There are different types of Mutual Funds on the basis of investment type
Growth or Equity Fund: Invests only in the equities irrespective of the size and sector of the equities. TheMain is to generate higher return and reduce the risk with proper diversification. This requires very active portfolio management process and active monitoring mechanism to check the performance.
Sector specific Fund: Invests only in the specific sector it belongs to. Suppose an IT sector mutual fund invests in companies only belong to the IT sector. In any case, they won’t invest in companies from any other sector.
Index Replicating Fund: Index fund invests only in the companies belong to specific index and replicates the weight that the companies have in the index. Suppose Indian Nifty has 50 companies. So the mutual fund replicates the nifty index and invests only in these 50 companies as per the same weight. For any bonus issue or change in the index companies, the fund has to modify the investment pattern to follow the new index companies and the weight. It does not require any active portfolio management as the fund manager only follows the nifty. The changes are done only to follow any respective changes in the underlying index.
Commodity specific Fund: This type of fund only invests in commodity related funds to get the benefit from the increasing commodity prices. All the commodities are now traded on exchange and most of them have exchange traded fund to replicate their price changes. This fund invests in the commodities or the commodity related exchange traded funds and 100% exposure in the global commodity prices. If inflation rises the value of this fund also rises.
Debt Fund: Debt funds invest only in the government and corporate bonds and debt securities. Small investors cannot invest directly in the government bonds, that’s they buy the debt mutual funds to invest in the government bonds. Debt funds also invest in the corporate bonds and debts issued by private and PSU companies.
Hybrid Fund: Hybrid funds invest in both the bonds and equity shares. The percentage distribution of investments in both of these instruments can be predefined at the time of issue and strictly followed by the fund management with some variance. Sometimes they follow a wide range of distribution which varies depending on the market condition. If the market condition is good and confidence is high, they invest more in equity and less in bonds. If the market condition is bad and confidence is low, they invest more in bonds and less in equity.
Large/Medium/Small Cap: Mutual fund schemes can also be based on the size of the companies it invests into. Investment in large and blue chip companies is considered to be less risky and provide lower return where investment in medium and small companies is considered to be high risky and provide much higher return to compensate the same. There are some specific mutual funds which invest only in large cap, midcap or small cap companies.