Different Types of Mutual Funds and Risk Return Measure

Mutual funds over time have proved to be an effective wealth creator for millions of investors. Its unique advantages and innovations have helped to drive in millions of new investors and give an edge over investing directly in the market.

In this post, we will be discussing the different fund types and risk associated with each fund type.

Equity Mutual Funds

Equity mutual funds attract the major block of assets from investors and is known as wealth compounder. Over the years, many new variants of equity mutual funds have been launched, offering multitudes of options to investors.

Any fund, which holds more than 60 per cent of holding as equity stocks in its portfolio, then it is categorised as an equity mutual fund. Various types of equity funds are:

Large Cap Fund

As the name suggests, the fund invests in bluechip companies or companies with large market capitalization. The fund selects companies generally from Nifty50, Sensex, BSE 200 index class. Moreover, this fund type is suitable for creating wealth over a long time.

Example: SBI Bluechip Fund, HDFC Top 200 Fund, ABSL Frontline Equity Fund etc.

Midcap and Small Cap Fund

The fund primarily invests in midcap and small-cap companies and have higher risk grade. The funds are generally volatile in nature but have enormous growth potential compared to large-cap funds.

Example: HDFC Mid-Cap Opportunities, Kotak Emerging Equity, L&T Mid-Cap Fund etc.

Balanced Funds

Balanced Funds are also known as Hybrid Funds, invests in a combination of equity and debt security. The primary objective of this fund is to reduce the risk by investing in debt securities and offer growth through investing in equity stocks.

The equity portion of the fund is generally multi-cap and is more than 60 per cent of the total asset.

Example: HDFC Balanced Fund, SBI Equity Hybrid Fund, L&T Equity Hybrid Fund etc.

Index Funds

Index Funds are the low-cost equity fund, whose portfolio composition is similar to the weight of its tracking index, like Nifty and Sensex. The funds are an exact replica of its tracking index in every term.

As the fund doesn’t require active management, it translates into a lower cost structure, benefitting investors.

Example: HDFC Index Funds-Sensex Plan and Nifty Plan, SBI ETF Nifty 50 etc.

Debt Mutual Funds

This fund category invests in debt securities issued by corporates and government like debentures, bonds, money market instrument etc. Debt funds provide less return on investment and are less riskier compared to an equity fund.

Various types of Debt funds are:

Short Term Debt Fund

The fund invests in debt securities with a shorter maturity term of 1-3 years. The debt securities mostly comprise of corporate and government bonds. The return percentage is generally higher than the bank FD of the same tenure and is highly liquid in nature.

Example: HDFC Short Term Debt Fund, IDFC Bond Fund, L&T Short Term Bond Fund etc.

Long-term Debt Fund

This fund invests in debt securities of the long-term period and the main objective of this fund type is to derive regular interest income. Capital appreciation is the secondary objective for this fund type. It is further divided into two categories:

  1. Income Fund: These funds invest in a mix of government bonds, corporate bonds, government securities, securitized debt. The investments are made in high credit rated securities as this helps to provide liquidity and avoid volatility in the portfolio.
  2. GILT Fund: Gilt funds invest in only government securities of longer maturities. The credit rating of the securities is highest as they are issued by the government and are risk-free.

Example: Reliance Gilt Securities Fund, SBI Magnum Constant Maturity Fund, ABSL Savings Fund etc.

Risk-Return Matrix of Different Mutual Fund Type

This matrix explains the mutual funds’ risk and returns measure in different categories. Higher risk does not guarantee higher returns from the investment. Poor fund management and volatility in the market affect the performance of the fund.

High ReturnMedium ReturnLow Return
High RiskMid Cap & Small Cap Funds
Large Cap Funds
Medium RiskBalanced FundsIndex Funds
Low RiskLong Term Debt FundsShort Term Debt Funds


As we have seen mutual funds are the ideal financial product for wealth creation with minimum effort from investors. It provides an opportunity for every type of investors, be it aggressive or those who don’t like to take many risks in the process. The matrix also points out that, as time advances, an individual needs to move from high-risk investment to medium or low-risk investment.

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