of it as just one bigpool of money. But, mutual funds are grouped in different ways depending on things like where the money is invested, what the fund’s objective is, how much risk it has, and its flexibility.
Once I understood these types, choosing the right mutual fund became much easier. Here’s how I look at them now:
1. Based on Asset Class
This refers to where the fund invests your money.
Equity Funds: These invest mainly in company shares. These are good if you are aiming for long-term growth. I have used equity funds when savingfor big goals like a future home or retirement. Although they have their ups and downs, they have given me good returns in the long run.
Debt Funds: These focus more on safety and stability. They invest money in bonds or fixed-income options.[6] Iuse these when I want to keep my money in a safe place, such as for emergencies or short-term projects.
Hybrid Funds: These are a mix of the two. I like these because they give me some growth and some safety. They are great when I don’t want to take a lot of risk but want a better return than a savings account.
2. Based on Investment Objective
Every mutual fund has an objective. Here’s what I learned:
Growth Funds: These are designed to grow your money over time. I use these for long-term projects where I don’t need the money right away.[10]
Income Funds: These are great if you want regular income. They are not for big gains but provide a steady stream of income. My parents like them because they provide a few months of income.
Tax Savings Funds (ELSS): I opt for these every year at tax time. They not only help reduce my taxable income but also give good returns if you keep the money invested for a few years.
3. Based on Structure
This is about how flexible the fund is with your money.
Open-Ended Funds: These are very convenient. I can invest or withdraw money whenever I want. I like this flexibility, so most of my mutual funds fall into this category.
Close-Ended Funds: These are locked in for a specific period of time. I personally avoid these unless I know for sure that I won’t need the money anytime soon.
Interval Funds: These are less common. They allow you to buy or sell only at specific times. I haven’t used them yet, but they might be a good fit for someone with a specific investment time frame.
4. Based on Risk Profile
This is a big one – knowing how much risk I’m willing to take has helped me make better choices.
Low-Risk Funds: These are safe and stable. I use these when I want to park my money in a reliable place.
Medium-Risk Funds: These create a balance. Hybrid funds usually come in here, and I find them useful when I want a better return without having to worry about daily market fluctuations.
High-Risk Funds: These have higher growth potential, but also higher volatility. I only invest a small portion here, and I remind myself that I need to invest for the long term.
How to Choose the Right Mutual Fund for You?
When I first started investing, I found it very confusing to choose the right mutual fund. Therewere so many funds, and on paper, they all looked good. But over time, I found a simple way to make things easier.
The first question I ask myself is : What amI investing for?
If it’s a long-term goal like retirement or buying a house, I usually choose equity or growth funds. For short-term needs like saving for a trip or anemergency fund, I prefer debt funds or funds with low risk.
Next, I think about how comfortable I am with taking risk. Am I okay with the value of my investment going down for a while? If not, I steer clear of high-risk equity funds andchoose something more balanced like hybrid funds.
Lastly, I always consider the time frame. If I don’t need the money for 5-10 years, I don’t worry about the market fluctuations. But if I need the money for a shorter period of time, I’ll be cautious.
Also, I always check the fund’s past performance, the fund manager’s experience, and theexpense ratio to make sure I’m getting the right value for my money.
Conclusion :
This is important to note: You really do not need to be a finance expert to start investing – this is one of the first things I learned in my journey of investing. I, for example, thought mutual funds were too complex or risky but in reality, once I started investing, understanding the basics made everything much simpler. Figuring out my “why” for investing did help. Was I investing for retirement or a long term goal, or for a vacation in the near term? That one question was pivotal in helping me pick the right mutual fund, without overthinking.
I certainly didn’t start big. To be more specific, my very first investment was quite small, and in retrospect, I am grateful that it was. It was effective in building my confidence towards learning at my own pace, and now, I am more at ease when it comes to managing my finances. By the end of this journey, I will be able to calm down and appreciate the fact that the goal was not to get the perfect fund, rather something that works for my life, risk appetite, and goals. As I said, trust me, it’s not as scary as it seems once you take the plunge. It was for me at least when I decided to just take that first step.
FAQ’s
What are different types of mutual funds?
Mutual funds mainly come in three types. Equity funds invest in shares and are great if you’re aiming for long-term growth. Debt funds are safer and offer steady returns, which makes them good for short-term goals. Then there are hybrid funds, which mix both equity and debt — I personally like these for balanced growth and lower risk.
Types of mutual funds in India ?
In India, mutual funds are divided based on four things: what they invest in, their purpose, how they’re structured, and the level of risk. Some invest in stocks, others in bonds, or a mix of both. You’ll find funds designed for growth, regular income, or even tax saving. They can be open-ended (you can enter or exit anytime) or close-ended (locked in for a fixed period). And of course, each type has a different level of risk — from low to high.
Different types of mutual funds based on various categories ?
Mutual funds can be grouped in several ways. Based on asset class, we have equity, debt, hybrid, and even gold funds. Based on investment objective, there are growth funds, income funds, and tax-saving options. Structurally, some funds are open-ended, some are close-ended, and a few are interval funds. Finally, based on risk, you have low-risk funds (stable), medium-risk (balanced), and high-risk (higher returns but more ups and downs).
What is the 20-25 rule for mutual funds?
The 20-25 rule simply means you don’t need to invest in more than 20 to 25 mutual funds. In fact, most people, including me, stick to 5–7 solid funds — that’s usually enough for good diversification. Having too many funds can actually make things harder to track and manage. It’s better to focus on quality over quantity.
About the Author
