A lot of us start our financial journeys by asking friends or family a simple question: “Where should I invest?” And more often than not, the answer includes mutual funds. They’re everywhere — from TV ads to casual conversations — and yet, understanding what they truly offer can feel like decoding a financial puzzle.
But here’s the thing: mutual funds aren’t just a single product. They come in many kinds, types, and categories, each created with a specific investment goal, risk profile, and time horizon in mind.
If you’re investing to build your child’s future, planning for retirement, or even just trying to make your savings grow — understanding the kinds of mutual funds can help you make smarter, more confident decisions.
Let’s break it down, one fund at a time.
What are Mutual Funds, really?
Mutual funds are investment vehicles that collect money from different investors and invest it in a diversified portfolio of assets — like stocks, bonds, gold, or international markets. A professional fund manager makes the buy/sell decisions on your behalf.
Think of a mutual fund as a financial carpool. Instead of driving alone (investing solo in stocks), you pool money with others and let an expert do the driving — while you still move toward your goal.
Understanding the Classification of Mutual Funds
Now here’s where it gets interesting.
Mutual funds are not one-size-fits-all. The classification of mutual funds exists to match your specific financial needs — whether you want high growth, regular income, or capital protection.
That’s why knowing the different categories of mutual funds becomes so important. Each mutual fund type has its own risk, return potential, and time horizon — making it easier to find a fund that aligns with your goals.
So, how many types of mutual fund options are out there? Quite a few — but we’ll focus on the top 10 kinds of mutual funds you need to understand as a smart investor.
Top 10 Categories of Mutual Funds in India
Understanding the different types of mutual funds is like understanding the compartments of a train — each is headed in the same direction (wealth creation), but they offer different speeds, comforts, and destinations. Here’s a breakdown of the ten most relevant mutual fund types in India — designed to match various financial needs and risk appetites.
1. Equity Mutual Funds
Equity mutual funds invest primarily in stocks or shares of listed companies. These funds aim to grow your investment by participating in the profits of businesses — ranging from large, stable companies to fast-growing startups. Their value fluctuates with the market but offers strong long-term return potential.
Purpose & Vision:
Equity funds were introduced to help ordinary investors participate in India’s economic growth. They enable you to invest in the stock market without having to pick individual companies yourself. For Indian families, especially parents thinking long-term for their children, equity funds are designed to build significant wealth over time, provided you have the patience to stay invested.
Risks & Objectives:
The biggest risk is volatility — prices can fluctuate daily based on market conditions. However, if you remain invested for 5 years or more, these risks tend to smooth out. Equity funds are best suited for goals like your child’s higher education, marriage, or building a legacy fund for their future.
2. Debt Mutual Funds
Debt mutual funds invest in fixed-income instruments like government bonds, treasury bills, corporate debentures, and other interest-generating securities. They do not participate in the stock market and are considered more stable than equity funds.
Purpose & Vision:
These funds were created to offer investors a more stable and predictable alternative to equity markets. Debt funds serve as a modern version of fixed deposits — offering better liquidity, slightly higher returns, and tax efficiency. For Indian parents, they’re ideal when planning for near-term expenses like school fees, tuition, or family emergencies.
Risks & Objectives:
Debt funds are not entirely risk-free. They carry interest rate risk (value drops if rates rise) and credit risk (the borrower may default). That said, short-duration and liquid debt funds are relatively safe and useful when your goal is capital preservation over 1–3 years.
3. Hybrid Mutual Funds
Hybrid funds invest in a combination of equity and debt instruments. The idea is to strike a balance — growth from equities and stability from debt — within a single fund.
Purpose & Vision:
Hybrid funds were introduced for investors who want moderate risk with reasonable returns. They’re particularly useful for beginners or conservative investors who don’t want full equity exposure. For parents, hybrid funds work well when you want your child’s investments to grow — but also want some protection from market crashes.
Risks & Objectives:
The equity portion still carries market risk, while the debt portion adds stability. These funds are great for medium-term goals like buying a laptop in 3 years or funding a coaching program. They’re not as high-growth as pure equity, but far less volatile.
4. Index Funds
Index funds are passively managed mutual funds that mirror a specific stock market index — like the Nifty 50 or Sensex. Instead of selecting stocks, the fund simply replicates the composition of the index.
Purpose & Vision:
Index funds were created to make investing simpler and more affordable. By removing active decision-making, these funds aim to deliver “average” market returns — which, in the long run, often outperform actively managed funds. For Indian investors, they offer a transparent, low-cost way to stay invested for the long haul — perfect for children’s education or wedding goals.
Risks & Objectives:
The risk here is that you will never outperform the market — you’ll simply track it. But that’s also the strength of index funds: no bias, no overtrading. They’re best for long-term, low-maintenance portfolios, especially if you want to invest small SIPs for your child and forget about them for years.
5. ELSS (Equity Linked Savings Scheme)
ELSS are mutual funds that primarily invest in equities and offer tax deductions under Section 80C of the Income Tax Act. They come with a mandatory 3-year lock-in period.
Purpose & Vision:
The government introduced ELSS to encourage long-term investing while allowing investors to save on taxes. For salaried parents, ELSS offers a double benefit — you reduce your taxable income and simultaneously invest for your child’s future. It promotes discipline since the money stays locked in.
Risks & Objectives:
Since ELSS funds are equity-based, they carry the same market risks as other stock-focused funds. However, the lock-in reduces the tendency to panic and withdraw during downturns. Ideal if you’re starting out with investing and want a tax-efficient way to grow wealth for long-term child-related goals.
6. Liquid Funds
Liquid funds are short-term debt funds that invest in instruments maturing within 91 days. Highly liquid, with funds typically available within 24 hours, subject to fund house policies and banking processes.
Purpose & Vision:
These funds were created to solve a basic problem — where can you park extra money for a few weeks or months without locking it in? For parents, this could be the perfect place to hold funds temporarily — like school fees due in 3 months or saving up for an annual family trip.
Risks & Objectives:
Risk is very low but includes minimal credit or interest rate risks, and returns are modest (around 6.5–7.5% depending on interest rates). Still, they’re better than leaving money idle in your bank account. Use liquid funds for short-term goals or as an emergency buffer for unexpected expenses.
7. Thematic and Sectoral Funds
These funds focus on specific sectors (like pharma, IT, banking) or investment themes (like ESG or infrastructure). They only invest in companies that fall within that theme.
Purpose & Vision:
Sectoral funds allow investors to bet on particular parts of the economy. They were created for more advanced investors who want to express a specific view — for example, betting on the rise of electric vehicles or renewable energy. These can also be part of your child’s portfolio if you’re looking to create higher exposure to trending sectors.
Risks & Objectives:
These funds are risky. If the sector underperforms, your entire investment suffers. They are best used in small quantities as part of a diversified portfolio. Definitely not meant for all your money — but useful for tactical bets when you believe in a sector’s long-term future.
8. Balanced Advantage Funds (BAFs)
BAFs dynamically adjust their exposure to equity and debt based on market conditions. They increase equity exposure when markets are cheap and reduce it when markets are expensive.
Purpose & Vision:
These funds were created to remove the need for investors to “time the market.” They use valuation models to automatically adjust portfolio mix. For Indian parents who want to invest but are unsure when is the “right time,” BAFs offer peace of mind.
Risks & Objectives:
BAFs lower risk during volatile periods by shifting to debt, and increase return potential during market dips by going into equity. They’re great for medium-to-long-term goals where you want growth with downside protection — say, building a corpus for your child’s career development by age 18.
9. International Funds
These invest in global companies or indices — like Apple, Amazon, Google, or the S&P 500. You get exposure to foreign markets while investing in rupees.
Purpose & Vision:
These funds were introduced to give Indian investors geographical diversification. Why be limited to just Indian companies when global businesses can also create wealth? For parents, international funds open the door to investing in global brands your children already use — and understanding finance in a global context.
Risks & Objectives:
Currency risk and global market volatility exist. These funds also carry higher expense ratios. But as part of a diversified portfolio, they can reduce country-specific risk and offer long-term stability. Ideal if you’re financially savvy and want to build a portfolio that prepares your child for a global future.
10. Children’s Gift Funds / Goal-Based Funds
These are mutual funds specifically designed for children, with a long-term lock-in and tax-efficient structure. They’re often a mix of equity and debt, and some have automatic maturity when the child turns 18.
Purpose &Kinds of Mutual Funds: Understanding the Different Categories & Their Purpose Vision:
These funds were introduced to help parents invest in a focused, disciplined way for their child’s future. With inbuilt lock-ins and goal-tagging, they remove the temptation to withdraw prematurely. Think of them as a mutual fund version of a fixed deposit — but smarter, and with better returns.
Risks & Objectives:
Risk levels vary based on asset allocation (some are conservative, some are aggressive). But the primary objective is long-term capital appreciation with goal alignment — perfect for parents planning 10–15 years ahead for higher education, skill development, or early financial independence.
Which Mutual Fund type is right for you?
This is where personal goals meet product choice.
Rather than just naming a fund, let’s talk about the types of mutual fund in India based on use-cases:
Your financial goals and risk appetite should guide your mutual fund choice. Here’s a clear breakdown of mutual fund types in India based on common use cases:
- For long-term wealth creation (10+ years): Consider Equity Mutual Funds or Index Funds. These invest in stocks and have the potential for higher returns over the long term, though they come with market risks.
Example: Large-cap, Small-cap or multi-cap funds for stability and growth. - For tax savings and wealth growth: Choose Equity-Linked Savings Schemes (ELSS). These offer tax deductions under Section 80C (up to ₹1.5 lakh annually) and equity exposure, but have a mandatory 3-year lock-in period.
Example: A diversified ELSS fund for tax-efficient growth. - For short-term needs (6 months to 1 year): Opt for Liquid Funds. These invest in short-term debt instruments, offering better returns than savings accounts with low risk, though not entirely risk-free (e.g., credit or interest rate risks).
Example: Liquid funds for parking emergency funds. - For medium-term goals (3–5 years): Consider Hybrid Funds (like Balanced Advantage Funds or Aggressive Hybrid Funds). These blend equity and debt to reduce volatility compared to pure equity funds, but returns depend on market conditions.
Example: Balanced Advantage Funds for education or travel goals. - For stability or conservative investing: Debt Funds are suitable for short-to-medium-term goals (1–3 years) or if you prefer lower risk. They invest in bonds and fixed-income securities, offering steady but moderate returns.
Example: Short-duration or corporate bond funds for predictable returns. - For your child’s future: Look for child-focused mutual funds or a diversified portfolio combining Equity and Hybrid Funds, depending on the time horizon. Platforms like mutual fund apps or Systematic Investment Plans (SIPs) can help you invest regularly for long-term goals like education.
Example: A multi-cap fund SIP for a child’s college fund (10+ years away).
Conclusion
There are over six thousand mutual fund schemes in India. The variety is incredible — but also overwhelming. Knowing the kinds of mutual funds, their purpose, their risks, and their fit for your goals is the first step to investing with confidence.
Consult a certified financial advisor/distributor to align your investments with your goals, risk tolerance, and financial situation.
Toodl is a platform designed for children — and with parents in mind. Whether you’re saving for school fees, or setting money aside for something special like their first cycle — we make it simple, transparent, and goal-focused.
Because your child’s future needs more than good intentions — it needs consistent savings and thoughtful investing.
FAQs
1. What are the types of mutual fund schemes in India?
There are broadly three types: Equity, Debt, and Hybrid. Each comes with sub-categories like large-cap, mid-cap, liquid, balanced, etc.
2. How many types of mutual fund options are available?
There are over 40 sub-categories across different schemes — including ELSS, index funds, thematic funds, international funds, and more.
3. Are mutual funds safe for minors?
Yes, when selected wisely. Platforms like Toddl help parents invest in regulated, goal-based funds designed for children’s futures.
Disclaimer: Mutual fund investments are subject to market risk. Please read all the scheme related documents carefully before investing.
