To start your mutual fund journey, it is important that you know what kinds of funds exist. Here, we explore five broad categories of mutual funds, each with a certain investment objective.

1. Equity Mutual Funds
What are they?
Equity mutual funds invest mostly in shares or stocks of firms. They have the objective of long–term capital appreciation and suit investors with high-risk tolerance.

Types of Equity Funds:

Large-cap funds: Invest in big, established firms.

Mid-cap and small-cap funds: Invest in mid-level and budding companies with greater growth prospects (albeit with greater risk).

ELSS (Equity Linked Savings Scheme): Has a lock-in period of 3 years and is eligible for tax relief under Section 80C.

Who to invest?
Young investors, long-term wealth creators, and those comfortable with market volatility.

Risks:
Market fluctuations may result in short-term losses, but historically, equity funds provide better returns in the long term.

2. Debt Mutual Funds
What are they?
Fixed-income securities like government bonds, corporate bonds, treasury bills, and commercial paper are invested in by debt funds. They seek stable returns with comparatively lower risk than equities.

Types of Debt Funds:

Liquid Funds: Invest in extremely short-term instruments, suitable for parking excess money.

Short Duration Funds: Ideal for a 1-3 year time horizon.

Long Duration Funds: Investment for those who can invest for more than 3 years.

Credit Risk Funds: Investment in lower-rated securities to earn more (at greater risk).

Who to invest with?
Conservative investors, retirees, or persons with short- to medium-term objectives.

Risks:
Interest rate risk and credit risk. Although safer than equities, not risk-free either.

3. Hybrid Mutual Funds
What are they?
Hybrid funds invest in a combination of equity and debt securities with an objective to achieve risk-return equilibrium. The proportion of equity to debt depends on the fund’s goal.

Categories of Hybrid Funds:

Aggressive Hybrid Funds: More allocation to equities (65-80%).

Balanced Hybrid Funds: Almost equal allocation between equity and debt.

Conservative Hybrid Funds: Greater exposure to debt.

Dynamic Asset Allocation Funds: Dynamic change in the equity-debt mix depending on market conditions.

To whom should it be recommended?
Investors seeking a balanced strategy—moderate returns with managed risk.

Risks:
Moderate risk, based on equity holding. Suitable for medium-risk investors.

4. Index Funds
What are they?
Index funds attempt to follow the behavior of a particular index such as Nifty 50 or Sensex. These funds are passively managed, and hence the fund manager does not actively select stocks.

Key Features:

Lower expense ratios than actively managed funds.

Returns follow the benchmark index.

Who should invest?
Investors wanting market returns at reduced costs and those who subscribe to long-term index investing.

Risks:
They are not able to beat the index, and if the market declines, so does the index fund.

5. Solution-Minded Mutual Funds
What are they?
These funds are created for a particular life objective such as retirement planning or education of child. They carry a long lock-in period to instill disciplined investment.

Types:

Retirement Funds

Children‘s Education Funds

Who should invest
People with long-term financial planning and looking for financing along a disciplined investment route.

Risks:
Subject to the underlying assets (equity or debt). Nevertheless, the lock-in period might not be suitable for all.
The selection of the type of mutual fund relies on your investment horizon, goals, and risk tolerance. Investing in a portfolio that consists of a combination of these types of funds can serve to maximize return and keep risk under control. Prior to investing, it is advisable to take the opinion of a financial planner or conduct proper research so that your money serves the purpose in accordance with your objectives.

FAQs on Types of Mutual Funds
1. What is the best mutual fund for a beginner?
Hybrid mutual funds or index funds are perfect for beginners because they are balanced and less risky.

2. Am I at risk of losing money in a mutual fund?
Yes. Mutual funds are exposed to market risks. Equity funds, especially, experience short-term losses, but they tend to provide superior long-term returns.

3. Are the returns in mutual funds guaranteed?
No. Mutual fund returns are not assured. They are based on market performance and fund management.

4. What is the minimum investment for a mutual fund?
You may begin investing with as little as ₹500/month through SIP (Systematic Investment Plan).

5. How are mutual funds taxed in India?
Taxability varies based on the type of fund and duration of investment. Equity funds invested for over 1 year are charged 10% on profit exceeding ₹1 lakh (LTCG), while debt funds have a 20% tax with indexation advantage if it is for over 3 years.

6. How do I select the appropriate mutual fund?
Determine your investment horizon, risk tolerance, and financial goals. Then, select between equity, debt, hybrid, or goal-based funds.

7. Is it possible to change between mutual fund schemes?
Yes, you can change, but with a tax consequence and exit load depending on the scheme and time.