SEBI sorts Indian mutual funds into five groups: equity, debt, hybrid, solution-oriented and other, with 36 categories between them. Equity funds buy shares, debt funds buy bonds, hybrids mix the two, solution-oriented funds target retirement or children's education with lock-ins, and the other group holds index funds, ETFs and fund of funds. Since April 2025 there is also a specialised investment fund class for investors with Rs 10 lakh or more.
A mutual fund pools money from many investors and has a professional manager invest it. What the manager is allowed to buy is set by the fund's category. SEBI fixed those categories in 2017 so that every fund house uses the same labels and a large-cap fund at one house holds the same kind of stocks as a large-cap fund at another. Each fund house may run only one fund per category, which cut hundreds of near-duplicate schemes from the market.
Equity funds
Equity funds invest at least 65% of their money in shares. The categories follow company size and style. Large-cap funds hold at least 80% in the top 100 companies by market value. Mid-cap funds hold at least 65% in ranks 101 to 250. Small-cap funds hold at least 65% in rank 251 and below. Large and mid-cap funds split between the two. Multi-cap funds must hold at least 25% in each of the three sizes, while flexi-cap funds can go anywhere. Beyond size there are value and contra funds, dividend yield funds, focused funds limited to 30 stocks, sectoral and thematic funds, and ELSS funds, which give a Section 80C deduction and lock money in for three years. Most SIP money goes into this group.
Debt funds
Debt funds buy bonds, government securities and money market instruments. SEBI's 16 categories are defined mainly by how long the fund's holdings run, from overnight funds that lend for a day to long duration funds holding bonds of seven years and more. Liquid funds, which hold paper of up to 91 days, are the common parking place for short-term money. Other categories are defined by what they hold: gilt funds hold only government bonds, corporate bond funds hold mostly top-rated company paper, and credit risk funds take on lower-rated paper for higher yield. Since April 2023 debt fund gains are taxed at the slab rate regardless of holding period. Whether they still make sense is weighed in what is a debt mutual fund.
Hybrid funds
Hybrid funds hold both shares and bonds in set proportions. Aggressive hybrid funds keep 65% to 80% in equity. Conservative hybrid funds keep only 10% to 25%. Balanced advantage funds move between the two based on valuations. Arbitrage funds exploit price gaps between cash and futures markets and behave like a low-risk debt fund while being taxed as equity. Multi-asset funds add gold or real estate as a third leg. These suit investors who want one fund to do the asset allocation for them.
Solution-oriented and other funds
Retirement funds and children's funds are built around a goal and carry a lock-in of five years or until the goal date. The other group holds the passive products. Index funds copy an index such as the Nifty 50 at low cost. Exchange-traded funds do the same but trade on the exchange like a share. Fund of funds invest in other funds, often overseas ones. The case for making an index fund the core holding is in what is an index fund.
Specialised investment funds
From April 2025 SEBI allowed fund houses to launch specialised investment funds, a class between mutual funds and portfolio management services. They can run long-short strategies, use derivatives more freely and take concentrated positions. The minimum investment is Rs 10 lakh per investor across a fund house's SIF strategies. They are taxed like mutual funds but are meant for investors who understand the extra risk.
Other ways funds are split
Any fund in any category also comes in a direct plan, bought from the fund house with no distributor commission, and a regular plan, bought through a distributor with a higher expense ratio. Open-ended funds can be bought and sold any day. Closed-ended funds are sold once and run for a fixed term. And every fund offers a growth option, where returns stay invested, and an income distribution option, where the fund pays out periodically. A fuller tour of the categories with examples is in types of mutual funds.
FAQs
Which type of mutual fund is best for beginners?
A large-cap index fund or a flexi-cap fund through a SIP is the usual starting point. It is diversified, cheap and needs no timing.
How are equity and debt funds taxed differently?
Equity fund gains held over a year are taxed at 12.5% above Rs 1.25 lakh. Under a year, 20%. Debt fund gains are added to income and taxed at the slab rate.
What is an ELSS fund?
An equity-linked savings scheme. It is an equity fund with a three-year lock-in that qualifies for the Rs 1.5 lakh deduction under Section 80C in the old tax regime.
Can one fund house run two large-cap funds?
No. SEBI's 2017 rules allow one scheme per category per fund house, with a few exceptions for index funds and sector funds.