Classification of Mutual Funds

Mutual fund classification is the backbone of product knowledge. It enables a distributor to match a client’s risk appetite, investment horizon and tax considerations with the most suitable scheme.

In the NISM Series V‑A exam, questions often present a client profile and ask which type of fund is appropriate. If you cannot quickly recall the classification matrix, you may lose marks even if you know the underlying concepts.

Moreover, SEBI’s regulatory framework uses these classifications to prescribe disclosure norms, liquidity requirements and investment limits. Ignoring the classification can lead to compliance errors in real‑world practice.

The structural classification is based on how and when investors can buy or sell units. The three main structures are open‑ended, closed‑ended and interval funds.

Open‑ended funds allow investors to subscribe or redeem units at any business day at the prevailing NAV. They are the most common scheme type in India and provide high liquidity.

Closed‑ended funds raise a fixed corpus during an initial subscription period and then trade on a stock exchange. Redemption is possible only on the secondary market, similar to equities.

Interval funds sit between the two. They permit redemptions only on specific dates (e.g., quarterly) while otherwise operating like open‑ended schemes.

• Liquidity: Open > Interval > Closed
• Pricing: NAV‑based for open and interval; market‑driven for closed.

Investment‑objective classification groups schemes by the primary goal they pursue for investors. The NISM syllabus recognises five broad objectives.

Growth (Equity‑oriented) schemes aim for capital appreciation by investing predominantly in equities. They suit long‑term investors with high risk tolerance.

Income (Debt‑oriented) schemes focus on regular interest or dividend payouts, investing mainly in fixed‑income securities. They are suitable for retirees or conservative investors.

Balanced (Hybrid) schemes blend equity and debt to offer moderate growth with some income, catering to investors who want a middle ground.

Liquid schemes invest in money‑market instruments and provide very high liquidity with minimal risk, ideal for parking surplus cash.

Tax‑saving (ELSS) schemes qualify for Section 80C deductions and have a mandatory three‑year lock‑in, making them attractive for tax‑planning.

Asset‑class classification reflects the underlying securities a scheme holds. The main categories are equity, debt, hybrid, fund‑of‑funds and solution‑oriented funds.

Equity funds invest at least 65% of assets in equities. They are further sub‑classified by market‑cap (large, mid, small) and style (growth, value).

Debt funds allocate at least 80% of assets to fixed‑income instruments such as government bonds, corporate bonds and money‑market securities.

Hybrid funds maintain a mix of equity and debt, with the equity portion ranging from 30% to 70% depending on the sub‑type (e.g., aggressive hybrid, conservative hybrid).

Fund‑of‑Funds (FoF) invest in other mutual fund schemes rather than directly in securities, offering diversification across fund managers.

Solution‑oriented funds (e.g., retirement, children’s education) are designed for specific life‑stage goals and often combine asset classes to meet the target.

Scheme‑type classification deals with the mode of purchase and the way returns are distributed.

Direct plans are sold directly by the asset management company (AMC) without involving a distributor. They have lower expense ratios, which can improve net returns.

Regular (or distributor) plans involve a distributor and carry a higher expense ratio due to commission structures.

Return‑distribution options include Growth (units appreciate in value, no periodic payouts) and Dividend (periodic payouts of income, either as cash or additional units). The choice does not affect the underlying performance but influences tax treatment.