History Of Mutual Funds In India & Their Types

Mutual funds are investment vehicles that pool money from many investors and invest the collected funds across different asset classes, based on the fund’s scheme and type. You can choose to invest in different types of mutual funds depending on your unique financial goals and risk appetite.

Before we dive into the types of mutual funds, let’s first understand the history of mutual funds in India.

History of Mutual Funds in India

India's mutual fund industry began in 1963 with the establishment of the UTI (Unit Trust of India) through an Act of Parliament, a joint initiative by the Government of India and the Reserve Bank of India (RBI). After initially operating under the RBI's control, UTI was transferred to the Industrial Development Bank of India (IDBI) in 1978, and the industry is now regulated by the Securities and Exchange Board of India (SEBI).

Types Of Mutual Funds

The following are the types of mutual funds in India.

Debt Funds

Debt funds invest in debt instruments such as bonds and government securities that may pay interest. However, debt funds do not guarantee fixed returns and can face credit risk, interest rate risk, and liquidity risk. They may suit investors who want exposure to debt investments, but cannot be considered risk-free.

Fixed Income Funds

Fixed income funds invest mainly in debt instruments that may generate interest income. These funds are similar to debt funds, and their returns depend on factors such as interest rate movements and credit risk. Fixed income funds may suit investors seeking income from debt investments, depending on their risk tolerance and financial goals.

Equity Funds

Equity funds invest mainly in shares and other equity-related instruments. The amount invested in equities depends on the fund's category and investment rules. Equity funds offer the potential for higher returns over the long term, but returns are not guaranteed. Their tax treatment may differ from that of debt funds and depends on the applicable tax rules and holding period.

Thematic Funds

Thematic funds invest in companies linked to a particular theme, such as renewable energy or digital technology. Unlike sectoral funds, which focus on one sector, thematic funds may invest across different sectors linked to the same theme.

Small-Cap Funds

Small-cap funds invest mainly in smaller companies and may offer strong growth potential. However, they can be more volatile and carry higher risk than many large-cap funds.

Mid-Cap and Large-Cap Funds

Mid-cap and large-cap funds invest mainly in medium-sized and large companies. They may be less volatile than small-cap funds, but they still carry market risk. Dividend payments and bonus issues are not guaranteed, and their growth may be higher or lower than that of small-cap funds.

Sectoral Funds

Sectoral funds invest in stocks belonging to a specific sector, depending on the scheme. These funds provide exposure to a particular sector, such as technology, automobile, or power, whose performance may vary over time.

Since sectoral funds invest mainly in one sector, they have less diversification across industries and can carry higher risk than more diversified equity funds. They may perform well when that sector grows, but they can also lose value if the sector performs poorly.

ELSS Funds

ELSS (Equity-Linked Savings Scheme) funds offer a dual benefit: market-linked returns and tax savings. Investments in an ELSS are eligible for a tax deduction of up to ₹1.5 lakh under Section 80C Section 80C of the Income-tax Act, 1961. Under the new Income-tax Act, 2025, provisions corresponding to Section 80C are carried forward under Section 123, maintaining the same ₹1.5 lakh limit under the old regime.

ELSS funds have a lock-in period of three years, during which investors cannot redeem the locked units.

Index Funds

Index funds aim to track an index, such as the Nifty 50 or Sensex, by investing in the securities included in it. Investors cannot buy an index directly, but they can invest in an index fund that tracks it.

Balanced Funds (Hybrid funds)

Hybrid funds invest in a mix of asset classes, such as equity and debt, to balance growth and risk. However, the level of risk and return depends on the fund's asset allocation and investment strategy.

Growth Funds

Growth options aim to increase the value of the investment over time rather than make regular payouts. Returns depend on the fund's performance and are not guaranteed to be higher than those of fixed income funds.

Dividend Funds

Mutual fund schemes with an income distribution option (IDCW) may pay money to investors from distributable surplus, subject to the scheme's terms and available funds. These payouts are not guaranteed and can reduce the scheme's NAV by the amount distributed per unit.

FAQs

When did mutual funds start in India?

The mutual fund industry in India began in 1963 with the establishment of UTI (Unit Trust of India).

What are the main categories of mutual funds?

The main types of mutual funds are equity funds, debt funds, hybrid funds, and index funds.

How to choose a mutual fund to invest in?

To choose a mutual fund to invest in, you must identify your financial goals, risk appetite and investment duration.