In this article, we will aim to show you why mutual funds are an ideal investment for any duration and for varying levels of risk appetite. For people already investing in mutual funds, this might be informative in making them aware of various categories of mutual funds. When people talk of mutual funds, most talk about equity mutual funds. But there are debt funds too.

Here is a table to give you an idea of the types of mutual funds.

Fund Type Ideal
Duration
Risk
Level
Expected
Returns
 Large-cap Funds  4+ years  Moderately
High
 12-18%
 Mid-cap Funds  6+ years  High  15-20%
 Small-cap Funds  7+ years  High  15-20%
 Multi-cap Funds  7+ years  Moderately
High
 15-20%
 ELSS Funds  3 year
(mandatory)
 High  15-20%
 Sector Funds  7+ years  High  Variable*
 Eqiuty Oriented Balanced Fund  2-3 years  Moderately
High
 10-15%
 Liquid Funds  Few days –
Few weeks
 Very Low  7-9%
 Ultra Short Term Funds  6 months –
1 year
 Very Low  6-9%
 Short Term Funds  1-3 years  Very Low  5-9%
 Monthly Income Plan (MIP)  Variable*  Moderately
Low
 7-10%
 Gilt Funds  1+ year  Moderately
Low
 8-10%
 Income Funds  1-3 years  Moderately
Low
 8-10%
 Debt Oriented Balanced Fund  2-3 years  Moderately
Low
 8-12%

Equity Mutual Funds

1. Large-cap Funds

Mutual funds that invest in the equity (shares) of large-cap companies are known as large-cap funds. Some of the most popular large-cap funds are SBI Bluechip Fund, Aditya Birla Sun Life Frontline Equity Fund, and ICICI Prudential Select Large-cap Fund.

Large-cap funds invest in companies with a large market capitalization. These are usually some of the largest companies in the country. There is no consensus the exact figure that qualifies a company to be called a large-cap company. However, it is usually accepted that the top 100 largest companies by market capitalization form the large-cap companies of a market.

Investing in large-cap funds is considered a relatively safe option. Large-cap companies usually are well-established businesses that have been around for a long time and are professionally managed. They are far less likely to default and thus make for a good investment.

Large-cap funds invest in such companies. These funds usually give returns in the range of 12%-18%. The risk involved is moderate and investment horizon is 5 years or more. At Groww we recommend people to invest in large-cap funds only if they plan to remain invested for more than 5 years.

2. Mid-cap Funds

Mid-cap funds, as the name suggests, invest in mid-cap companies. Again, there is no consensus on the exact number which would ascertain if a company is mid-cap or not. However, it is generally agreed upon that companies that are between 101 and 250 on the list of the largest companies by market capitalization are the mid-cap companies.

Some top-rated mid-cap funds on Groww are L&T Midcap Fund, Mirae Asset Emerging Bluechip Fund, and Aditya Birla Sun Life Pure Value Fund.

Mid-cap companies are companies that have a good potential to grow very fast. Therefore investing in mid-cap funds can give you very good returns. However, mid-cap companies are not as stable as large-cap companies. Which means, while there is a chance for you to gain great returns, you could also lose your money just as fast.

Invest in mid-cap funds only if you are willing to take the risk and can remain invested for more than a minimum of 6 years. These funds can give returns in the range of 15-20% if times are favourable.

3. Small-cap Funds

As the name suggests, small-cap funds invest in companies of a small size. Companies smaller in market capitalization than large-cap and mid-cap funds are called small-cap companies. This would mean companies in the market that are not in the top 250 companies list.

Small-cap companies are even smaller than mid-cap companies and can provide even higher returns when compared to mid-cap companies. As anyone would guess, small-cap funds are even riskier than mid-cap and large-cap funds.

Some of the best small-cap funds on Groww are Kotak Emerging Equity Scheme, Reliance Small Cap Fund, and Canara Robeco Emerging Equities Fund.

Invest in small-cap mutual funds only if you have a good understanding of what you are doing. Ideally, you should invest only a small percentage of your investment portfolio in small-cap equity funds. These funds are able to returnbetween 15-20% in good times. Returns as high as 25% and 30% is also possible. At Groww, we recommend investing in small-cap funds for more than 7 years. The longer, the better.

4. Multi-cap Funds

Multi-cap funds invest in companies of a varied variety. They do not stick to one category of companies. A usual mutli-cap fund would have a good mix of investments in all types of companies. A good portion of investments would be in large-cap funds for stability and the remainder in small and mid-cap funds for higher growth. This is exactly why the selection of a good fund is very necessary when choosing a multi-cap fund.

Among mutli-cap funds, some top rated mutli-cap funds are Aditya Birla Sun LifeAdvantage Fund, Franklin India High Growth Companies Fund, and Kotak Select Focus Fund.

Axis Mutual Fund has just launched a new multi-cap fund called Axis Multi-cap fund.

Multi-cap funds give returns in the range of 15-20% or higher if the markets are doing good. Again, your investment’s exposure to mutli-cap funds should be low and you must invest for a time period greater than 7 years.

5. ELSS Fund (Equity Linked Savings Scheme)

ELSS funds are a special type of equity mutual fund. Like multi-cap funds, ELSS funds also invest in companies of varied sizes. However, the big difference between ELSS funds and mutli-cap funds is that ELSS funds offer you tax benefits under Section 80C.

Depending on the tax slab you belong to, you could save up to ₹45,000 in taxes every year.

Some of the best ELSS funds are Reliance Tax Saver Fund, Mirae Asset Tax Saver Fund, and Axis Long Term Equity Fund.

Investing in ELSS funds is especially easy on Groww. You can very easily invest by following a few very simple and easy steps. 

ELSS funds come with a mandatory 3 year lock-in period from the date of investment. After the 3 year period, you can choose to remain invested or withdraw and invest somewhere better based on your financial goals.

ELSS funds return in the range of 15-20% per annum.

6. Sector Funds

Sectoral funds are unique in that they invest in companies of a single industry or sector. For example, automobile funds invest in companies belonging to the automobile sector – automobile manufacturing companies, tire companies, ancillary parts companies, and so on.

You should only in sector funds if you have a good knowledge of the industry in which the fund is investing, Otherwise, you could end up suffering losses.

If you are a novice investor, you should probably stay away from this type of fund.

However, you have done your research well and are sure you want to invest in this sector, you should be prepared to carefully monitor the industry and make necessary changes to your investment as and when required.

Sector mutual funds are very high risk and very high return in nature. IDFC Infrastructure Fund, for example, gave an astounding return of around 50% in the last one year. With high-risk funds, it is best to stay invested for long durations. Ideally, 7+years would be a good duration to invest in sectoral funds.

7. Equity Oriented Balanced Fund

These funds are funds that invest between 65% and 80% of their investments in equity. The remainder is invested in debt instruments.

This allows for a good balance between debt and equity. This type of a fund is ideal for a new investor.

Some of the best equity-oriented balanced funds on Groww are Tata Retirement Savings Fund, L&T Prudence Fund, and Reliance Regular Savings Fund.

If you are looking to invest for a time horizon of 2-3 years, you should invest in Equity Oriented Balanced Funds. You can expect returns in the range of 10-15%.

Debt Mutual Funds

1. Liquid Funds

Liquid funds invest your money in short-term bonds (90 days). Their returns are usually around 6% these days.

People view liquid finds as an alternative to keeping money in the savings account. This is largely because as the name suggests, these funds are very liquid – they can be redeemed very fast. Under normal circumstances, these funds take about one working day to get redeemed. Which is exactly why people aren’t afraid of putting their ’emergency money’ in liquid funds.

So you can invest in these funds for a few days to a few weeks.

Liquid funds give returns in the range of 7-9%. Some of the best liquid funds are Kotak Floater Short Term Fund, Indiabulls Liquid Fund, and Tata Money Market Fund.  

2. Ultra Short Term Funds

These funds invest money in short-term (1 year) bonds. These funds are a good investment if you aim to invest for a short duration of time – like 6 months to a year.

Many people use ultra-short-term funds to quickly achieve a goal for a purchase or spending like buying a bike or going for a vacation.

Recently, ultra short-term funds have gained in popularity as a place to invest money for a short duration while deciding where to invest.

Another good use of ultra short-term bonds is to invest equity mutual funds using STP (Systematic Transfer Plan).

Some top-rated ultra short-term funds are Franklin India Low Duration FundAditya Birla Sun Life Savings Fund, and Reliance Floating Rate Fund.

Expect returns in the range of 6-9%

3. Short Term Funds

Short-term funds are very similar to ultra short-term funds except these funds are better suited for holding for a bit longer.

An ideal duration for investment in these funds would be between 1 year and 3 years. You can expect returns int eh range of 5-9% from these funds.

Short-term funds can be categorized as very low-risk funds.

Some of the best short-term funds are Aditya Birla Short Term Fund, Franklin India Short Term Income Plan, and HDFC Short Term Opportunities Fund.

4. Monthly Income Plans (MIP)

MIP funds are more popular with people who want to invest and grow their money while still having capital protection.

MIP funds invest about 10-20% of their funds in equity. The rest is invested in fixed income securities.

Their primary aim is to beat inflation. As long as that happens, the fund managers stop themselves from taking greater risks.

MIP give returns in the range of 7-10%.

Some of the best rated monthly income plans are SBI Magnum Monthly Income Plan, Reliance Monthly Income Plan, and HDFC Monthly Income Plan among others.

5. Gilt Funds

If you invest in gilt funds for more than a year, it is practically betting against the movement of interest rates. For less than a year, gilt funds aren’t a good investment.

Gilt funds are considered very low risk. The returns in the case of gilt funds do not suffer from too many ups and downs.

If you’re investing in gilt funds, an ideal duration would be more than a year and less than 3 years.

Some of the best gilt funds are ICICI Prudential Gilt Fund, SBI Magnum Gilt Long Term Plan, and UTI Gilt Advantage Fund – Long Term Plan.

6. Income Funds

Income funds invest in fixed income securities like government securities, bonds, debentures, fixed deposits etc.

Income funds give priority to capital protection. Therefore, they do not aim for high capital appreciation. Income funds are considered to be of higher risk than gilt funds.

The ideal duration of investment in income funds would be in the range of 1 to 3 years.

ICICI Prudential Income Opportunities Fund, Axis Income Fund, and Sundaram Flexible Fund are some noteworthy funds in this category.

7. Debt Oriented Balanced Funds

Debt oreiented balanced funds are, as the name suggests, balanced funds that invest primarily in debt instruments and aim at some capital appreciation by investing in equity. They are taxed as debt mutual funds.

Investment horizon for these funds is between 2 and 3 years. You can expect returns in the range of 8 and 12%.

Some of the best debt oriented balanced funds are Franklin India Pension Plan, HDFC Equity Savings Fund, and ICICI Prudential Child Care Plan.

Tax on Mutual Funds

At this stage, it is important to remember that different types of mutual funds are taxed differently. To understand the taxation on different types of mutual funds, click here.

To start investing in mutual funds online, visit Groww.

Happy investing!