We can classify Mutual Funds as follows :
1. Equity Fund :
In this type of fund, amount is invested in equity shares of the companies. It can be further classified into Large Cap Fund, Small Cap Fund, Multi Cap Fund, Index Fund, Tax Savings fund. Risk is high in this type of fund. Hence reward is awesome.
Equity Market, classified stock as per there Market Cap. Stocks / Shares with huge market cap called as Large Cap Shares. Shares with mid range market cap called as Mid Cap Shares. Remaining shares called as Small Cap Shares.
In Large Cap Funds, fund manager invests in Large Cap Shares. It has lowest risk in equity segment.
In Mid Cap Funds, fund manager invests in Mid Cap Shares. It has higher risk than Large Cap Funds.
In Small Cap Funds, fund manager invests in Large Cap Shares. It is most riskier kind of equity fund.
In Multi Cap Funds, fund manager invests in all types of shares as per market conditions.
In Tax Savings Fund, fund manager invests in equity shares. But one thing make Tax Saving Funds different from above funds is Investor get Income Tax benefits under section 80C. But he can not redeem units purchased for next 3 years.
All the above types of funds are actively managed funds. Here fund managers invest in shares as per his expertise. He wants to beat performance of Index. But it is very difficult task for fund manager to beat index returns.
Index Funds is one of type of passive fund. Here composition of stocks invested is as same as composition of stock in specified index. Since it is passively managed, expense ratio is low than above types of funds.
Exchange Traded Funds are the fund which can be traded in exchange.
2. Debt Funds :
In this type of fund, fund manager invest in instruments having fixed returns like bonds, debentures, government securities, etc. Returns of of this type of funds are mostly less as compare to Equity Funds. It follows principal of Low Risk Low Return.
3. Liquid Funds :
It is subtype of Debt Fund. In this type of fund, fund manager invest in, very short duration debt securities. You can redeem it any time. Most of investor park their surplus in this fund, because it gives little more returns than Savings Bank Account.
4. Balanced Fund :
In this type of fund, fund manager invest in combination of Debt Securities and Equity Shares. Here risk is balanced. It can be further classified as Debt Oriented Balanced Fund and Equity Oriented Balanced Fund.
In Debt Oriented Balanced Fund, investment in debt securities is more than equity shares. In Equity Oriented Balanced Fund, investment in equity shares is more than debt securities.
5. Gilt Fund :
It is also subtype of Debt Fund. In this type of fund, fund manager invest in only government securities.
6. Sectoral / Thematic Fund :
In this type of fund, fund manager invest in only shares in specified sectors. For example in case IT Fund, Fund Manager only invest in stocks of IT Companies. It is riskier fund. Returns of this type of funds depend on performance of specified sector. Most of experts says to avoid these type of funds.
7. Gold Fund :
You can invest in gold, through gold fund. Return is similar to physical investment in gold. It reduces risk associated with physical buying and storing of gold.
These are few types of Mutual Funds. There are also other types of Mutual Fund like Arbitrage Fund, Fund of Fund etc.
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