When it comes to investing in mutual funds, one common question that arises is—how to classify mutual funds? A proper understanding of mutual fund classification helps investors make well-informed decisions based on their financial goals, risk appetite, and investment duration.
Classification of Mutual Funds
Let’s explore the right method to classify mutual funds based on different criteria. This approach not only simplifies your selection process but also ensures alignment with your investment strategy.
1. Classification Based on Withdrawal Process
This classification refers to how and when returns are paid to investors.
Growth Option:
Returns are reinvested, and no payouts are made until you redeem the investment. Ideal for long-term capital growth.
IDCW (Income Distribution cum Capital Withdrawal):
Periodic payouts are made whenever the fund earns a surplus. Suitable for those seeking regular income.
2. Classification Based on Purchase Style
This categorization depends on how you buy the mutual fund—either directly or via intermediaries.
Direct Plan:
Purchased directly from AMC without a distributor, resulting in lower expense ratios and better returns.
Regular Plan:
Bought through brokers or agents, includes distribution charges in the expense ratio.
3. Classification Based on Investment Options
This is the most detailed and important classification. Mutual funds are mainly grouped into the following categories based on their investment strategy:
🟢 Equity Funds
Invest primarily in shares of companies and are suitable for long-term capital appreciation.
- Index Funds
- Large Cap Funds
- Mid Cap Funds
- Small Cap Funds
- Large and Mid Cap Funds
- Flexi Cap Funds
- Multi Cap Funds
- Sectoral/Thematic Funds
🔵 Debt Funds
Invest in fixed-income instruments like bonds, treasury bills, and money market instruments. These are typically lower-risk options.
- Liquid Funds
- Overnight Funds
- Banking & PSU Funds
- Duration-Based Funds:
- Long Duration
- Medium Duration
- Low Duration
- Short Duration
- Ultra Short Duration
- Dynamic Bond Funds
- Money Market Funds
- Gilt Funds
- Corporate Bond Funds
- Floater Funds
- Credit Risk Funds
- Gilt with 10-Year Constant Duration
🟠 Hybrid Funds
These funds invest in a mix of equity and debt instruments. Ideal for moderate risk-takers.
- Arbitrage Funds
- Dynamic Asset Allocation Funds
- Multi Asset Allocation Funds
- Equity Savings Funds
- Aggressive Hybrid Funds
- Conservative Hybrid Funds
🎯 Solution-Oriented Funds
Designed to serve specific life goals like retirement or child’s education.
Retirement Funds
Children’s Future Funds (Note: Not actively available in India; insurance-based products are generally recommended instead.)
💎 Gold & Silver Funds
These funds invest in gold/silver-related instruments and are good for diversification and hedging against inflation.
📦 Others
Some mutual funds do not fall strictly into the categories above but serve unique investment purposes.
- Fund of Funds (FoF)
- Mutual Funds investing in ETFs
📌 Conclusion
Knowing how to classify mutual funds properly is essential for building a balanced and goal-oriented portfolio. Whether you’re a conservative saver or an aggressive investor, this classification method can help you find the right fund for your needs. Focus on your objective first, then select the fund category accordingly.
Tip: Always check fund type, risk level, and expense ratio before investing.
For Further Reading:
A Beginner’s Guide to Mutual Funds
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