Types Of Mutual Funds In India

A Mutual fund (MF) is a pool of money collected from various investors with common financial goals to be invested in different investment opportunities. These opportunities could be equities, bonds, gold, or any other financial instruments. Fund managers use various mutual fund schemes to invest money on behalf of the investors. The return earned on the pool of money then gets distributed among all the investors based on their investment proportion.  Unlike the stock market where investors invest in each stock individually, mutual funds are a combination of stocks that help diversify your portfolio. There are different types of mutual funds and various ways in which investments take place. Let's find out.

Different Types Of Mutual Funds In India

Type 1: Based on Strategy Used By Fund Managers

     1. Active Funds

In active funds or actively managed funds, fund managers regularly work on the fund’s portfolio. Managers continuously analyze the market and use their expertise and judgment to allocate assets based on market conditions.      2. Passive Funds Contrary to active funds, passive funds replicate the market index. (For example NSE Nifty 50, BSE Sensex, etc.) Here, fund managers don’t make frequent changes to asset allocation. Investors don’t have to rely on constant market analysis and expert judgment.

Type 2: Based on The Structure of The Funds

     1. Open-Ended Funds

Open-ended funds are available to purchase/subscribe to with no maturity period. Investors can buy/sell units as they please. The NAV is declared every day for investors to track and modify their investments as and when they want.      2. Closed-Ended Funds Closed-ended funds are available to purchase only for a specific period of time at the launch of the scheme. These funds have a maturity period of usually between 3 to 5 years. They are available to purchase only during New Fund Offer (NFO).

Type 3: Based on Asset Class

     1. Equity Mutual Funds Equity Mutual Funds invest in companies that belong to different market capitalizations (small-cap, mid-cap, large-cap), sectors, or themes.  ELSS offers tax benefits under Section 80C of the Income Tax Act. These funds are more likely to deliver better returns than other schemes but can be riskier.  Read more about- 7 Common Types of Equity Mutual Funds

     2. Debt Mutual Funds

Debt funds, also known as bond funds, allocate assets to bonds such as corporate bonds, government bonds, commercial papers, treasury bills, etc. These funds are further classified based on duration into Liquid Funds, Corporate Bonds, Banking and PSU, Gilt Funds, Short Term funds, Long Term funds. These funds are safer to invest in but deliver lower returns compared to equity funds. However, debt funds deliver superior tax-adjusted returns as compared to Fixed Deposits.  Read more about- 15 Common Types of Debt Funds

     3. Hybrid Mutual Funds

Hybrid mutual funds distribute assets in both equity and debt instruments depending on the scheme’s objective.  While equity allocation can bring decent returns, debt allocation offers security against volatile markets thereby creating a perfect balance.  These funds can be further classified as Dynamic Asset Allocation funds, Aggressive Hybrid funds, Multi-Asset Allocation funds, or Monthly Income Plans. 

How Are Mutual Funds Taxed?

The capital gains (total return) of mutual funds are taxed based on the type of scheme and the holding period.

     1. Capital Gain Taxation on Equity Funds

Investments redeemed before 12 months fall under Short Term Capital Gains (STCG). Investors have to pay a 15% tax on short-term capital gains of mutual funds. On the other hand, investments redeemed after 12 months fall under Long Term Capital Gains. In this case, the capital gains over INR 1 lakh will be taxed at 10%. Capital gains below 1 lakh are tax-free. 

     2. Capital Gain Taxation of Debt Funds

When you sell a debt fund before 36 months (Short-Term Capital Gain), the capital gain will be added to your total income and taxed as per your income tax slab. In the case of Long-Term Capital Gain (funds sold after 36 months), the gain will be taxed at 20% with indexation. Indexation is a method of recalculating mutual funds' unit prices with respect to the inflation index published by the Income Tax Department. 

Top 5 Benefits of Investing in a Mutual Fund

     1. Diverse Portfolio

As mutual funds allocate your money to different stocks, it makes your portfolio diverse and delivers superior returns over the years.

     2. Liquidity

You can sell/redeem mutual funds units quite easily on any business day. The money gets credited to your account in T+1 day in case of liquid funds. T stands for transaction day. For example; if you redeem the liquid fund on Monday, the amount is credited to your account on Tuesday. For other debt funds, the TAT (Turnaround Time) is T+2 and for equity mutual funds, it’s T+3.

     3. Professional Management

Once you invest your money, you don’t have to worry about which sectors to invest in, which companies within those sectors, what proportion to invest in, and how much exposure to take in debt and equity, etc. Fund managers take those calls and handle asset allocation to ensure superior returns.

     4. Affordable Investments

You can start investing in mutual funds via a Systematic Investment Plan with as low as INR. 500 per month.

     5. Tax Benefits

ELSS mutual funds offer tax benefits on investments up to INR. 1.5 lakhs under Section 80C of the Income Tax Act. You can also gain indexation benefits on debt mutual funds if you hold them for 3 years or more.


Why select individual stocks and spend hours analyzing markets when you can just invest in mutual funds? Mutual funds are suitable for anyone who wants to explore multiple stocks without actually managing them. Fund managers can handle and may multiply your money with their market analysis. There are various types of mutual funds that can align with your financial goals. You can start a SIP of INR. 500 per month and gradually build wealth for retirement.  Don’t wait anymore. Start investing in mutual funds. For in-detail insights on your portfolio and risk profile, contact experts at VNN Wealth and we will help you meet your financial goals.