Perccent

Clarity beats guesswork. With dozens of schemes and labels—equity, debt, hybrid, index—it’s easy to feel stuck at the very first step. What you actually need is a simple way to map choices to real timelines and comfort with risk, so you can invest calmly and keep life moving.

This guide does exactly that. We’ll cut through the clutter, explain the kinds of mutual funds, show how the standard classification of mutual funds works, and connect each category to practical goals and holding periods.

By the end, you’ll know why to invest, how to get started, what taxes look like today, and which options make sense for you.

Why this matters

If you’ve ever opened an app and felt lost between equity, debt, hybrid, index, ELSS, liquid, or “balanced advantage,” you’re not alone. 

Markets move, incomes can be uneven, and goals often have clear dates (buying tools for your workshop next year, upgrading a two-wheeler in 18 months, expanding a storefront in 3–4 years). 

Picking the right mutual fund type for the right horizon can make the journey calmer and more predictable, even when headlines are loud.

What a mutual fund really is

A mutual fund pools money from many investors and invests it in shares, bonds, or a mix. A professional team manages the portfolio; you get “units,” and the unit price is called the NAV. 

Think of it as taking a reliable bus driven by experts, instead of navigating traffic alone. The industry in India follows standardised categories of mutual funds defined by SEBI so that you can compare schemes more fairly.

The big picture: how funds are classified

Before we list the different categories of mutual funds, it helps to know the four lenses you’ll see on every factsheet:

1. By asset class (what it invests in) – equity, debt, hybrid/multi-asset, gold/international, etc.
   
2. By structure (how you buy/sell) – open-ended (anytime) vs closed-ended (locked-in for a term).
   
3. By investment objective (what it’s trying to do) – growth, income, tax-saving, or solution-oriented.
   
4. By risk (Riskometer level) – from Low to Very High; this is the quick, comparable label.

We’ll walk through each lens and the kinds of mutual funds inside it, with simple examples, before we go deeper.

Kinds of mutual funds by asset class (what’s inside the fund)

Before the list, a quick note: asset class decides the core behaviour—how much it can swing and how it grows. Equity aims for higher long-term growth with higher ups and downs; debt seeks stability and income; hybrids mix the two.

1) Equity funds (long-term growth engine)

Equity funds invest primarily in shares. Under SEBI’s standardised classification of mutual funds, you’ll see Large Cap, Mid Cap, Small Cap, Flexi-Cap, Multi-Cap, Value, Contra, Focused, Sectoral/Thematic, ELSS, and Index/ETF variants. 

Many investors keep a broad index or flexi-cap as the core and add a satellite style (say, value or mid-cap) in small doses. 

One nuance: an AMC can offer either Value or Contra, not both.

When it fits: Goals 5+ years away (e.g., building a corpus to upgrade machinery for your workshop in 6–7 years). The long runway gives time to ride out volatility.

Popular kinds:

• Index funds/ETFs: Track indices like Nifty/Sensex. Low-cost, broad exposure, and a strong “default” for many long horizons.
  
• Flexi-Cap: Manager can move across large/mid/small caps. Balanced growth with flexibility, useful as a core holding.
  
• Large Cap: Focus on big companies. Smoother rides than mid/small caps, but still equity.
  
• Mid/Small Cap: Higher potential, higher swings. Add in measured amounts, not as the only core.
  
• Value/Contra/Focused/Sectoral: Style or theme plays—great for precise bets, but best layered after you have a diversified core.

2) Debt funds (parking, planning, and steadier accrual)

Debt funds lend to governments, PSUs, and companies. You’ll meet Overnight, Liquid, Ultra Short, Low/Short/Medium Duration, Money Market, Corporate Bond, Banking & PSU, Gilt/10-yr Constant Duration, Credit Risk, Floater.

The names indicate interest-rate sensitivity and credit quality. Lower duration generally means lower volatility.

When it fits: Under 3 years (parking a security deposit for a shop lease in 9–12 months, or setting aside money for a skills course next year).

• Overnight/Liquid/Ultra-Short: Built for days to months; focus on low volatility and quick access.
  
• Low/Short Duration, Money Market: For 12–36 months; target steadier accrual with moderate rate risk.
  
• Corporate Bond/Banking & PSU: Focus on higher-quality issuers for stability.
  
• Gilt/10-yr Constant Duration: Pure interest-rate bets; can be volatile when rates move—more niche for most investors.

3) Hybrid & allocation funds (mix of equity + debt + more)

Hybrids blend assets to smooth the ride. You’ll see Conservative Hybrid, Balanced Hybrid, Aggressive Hybrid, Balanced Advantage/Dynamic Asset Allocation, Equity Savings, Multi-Asset Allocation, and Arbitrage. 

The key is how much equity they carry and how dynamically they rebalance.

When it fits: 3–5 years or when you value smoother journeys—say, expanding a kiosk into a full store in ~4 years.

• Balanced Advantage/Dynamic Asset Allocation: Adjusts equity based on models/valuations to moderate drawdowns.
  
• Conservative/Aggressive Hybrid: Fixed ranges of equity vs debt; pick based on your comfort with swings.
  
• Equity Savings/Arbitrage: Use hedging/derivatives to deliver equity-like tax with tamer volatility—useful as a bridge for cautious investors.

4) Gold, international, and other “satellite” options

• Gold ETFs/Gold FoFs: Diversifier against equity stress and inflation spikes; usually small allocation.
  
• International funds/FoFs: Exposure to global markets; taxation is different post-2023 (explained later). 

Use these to balance a portfolio once your core is set.

Kinds of mutual funds by structure (how flexible is entry/exit?)

Structure affects liquidity and discipline.

• Open-ended funds: You can buy/sell on any business day at NAV. Ideal for SIPs, flexible goals, and most investors.
  
• Close-ended funds: Locked for a fixed term; units may list on exchanges, but liquidity can be patchy. Some investors like the built-in discipline, but know the trade-offs.
  
• Interval funds: Open for transactions at set intervals; niche use.

Kinds of mutual funds by investment objective (what the fund aims to do)

An objective clarifies the “why” of a scheme.

• Growth/Capital Appreciation: Usually equity or equity-oriented; aims to grow wealth over the years.
  
• Income/Regular Cash Flow: Typically, debt or conservative hybrids; focus on stability and payout options (you can also set up SWPs—systematic withdrawal plans—from growth options).
  
• Tax-saving (ELSS): Equity funds with a 3-year lock-in; eligible under Section 80C of the Income-tax Act (up to ₹1.5 lakh within the overall 80C limit).
• Solution-oriented: Long-horizon goals with discipline features (e.g., retirement). Good when you want a structure that nudges patience.

Kinds of mutual funds by risk (the Riskometer)

Every scheme carries a Riskometer label—Low, Low to Moderate, Moderate, Moderately High, High, Very High—updated periodically so investors can compare risks at a glance. It reflects market volatility and, for debt, credit quality/rate risk. 

Use it to sanity-check whether a scheme’s risk matches your time horizon and comfort.

Funds and goals must talk to each other

A fund choice makes sense only when it fits your goal amount and date:

• Under 1 year: Prioritise safety/liquidity—Overnight/Liquid/Ultra-Short.
  
• 1–3 years: Low/Short Duration debt or Conservative Hybrid.
  
• 3–5 years: Balanced Advantage/Equity Savings or a cautious Flexi-Cap (if you accept some swings).
  
• 5+ years: Core Index/Flexi-Cap equity; add style (Value/Mid-Small) gradually.

Example: You plan to move to a larger rented unit for your workshop in 18 months and need a security deposit. 

That’s not equity time. A Liquid or Low-Duration fund is the practical fit; it aims to keep the corpus steady and accessible—far better than hoping a small-cap rally turns up exactly when you need the money.

Why invest in mutual funds and how to do it right

Before lists, a short frame: a mutual fund simplifies diversification, discipline, and disclosure—all three are hard to DIY consistently.

Benefits:

• Diversification in one line item: Your money spreads across many securities, reducing single-stock or single-bond risk.
  
• Professional management and transparency: Regulated space (SEBI/AMFI), standardised categories, monthly factsheets, and Riskometer—so you can track what you own.
  
• Works with your cash flows: SIPs build over time; staggered LumpSums reduce timing regret; SWPs help draw income in a planned way.
  
• Low-cost index options: Simple, broad-market exposure as a core—easy to understand and stick with.

How to invest (a simple, steady process):

1. Define the goal (amount + date + must-have). Writing it down reduces second-guessing later.
   
2. Pick the category by horizon/risk (use the mapping above). This narrows the different types of mutual funds to a few sensible options.
   
3. Choose the scheme (factsheet, expense ratio, track record across cycles, portfolio quality, Riskometer).
   
4. Execute with SIPs/Staggered lumpsum: SIP for habit; spread any big cash over weeks/months if you’re worried about timing.
   
5. Review yearly: Check if you’re on track, rebalance to the intended mix, and avoid chasing last year’s winners.
   
6. Stay the course: Markets move; your discipline is the real edge.

Taxation of Mutual Funds

Tax rules for mutual funds were updated in April 2023 (non-equity) and July 2024 (equity).

Equity Funds (≥65% Indian equity):

• Before July 23, 2024: STCG (≤12 months) at 15% (Section 111A); LTCG (>12 months) at 10% on gains above ₹1 lakh (grandfathering for pre-2018 holdings).
• On/after July 23, 2024: STCG at 20%; LTCG at 12.5% with ₹1.25 lakh annual exemption for listed equity/equity MFs. Specified Funds (≤35% Indian equity, e.g., debt/international FoFs):
• Acquired on/after April 1, 2023: Gains taxed as STCG at slab rate, no indexation (Section 50AA).
• Pre-April 2023 units, sold on/after July 23, 2024: LTCG (>24 months) at 12.5% without indexation. Dividends: Taxed at slab rate; growth + SWP often preferred. ELSS: Offers Section 80C deduction (≤₹1.5 lakh) with 3-year lock-in. Equity funds retain tax advantages over non-equity funds. 

Verify rules for your assessment year.

Who should invest in which mutual fund and why

This is where all the labels—types of mutual fund, mutual fund different types, kinds of mutual funds—become real decisions. 

Link time horizon + comfort with volatility:

• If your goal is < 1 year:
  Choose Overnight/Liquid/Ultra-Short. You want capital stability and access, not market drama. 

Example: Keeping aside funds for a festival-season inventory purchase in 6 months.

• If your goal is 1–3 years:
  Consider Low/Short Duration debt or Conservative Hybrid. You’re seeking modest growth with limited swings.

Example: Saving for a tool upgrade or short certification in 18–24 months.

• If your goal is 3–5 years:
  Balanced Advantage/Equity Savings or a cautious Flexi-Cap if you can handle some volatility. These aim to smooth the ride while giving growth a chance. 

Example: Expanding from one kiosk to a small outlet in 4 years.

• If your goal is 5–7 years:
  Make Index/Flexi-Cap your core; Large & Mid Cap as an add-on. The time cushion lets compounding work through cycles.
  
• If your goal is 7–10+ years:
  Core Index + measured satellites (Value/Contra/Mid-Small). Review annually to avoid style creep. Add a small gold allocation if you want a diversifier.

This isn’t about how many types of mutual funds you can list; it’s about which type fits your data-and-amount reality.

Key takeaways

• The classification of mutual funds is there to help you compare apples to apples—use it.
  
• Start with the category that matches your goal horizon, then choose a scheme with sensible costs, clean portfolio quality, and an appropriate Riskometer level.
  
• Don’t over-optimize; a core index or flexi-cap, a parking fund for short-term needs, and a hybrid for the middle ground cover most use-cases.
  
• Taxes matter, but discipline matters more. Plan SIPs/SWPs, stagger large entries, and review once a year.

Conclusion

You don’t need to memorise everything—just match the category to your horizon, pick a simple core, add satellites thoughtfully, and review annually. 

If you’ve ever wondered “what are the types of mutual fund” or sifted through mutual fund & types explainers, the shortest path is the clearest one: use the classification to make a decision you can stick to.

Start simply with Perccent. 

Our goal- and basket-based approach helps you choose sensible combinations of the kinds of mutual funds you’ve just read about—built for everyday investors and focused on Tier-2/3 realities without making it complicated.

FAQs

1) What are the types of mutual fund schemes I should know first? 

Start with Equity, Debt, and Hybrid. Equity for 5+ years, Debt for <3 years, Hybrid for 3–5 years. Once that’s clear, layer styles like Index, Flexi-Cap, Large/Mid/Small, Balanced Advantage, Liquid/Ultra-Short. These kinds of mutual funds cover most needs.

2) Are liquid funds “guaranteed”?

No. They aim for high liquidity and very low volatility, but they’re not guaranteed or fixed deposits. They invest in short-term debt; credit and rate risks are minimised, not eliminated. Check the Riskometer and portfolio quality before investing.

3) ELSS vs other equity funds—what’s special? 

ELSS is an equity fund with a 3-year lock-in and eligibility under Section 80C (within the ₹1.5 lakh limit). Many investors use it as a tax-efficient equity core while building discipline through the lock-in.

4) How did taxes change recently for equity funds? 

For sales on/after 23 July 2024, STCG is 20% and LTCG is 12.5% with a ₹1.25 lakh exemption on listed equity/equity MFs; before that date, the old 15%/10% + ₹1 lakh rules applied. Always compute based on the date of sale.

5) What about debt funds and international FoFs since 2023? 

If the fund invests ≤35% in Indian equity and units were acquired on/after 1 Apr 2023, gains are treated as short-term and taxed at your slab rate—no indexation (Section 50AA). Older holdings may differ.

6) Flexi-Cap vs Multi-Cap—what’s the practical difference? 

Flexi-Cap can allocate freely across large/mid/small caps (flexibility). Multi-Cap maintains minimum allocations to each (structure). If you want manager freedom, choose Flexi-Cap; if you prefer built-in balance, pick Multi-Cap.

Disclaimer:

Mutual fund investments are subject to market risks. Please read all scheme-related documents carefully before investing. The examples and scenarios shared in this article are for educational purposes only and are intended to help parents and individuals make informed decisions. They do not constitute financial advice or a recommendation. For personalised investment planning — especially when investing for your child’s future — please consult a certified financial advisor or distributor.