Strategic Financial Management · Mutual Funds

Types and Classification of Mutual Fund Schemes

Updated 11 October 2026 · Fact-checked

Mutual fund schemes are classified by structure (open-ended, close-ended, interval), by asset class (equity, debt, hybrid, solution-oriented, other) and by SEBI's category rules. To answer a question, identify the investor's objective and horizon, match it to the scheme's asset mix and liquidity, then justify the choice with risk and return.

Understand Types and Classification of Mutual Fund Schemes

A mutual fund pools money from many investors and invests it in securities. Each investor owns units. The fund is run by an Asset Management Company (AMC) under a scheme with a stated objective. Because objectives differ, schemes differ. You need to know how they are grouped.

There are two broad ways to classify. By structure: an open-ended scheme sells and repurchases units on an ongoing basis at NAV-linked prices, so it has no fixed maturity and you can enter or exit on any business day. A close-ended scheme has a fixed tenure, units are sold only during the New Fund Offer (NFO), and investors exit by selling on a stock exchange or at maturity. An interval scheme combines both: it is open for purchase and redemption only at specified intervals.

By asset class and objective: SEBI has standardised categories so that each AMC cannot invent its own labels. The main groups are equity schemes, debt schemes, hybrid schemes, solution-oriented schemes (retirement and children's funds) and other schemes (index funds and ETFs, fund of funds). Within equity, categories include large cap, mid cap, small cap, multi cap, flexi cap, ELSS, sectoral or thematic, dividend yield, value and contra, and focused funds. A fund house may offer either a value fund or a contra fund, not both. Debt categories are overnight, liquid, ultra short duration, low duration, money market, short duration, medium duration, medium to long duration, long duration, dynamic bond, corporate bond, credit risk, banking and PSU, gilt, gilt with 10-year constant duration and floater funds.

Hybrid schemes mix equity and debt. Examples are conservative hybrid, balanced hybrid, aggressive hybrid, dynamic asset allocation, multi asset allocation, arbitrage and equity savings. Each has a prescribed range of equity and debt, which you should be able to describe in general terms.

Index funds and ETFs are passive. Both track an index such as the Nifty 50. An index fund is bought from the AMC at NAV and is priced once a day. An ETF is listed and trades on an exchange throughout the day at market price, which can differ slightly from NAV. An ETF needs a demat account and a broker. An index fund does not. Both aim for low cost and low tracking error. Do not confuse passive funds with actively managed funds, where the manager picks securities to beat the benchmark.

A sectoral fund invests mainly in one sector, so it is more concentrated and riskier. A liquid fund is a debt fund investing in money market and debt securities of short maturity, meant for parking surplus cash with low risk. Always check current SEBI circulars for exact limits, because categories are revised from time to time.

Key rules to remember

Net Asset Value (NAV) per unit: NAV = (Market value of fund's investments + Other assets − Liabilities) ÷ Number of units outstanding; Open-ended schemes transact at NAV-linked prices. ETFs trade at market price, which may be above or below NAV.
Tracking error (concept): Tracking error = standard deviation of (Fund return − Index return); Lower tracking error means the passive fund follows its index more closely.
Structure rule: Open-ended: continuous entry and exit | Close-ended: fixed tenure, exit on exchange or at maturity | Interval: entry and exit only at set intervals; Use this one-line rule to answer difference questions.
Passive fund rule: Index fund: bought from AMC at NAV | ETF: traded on exchange at market price; Both track an index; the difference is how you buy and sell.

How to solve Types and Classification of Mutual Fund Schemes questions

Use this method for both theory and case questions on scheme types.

1Read the question and note what is asked: define, differentiate, classify or recommend.
2Identify the investor's objective, time horizon, risk appetite and need for liquidity.
3Decide the structure: open-ended, close-ended or interval, based on liquidity needs.
4Decide the asset class: equity, debt, hybrid or passive, based on risk and return expectations.
5Name the specific SEBI category that fits, such as liquid fund for short-term surplus or ELSS for tax-saving equity.
6Support the choice with two or three points on risk, cost, liquidity and taxation where relevant.
7For difference questions, use a two-column comparison on basis such as tenure, liquidity, price, trading venue and cost.
8End with a clear recommendation or one-line conclusion.

Quickest way: Match the investor to the scheme in three checks

When to use it: Use for MCQs and short case-based recommendations where time is tight.

Horizon check (indicative guide only, not a fixed rule): under 1 year points to liquid or money market funds; 1 to 3 years points to short duration debt; 3 to 5 years points to hybrid or medium duration debt funds; over 5 years can suit equity-oriented schemes if the investor's risk appetite allows.
Liquidity check: need to exit any day means open-ended; lock-in or fixed term means close-ended, ELSS or interval.
Style check: want low cost and index-like return means index fund or ETF; want manager skill means active fund; need exchange trading means ETF.

Common mistakes in Types and Classification of Mutual Fund Schemes

Saying close-ended units cannot be sold at all before maturity.
Students focus on the lack of redemption by the AMC.
Fix: Write that units are not redeemed by the fund before maturity but can be sold on a stock exchange, often at a discount to NAV.
Treating an ETF and an index fund as identical.
Both track the same index, so they look the same.
Fix: State the differences: ETF trades on an exchange at market price all day and needs a demat account; index fund is bought from the AMC at end-of-day NAV.
Calling every debt fund risk-free.
Debt is associated with fixed income.
Fix: Mention interest rate risk, credit risk and liquidity risk. Even liquid funds are not guaranteed.
Using old or invented scheme names and limits.
Memorising from older notes or guessing percentages.
Fix: Use SEBI's standard category names. Give exact asset limits only when you are sure of them, otherwise describe the mix in general terms.
Confusing sectoral funds with diversified equity funds.
Both are equity funds.
Fix: Remember that a sectoral fund invests mainly in one sector, so it has higher concentration risk and is not a core holding.
Recommending a scheme without linking to the investor's profile.
Students list features and forget the case.
Fix: Always tie the recommendation to horizon, risk tolerance and liquidity need given in the case.

Worked examples

Example 1

Differentiate between open-ended and close-ended mutual fund schemes on any five bases.

Show the solution

Choose clear bases: tenure, entry, exit, price and liquidity.
Tenure: an open-ended scheme has no fixed maturity; a close-ended scheme has a fixed term.
Entry: open-ended units can be bought at any time; close-ended units are bought mainly during the NFO.
Exit: open-ended units are redeemed by the AMC at NAV-linked prices; close-ended units are sold on an exchange or redeemed at maturity.
Price: open-ended units are purchased from and redeemed by the AMC at NAV-linked prices, less any exit load on redemption; close-ended units on an exchange trade at market price, often at a discount to NAV.
Liquidity and fund size: open-ended offers high liquidity and the corpus changes with flows; close-ended corpus is fixed, so the manager can stay fully invested without redemption pressure.

Answer: Open-ended schemes offer continuous entry and exit at NAV-linked prices with no fixed term and a variable corpus. Close-ended schemes have a fixed term, a fixed corpus, entry mainly at NFO, and exit through an exchange or at maturity.

Example 2

Meera Iyer, 30, has a high risk appetite. She wants to invest ₹5,00,000 for retirement 25 years away and also needs ₹1,00,000 she may use within three months. Suggest suitable scheme types with reasons.

Show the solution

Split the money by horizon: ₹5,00,000 is long term and ₹1,00,000 is very short term.
For ₹1,00,000: needs low risk and quick access, so a liquid fund, which is an open-ended debt scheme investing in short maturity money market and debt instruments.
For ₹5,00,000: a 25-year horizon and a high risk appetite allow equity risk. A diversified equity scheme such as a flexi cap or a low-cost index fund tracking the Nifty 50 suits her.
Alternatively, a retirement solution-oriented scheme can be considered. It carries a lock-in of 5 years or until retirement age, whichever is earlier. This suits the ₹5,00,000 because she does not need it for 25 years, but it would not suit the ₹1,00,000.
Avoid a sectoral fund as the core holding because of concentration risk.

Answer: Put ₹1,00,000 in a liquid fund for safety and liquidity, and ₹5,00,000 in a diversified equity or index fund (or a retirement solution-oriented scheme, with its lock-in of 5 years or until retirement age, whichever is earlier) for long-term growth in line with her high risk appetite, avoiding sectoral funds as the core holding.

Exam tips

For difference questions, always write a two-column comparison with at least five bases. Add an example for each side.
In MCQs, watch the keywords: 'exchange traded', 'NFO only', 'lock-in', 'tracks an index'. Each points to a specific scheme type.
In case questions, quote the investor's horizon and risk appetite in your answer. That is where marks are given.
Learn the SEBI category names for equity, debt and hybrid in groups so you can list them quickly.
Do not quote exact percentage limits unless you are sure. Describe the asset mix in words.

Practice questions from Mutual Funds

Types and Classification of Mutual Fund Schemes in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Types and Classification of Mutual Fund Schemes: frequently asked questions

What is the difference between open-ended and close-ended mutual funds?

An open-ended fund accepts and redeems units on an ongoing basis at NAV-linked prices and has no fixed maturity. A close-ended fund has a fixed tenure, sells units during the NFO, and investors exit on an exchange or at maturity.

What is the difference between an ETF and an index fund?

Both track an index passively. An index fund is bought from and sold to the AMC at end-of-day NAV. An ETF is listed, trades on an exchange at market price during the day, and needs a demat account and broker.

How does SEBI categorise mutual fund schemes?

SEBI groups schemes into equity, debt, hybrid, solution-oriented and other schemes. Each group has defined sub-categories such as large cap, liquid, aggressive hybrid and index funds or ETFs, so every AMC uses uniform labels.

What is a liquid fund?

A liquid fund is an open-ended debt scheme that invests in money market and debt securities of very short maturity. Investors use it to park surplus cash for a short period. It carries low risk but is not guaranteed.