What are the four types of mutual funds? Here's all you need to know

The four main types of mutual funds are – equity, debt, money market, and balanced – and they offer levels of returns based on the risk appetite of an investor

Representational image. Reuters

Mutual funds are one of the most popular forms of investment in India. There were over 13.56 crore (135.6 million) registered accounts for mutual funds in India, as of July 31, 2022, according to the Association of Mutual Funds in India. With more and more investors looking to mutual funds as their primary investment vehicle, it can be slightly overwhelming to understand all the jargon and parlance when it comes to the world of mutual funds. A new investor would quickly notice that there are a variety of mutual funds that they can choose for their investment.

Here’s a quick brief on the four broad types of mutual funds and how they differ from each other.

Equity Mutual Funds

Equity mutual funds are perhaps what most investors think of when they imagine mutual funds. Equity funds, as the name suggests, invest in the equity market. As these funds are investing in the shares of companies, they have a higher risk than other forms of mutual funds. But as is common in the world of investment, the higher risk comes with a greater likelihood of wealth appreciation. Equity funds can be further divided across the sectors they invest in, the size of the companies they are investing in, and various index funds.

Bond Funds

Also called fixed income funds, bond funds are the second most popular type of mutual funds that investors choose to park their money in. Bond funds use their assets under management to invest in government and corporate debt, in the form of bonds. This makes bond funds much less risky than equity funds, though the potential returns are also lower. However, the biggest draw of bond funds is the fact that they provide regular and steady income to investors.

Money Market Funds

Money market funds or liquid funds are very similar to bond funds. Money market funds invest in short-term debt instruments, with the aim of providing relatively safe yet appreciable returns to investors in the short term. Due to the short tenure of the instruments that they hold, money market funds are considered one of the safest. Common instruments that are invested in include certificates of deposits, T-bills, short-term corporate bonds, and dated government securities.

Balanced Funds

Balanced funds allocate their money across both bond and equity markets to present an investment vehicle with a balanced outlook on risk and returns. The allocation can be either fixed or variable, with most funds choosing to allocate 60 percent of AUM to equity markets and 40 per cent to bond markets.

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