What is the right Method to Classify Mutual Funds

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.

Frequently Asked Questions (FAQ)

1. What is the classification of mutual funds based on the withdrawal process?

Mutual funds can be grouped by how investors receive returns:
Growth Option – Profits are reinvested; investors earn only at redemption. Best for long-term wealth creation.
IDCW (Income Distribution cum Capital Withdrawal) – Periodic payouts are made from the fund’s surplus. Suitable for regular income seekers.

2. How are mutual funds classified based on purchase style?

Two types of plans exist based on how you buy the fund:
Direct Plan – Purchased directly from the AMC, with lower expense ratios and higher returns.
Regular Plan – Bought through intermediaries like brokers, carrying distribution charges.

What are equity mutual funds and their types?

Equity funds invest mainly in company shares to provide long-term capital appreciation. Subcategories include:
Index Funds
Large Cap, Mid Cap, and Small Cap Funds
Large & Mid Cap Funds
Flexi Cap Funds
Multi Cap Funds
Sectoral/Thematic Funds

4. What are debt mutual funds and their types?

Debt funds invest in fixed-income instruments like bonds, treasury bills, and money market securities. They are relatively low-risk. Examples include:
Liquid & Overnight Funds
Banking & PSU Funds
Duration-Based Funds (Long, Medium, Low, Short, Ultra Short)
Dynamic Bond Funds
Gilt Funds
Corporate Bond Funds
Floater & Credit Risk Funds
Money Market Funds
Gilt with 10-Year Constant Duration

5. What are hybrid mutual funds?

Hybrid funds invest in a mix of equity and debt, offering both growth and stability. Key categories include:
Arbitrage Funds
Dynamic Asset Allocation Funds
Multi Asset Allocation Funds
Equity Savings Funds
Aggressive Hybrid Funds
Conservative Hybrid Funds

6. What are other categories of mutual funds?

Certain funds cater to special goals or diversification needs:
Solution-Oriented Funds – Retirement Funds, Children’s Future Funds.
Gold & Silver Funds – Investments linked to precious metals.
Fund of Funds (FoF) & ETF-Based Funds – Invest in other mutual funds or exchange-traded funds.

7. Which type of mutual fund is best for beginners?

For new investors, index funds or large-cap equity funds are usually recommended due to their simplicity, lower risk, and diversification. Beginners seeking stability may also consider hybrid funds or SIP in large-cap funds to gradually build wealth with discipline.

📖 Further Reading:

Explore more on this topic in our Mutual Fund Basic guide.

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