Mutual funds have become a great way of creating multiple streams of income, in addition to achieving financial freedom. If you are a conservative saver or an aggressive fund manager, there is always a mutual fund waiting for you. Here at Money Moksh, we will explore all the major types of mutual funds and their associated risks and rewards to help make better investment decisions.
What Are Mutual Funds?
Mutual funds collect capital from various investors and invest it into a balanced blend of securities such as stocks, bonds, government securities, real estate and others. These funds are managed by a professional fund manager whose job is to allocate assets in order to accomplish specific goals in investments.
🔑 Key Benefits of Mutual Funds:
✅ Diversification
These funds offer blend of various sectors to reduce risk.
✅ Professional Management
Fund managers are trained professionals with adequate knowledge.
✅ Liquidity
The ability to sell fund units makes them liquid.
✅ Transparency
All changes in fund portfolios must be reported on a regular basis.
✅ Tax Benefits (in ELSS and some debt funds)
Equity Funds: High Growth, High Risk
Equity funds invest mainly in shares and the aim is long tailed capital gain. They tend to suit an investor who has a greater risk tolerance and can hold for a longer period of time (5+ years).
Large Cap Funds
What are they? Invest in large and well-established companies with strong foothold in the market.
- Risk: Low to Moderate
- Return Potential: 10–13% each year
- Example: SBI Blue chip Fund, ICICI Prudential Blue chip Fund
- Best For: More conservative investors needing more steady returns
📌 Think Reliance, TCS, HDFC Bank- the giant blue chip stocks that are very stable and well established within the Indian economy.
- Risk: Moderate
- Return Potential: 12–15% each year
- Example: Kotak Emerging Equity Fund, DSP Midcap Fund
- Best For: Investors that are Moderately aggressive and need growth
📌 Ideal for those wanting the optimized balance in risk and reward.
- Risk: High
- Return Potential: 14-18%+ each year
- Example: Axis Small Cap Fund, Nippon India Small Cap Fund
- Best For: Long term risk takers
📌 Great for aggressive investors that can handle extreme fluctuation in the economy.
- Risk: Moderate
- Return Potential: 12-15%+
- Example: Parag Parikh Flexi Cap Fund, UTI Flexi Cap Fund
- Best For: Investors seeking balanced exposure across markets
📌 Designed so that fund managers have more active control and can respond to changes in economic conditions.
🔸 Sector/Thematic Funds
What are they?
Focus on a sector (e.g. IT, Pharma) or a theme (e.g. ESG, digital India) and invest.
- Risk: High
- Return Potential: 15-20%+ (depends on sector)
- Example: ICICI Prudential Technology Fund, Axis ESG Fund
Best For: Well-informed investors with sectoral knowledge
📌 Great for investors extremely bullish on certain industries.
🔸 Dividend Yield Funds 💸
What are they?
These funds focus on companies that have a history of paying high and consistent dividends.
- Risk: Moderate
- Return Potential: 10-14% + dividend income
- Example: UTI Dividend Yield Fund, Templeton India Equity Income Fund
- Best For: Income seekers and retirees
📌 Growth and regular income at the same time.
🔸 Value vs Growth Funds 💡
- Value Funds: Invest in stocks that are currently undervalued but have the potential to bounce back.
- Growth Funds: Invest in companies that are expected to grow at an accelerated pace.
- Example: Value: ICICI Prudential Value Discovery Fund Growth: Mirae Asset Large Cap Fund
📌 Decide based on your belief: Value = buying cheap; Growth = buying future potential.
🔸 Debt Funds: Stability and Predictable Returns 💵
Debt mutual funds buy fixed income securities such as bonds, debentures and treasury bills. Suitable for investors who are risk averse and wish to receive steady income.
🔸 Duration-based Funds ⏱️
| Fund Type | Ideal Horizon | Risk Level | Example |
| Overnight Funds | 1 Day | Very Low | HDFC Overnight Fund |
| Liquid Funds | Up to 3 Months | Low | ICICI Prudential Liquid Fund |
| Short-Term | 1–3 Years | Low–Moderate | SBI Short Term Debt Fund |
| Long-Term | 3+ Years | Moderate | Axis Long Duration Fund |
📌 Suitable for savings with a cash reserve that need to be accessed or utilized in the near-terms.
🔸 Credit Risk Funds ⚠️
What are they?
Invest in bonds that are rated lower and have higher interest.
- Risk: High (default risk)
- Return Potential: 9–11%
- Example: Franklin India Credit Risk Fund
- Best For: Knowledgeable investors with a high risk threshold
Optimal for investors willing to take higher risk for a potentially greater return.
🔸 Gilt Funds 🏛️
What are they?
Focus solely on investment in government bonds (G-secs)
- Risk: Low credit risk, some risk from interest rate changes
- Return Potential: 7–9%
- Example: SBI Magnum Gilt Fund
- Best For: Investors with conservative long-term growth focus
Ideal during periods of declining interest rates.
🔸 Floating Rate Funds 🌊
What are they?
Bonds with interest rates that may change over time
- Best For: Inflation hedging and increasing rate environments
- Example: HDFC Floating Rate Debt Fund
Best for preserving capital when competing debt instruments face falling interest rates.
🔸 Hybrid/Asset Allocation Funds: Balanced Growth ⚖️
Hybrid funds blend equity and debt to achieve balanced growth along with stability. These funds are great for beginners and moderate risk investors.
🔸 Aggressive Hybrid Funds 🧠
- Equity Exposure: 65–80%
- Return Potential: 12–15%
- Example: Mirae Asset Hybrid Equity Fund
- Best For: Investors seeking growth with low volatility
📌 A good step up from debt to equity.
🔸 Balanced Advantage Funds 🔃
What are they?
They dynamically manage asset allocation between equity and debt.
- Return Potential: 10–14%
- Example: ICICI Prudential Balanced Advantage Fund
- Best For: Those looking for calmness during turbulent times in the market.
📌 Automatic market timing without the effort.
🔸 Conservative Hybrid Funds 🧓
- Equity Exposure: 10–25%
- Return Potential: 7–10%
- Example: HDFC Hybrid Debt Fund
- Best For: Retired individuals or individuals nearing their financial goals.
📌 Security paired with slow growth.
🔹 Alternative Funds: Diversifying Beyond the Basics 🌍
🔸 REITs & InvITs Mutual Funds 🏬
- REITs: Invest in commercial real estate (malls, offices)
- InvITs: Invest in Infrastructure (roads, bridges, transmission lines).
- Return: Stable income through dividends/rentals
- Example: SBI REIT Fund, ICICI Prudential Infrastructure Fund
📌 Useful for passive income generation as well as diversifying beyond equities.
🔸 International Funds 🌐
What are they?
Invest in global stocks/bonds (U.S., Europe, and China)
- Return Potential: Depends on market performance and how the currency will do.
- Example: Motilal Oswal Nasdaq 100 Fund and PGIM Global Opportunities Fund.
📌 Lets you benefit from the rise of Apple, Amazon, Tesla, and others.
🔸 Fund of Funds (FoFs) 🔁
What are they?
Invest in other mutual funds.
- Return Potential: Different from the fund used as the FoF.
- Example: Edelweiss US Technology Fund of Fund.
- Best For: Simple diversification across industries and countries.
📌 One fund, many strategies.
Tips to Follow When Selecting a Mutual Fund
- Define Your Goal: Retirement, education, buying a house, and so on.
- Assess Risk Appetite: Low, Moderate, High
- Investment Horizon: Short Term: Less than Three Years; Long Term: Over Five Years
- Diversify Carefully: Equities, Debt, Alternatives
- Review Fund Ratings: Value Research and Morningstar
Real Life Scenarios
A Case For A Young Professional
- Objective: Build wealth in 15 to 20 years
- Suggested Strategy: Systematic investment plans in small, mid, and flexi cap funds.
A Case For A Family Saving To Buy A House
- Objective: Within three to five years
- Suggested Strategies: Short-term debt funds and aggressive hybrid funds.
A Case For A Retiree
- Objectives: Earn steady income
- Suggested Strategies: Dividend yield funds, gilt funds, conservative hybrid funds.
Final Thoughts From Money Moksh
When it comes to mutual funds, one size doesn’t fit all. Adapting your finances to different types of funds in the market is a crucial strategy for wealth building. Whether you prefer aggressive growth or steady income, there is a fund type tailored to your needs.
“Information is key to successful investing,” – At MoneyMoksh, we’re here to help at every stage.