Understanding different Mutual Funds and how they work

Imagine this — you’ve built up some savings. Maybe it’s from your salary, a business windfall, or a bonus you weren’t expecting. It’s just sitting in your account, not losing value, but not growing either.

That’s exactly where mutual funds step in — think of them as a smarter way to grow your surplus without having to constantly watch the stock market.

In simple terms, a mutual fund collects money from multiple investors (like you and me) and invests it across assets like stocks, bonds, or gold — all managed by a professional.

Over the years, mutual funds have evolved from a niche product into one of India’s most trusted investment options — accessible, diversified, and backed by regulation.

Now, let’s break down the different types of mutual funds, not just by names but by purpose — so you can choose what works best for your business and your financial goals.

How are Mutual Funds Categorized?

Before diving in, let’s understand that there isn’t just one way to define the types of mutual fund options available today. In fact, the classification usually depends on these four dimensions:

What assets they invest in (equity, debt, etc.)
How they’re structured (open-ended or fixed).
What they aim to achieve (growth, income, tax-saving).
How risky they are.

Together, these give rise to the different types of mutual funds in India.

Let’s explore each one.

1. Based on Asset Class: What’s Under the Hood?

This is one of the most common ways used in the classification of mutual funds — based on the kind of instruments your money is invested in. Broadly, there are 4 types of mutual funds in this category.

a. Equity Mutual Funds

These funds primarily invest in the stock market — in shares of listed companies.

Why choose this? Equity funds offer the potential for long-term capital appreciation, making them suitable for investors with a growth mindset and a higher risk appetite.
Best for: Individuals or business owners who can invest for a longer horizon — typically 3 to 5 years or more.
Risk level: High — but this also brings the potential for higher returns over time.

b. Debt Mutual Funds

These funds allocate your investment to fixed-income instruments like government securities, corporate bonds, and money market instruments.

Why choose this? They provide a more stable, lower-risk option with predictable returns, making them ideal for conservative or short-term investors.
Best for: Parking surplus cash, creating emergency reserves, or investing funds that may be needed in the short to medium term.
Risk level: Low to moderate — depending on the duration and credit risk of the underlying instruments.

c. Hybrid Mutual Funds

As the name suggests, hybrid funds invest in a mix of equity and debt instruments. The fund manager actively manages the proportion depending on market conditions.

Why choose this? These funds strike a balance between risk and reward, offering moderate returns with less volatility than pure equity funds.
Best for: Investors who want some market exposure without the full risk of equities.
Risk level: Moderate — influenced by how the equity and debt components are balanced.

d. Solution-Oriented Mutual Funds

These funds are designed with specific long-term goals in mind — such as retirement planning or saving for a child’s education. They often come with a lock-in period to encourage discipline.

Why choose this? They simplify goal-based investing by aligning the fund strategy with long-term personal or family milestones.
Best for: Investors with defined financial goals and a willingness to stay invested over a longer period.
Risk level: Varies — depending on the underlying portfolio mix, but often leans toward medium to long-term strategies.

Together, these form the types of mutual fund scheme options available in India based on asset class. Whether you’re a cautious investor or looking for long-term growth, this category of mutual funds offers options tailored to different levels of risk and time horizons.

2. Based on Structure: How Flexible is the Fund?

This classification of mutual funds is based on how liquid or locked-in your investment is — essentially, how easy it is to enter and exit the fund. The three types of mutual fund scheme structures here are:

a. Open-Ended Funds

These are the most flexible types of mutual funds in India. You can invest or redeem units anytime at the prevailing Net Asset Value (NAV), just like buying or selling shares.

Why choose this? Open-ended funds are ideal if you want complete liquidity and the freedom to enter or exit your investment whenever your financial needs change.

Best for: Investors who value flexibility and may not want to commit their funds for a fixed duration.

Risk level: Depends on the fund’s asset class — equity-based open-ended funds carry more risk than debt-based ones.

b. Close-Ended Funds

Close-ended mutual funds have a fixed maturity period — usually between three to five years — and you can only invest in them during their New Fund Offer (NFO) period. Once the fund is launched, you can’t add more units or redeem early (unless through stock exchange listing).

Why choose this? These funds promote long-term discipline, which helps the fund manager manage the portfolio without sudden redemption pressure.

Best for: Investors who have a lump sum to invest and don’t need liquidity before maturity.

Risk level: Also depends on the fund’s portfolio — could range from low to high.

c. Interval Funds

Interval funds sit somewhere between open and close-ended structures. They only allow you to buy or redeem units at specific intervals — say quarterly or annually — as defined by the fund.

Why choose this? You get partial liquidity while also giving the fund manager breathing room to invest more strategically.

Best for: Investors who want a semi-liquid product — not as open as open-ended, but not locked up either.

Risk level: Varies based on the underlying investment, similar to the other two.

These different types of mutual funds offer structural flexibility based on your investment habits and cash flow needs.

Once you’ve figured out how much flexibility you need, the next big consideration is why you’re investing in the first place — and that brings us to the third way mutual funds are classified: by investment goal.

3. Based on Investment Objective: What Is the Fund Trying to Do?

You’ll often hear the term types of mutual fund schemes — these refer to the end goal of the fund.

Here’s a simple table to explain this category:

Fund Type	Goal	Who Should Consider
Growth Funds	Capital appreciation	Founders investing long-term business surplus
Income Funds	Regular income	Businesses with stable, low-risk cash flow needs
Tax Saving Funds (ELSS)	Tax benefit under Sec 80C	Anyone looking to reduce taxable income
Index Funds	Track stock market indices	Passive investors, low-cost exposure to Nifty/Sensex

Each of these schemes fits into the different types of mutual funds based on use-case. So, choose based on what your capital is meant to do.

But knowing the types of mutual funds in India is just one part of making a smart investment decision. The next big question most investors ask is — how safe is my money really in a mutual fund?

Are Mutual Funds safe? Let’s talk about the Risks and Regulations.

Many investors — whether running a business or managing a busy job — prefer peace of mind. And that’s fair.

So, let’s talk honestly about risks and protections.

What are the Risks?

Market Risk: Equity funds are subject to stock market movements, ie, ups and downs.
Interest Rate Risk: Debt fund returns may fall if interest rates rise.
Liquidity Risk: Some funds (like credit risk or close-ended funds) may not let you exit easily.
Fund Manager Risk: The human element always exists — decisions can go wrong.

But here’s the good news: Mutual funds are among the most regulated financial instruments in India.

Who Regulates Mutual Funds in India?

All mutual fund houses in India are regulated by SEBI — the Securities and Exchange Board of India. SEBI has laid down strict rules regarding:

Investment caps in certain sectors
Risk-o-meter disclosures for each fund
Portfolio transparency (monthly fact sheets)
NAV reporting and valuation norms
Audits and independent trusteeship

So yes, mutual funds are safe or not — depends on your choice of fund and horizon, but the system itself is very well-regulated.

Tax implications of Mutual Fund investment

Once you’ve understood the risks and the regulatory guardrails in place, there’s another key piece to the puzzle — taxation. And no, it’s not just fine print. The type of mutual fund you choose plays a direct role in how much of your return you’ll actually take home.

Knowing the tax rules helps you plan better, avoid surprises, and optimize for post-tax returns.

For instance, two funds might give you similar returns — but if one is taxed more heavily, it could quietly eat into your profits. That’s why understanding the classification of mutual funds isn’t just about risk and returns — it’s also about how they’re taxed.

Let’s just get into it,

Equity Mutual Funds:

Short Term (less than 1 year): 20% tax on capital gains
Long Term (after 1 year): 12.5% tax on gains exceeding ₹1 lakh per year

Debt Mutual Funds (after new rules):

As of 2023, all gains — regardless of holding period — are taxed as per your income slab (like FD interest). Indexation benefits are no longer available on most debt funds.

Why Does It Matter?

If you’re a business owner in the 30% tax bracket, debt fund gains are taxed higher than equity.
Equity Mutual Funds offer more favorable taxation over longer periods.

Conclusion – What’s the next step…

Whether you’re managing personal wealth or your company’s surplus capital, mutual funds offer a wide menu of options to match your goals — from safe parking to aggressive growth. The key lies in understanding the kinds of mutual funds, not just by name, but by what they’re designed to do.

Here’s a quick summary of how to think about it:

Want long-term growth? → Equity Funds or Index Funds
Want stability? → Debt Funds or Liquid Funds
Need both? → Hybrid Funds
Want tax savings? → ELSS
Investing for a goal? → Solution-Oriented Funds
Looking for flexibility? → Open-Ended Funds

And the best part? You don’t have to figure it all out alone.

Always seek professional advice before deciding the best for yourself. Hyperbola is an AMFI regulated Mutual Fund Distributor, assisting its investors in making risk profile based decisions.