A mutual fund is an investment vehicle managed by Asset Management Companies (AMCs) where money is pooled from a number of investors to build a corpus. A professional fund manager then invests the corpus in various securities including stocks, bonds, gold, and other assets as per the underlying objective of the fund. The main aim of mutual funds is to generate maximum returns for investors over a period of time. SEBI (Securities and Exchange Board of India) regulates all mutual fund schemes.

Mutual funds can be categorised based on investment strategy, structure, investment goals, asset classes, market cap and risks:

• Active Mutual Funds
  In the case of active mutual funds, the fund manager actively participates in taking decisions pertaining to buying and selling of stocks. The primary goal of active funds is to outperform the benchmark index in terms of returns.
  
  The fund manager’s investment decisions may result in the fund outperforming or underperforming the benchmark. One of the downsides of active mutual funds is that since these funds require the active participation of fund managers, the expense ratio or fund management fees is slightly on the higher side.
• Passive Mutual Funds
  Passive funds are mutual funds that replicate the performance of the underlying index - Nifty, Sensex. The primary goal of passive funds is to generate returns that closely match the performance of the benchmark index. In the case of passive funds, the fund manager’s role is to create a portfolio that mirrors the components of the index and rebalance the portfolio whenever necessary.
  
  Since there’s no active involvement of fund managers, the expense ratio or fund management fee is extremely low. This is the reason why passive mutual funds are referred to as low-cost funds. Some of the popular passive mutual funds are the Nifty 50 index fund, Nifty Midcap 150 index fund and passive ELSS fund, among others.

• Open-ended Funds
  Open-ended funds are mutual funds that don’t have any fixed maturity period, meaning you can remain invested in these schemes as long as you want. You can buy or sell mutual fund units of open-ended schemes at any given point. Open-ended schemes are preferred by investors because of the liquidity they provide, meaning you can sell your mutual fund units anytime, subject to exit load.
• Close-ended Funds
  Close-ended funds come with a specific maturity period, meaning you cannot sell your units before the maturity period. Once the maturity period expires, the units get automatically redeemed and the proceeds are directly credited into your account. Some AMCs convert close-ended schemes to open-ended schemes upon maturity.
• Interval Funds
  Interval funds have an uncanny resemblance with close-ended funds. However, they are slightly different in terms of functionality. For such funds, you can buy or sell units only during specific intervals. The time intervals are declared by the fund houses managing such funds.

• Equity Funds
  Equity mutual funds are funds that invest at least 65% of their corpus in equities and equity-related instruments. These funds provide the benefit of a diversified portfolio and professional fund management to ordinary investors, who find it difficult to invest in individual stocks. While equity funds hold the potential of delivering high returns, they carry a higher risk than debt funds.
  
  These schemes can also be categorised based on their market capitalisation and investment style. Some of the different types of equity funds are large cap funds, mid cap funds, small cap funds, sectoral funds and ELSS, among others.
• Debt Funds
  Debt funds are mutual fund schemes that primarily invest in fixed-income instruments like corporate and Government bonds, money market instruments, corporate debt securities, etc. Though these funds provide low to moderate returns, they are considered to be less risky than equity funds.
• Hybrid funds
  These mutual funds invest in both debt and equity-linked instruments to give investors a balanced portfolio. The AMC decides whether the investment ratio will be fixed or varied. Hybrid funds can be broadly categorised into equity-oriented or debt-oriented funds.

• Large Cap Funds
  Large cap mutual funds invest in stocks of the top 100 companies listed on the stock market based on their market cap (more than ₹20,000 crore). These funds are considered to be less risky than mid-cap and small-cap funds.
• Mid Cap Funds
  Mid cap funds invest in stocks of companies of the mid-cap segment ranked 101-250 based on their market cap between ₹5,000 crore and ₹20,000 crore. These funds carry more risk than large cap funds but also have a better return potential.
• Small Cap Funds
  Small cap funds invest in stocks of companies having a market share of less than ₹5,000 crore. Though these are primarily small companies, they have high growth potential. Small cap funds have the ability to deliver the highest returns among all other asset classes. However, these funds are extremely prone to market movements and carry high-risk.

• Tax-saving Mutual Funds (ELSS)
  ELSS or Equity Linked Saving Schemes are equity mutual funds that offer tax deduction benefits of up to ₹1.5 lakh under Section 80C of the I-T Act. ELSS funds have a mandatory lock-in period of 3 years, which is the lowest compared to other saving schemes like PPF (15 years), NPS (5 years), NSC (5 years), SSY (21 years), etc.
• Growth Funds
  Growth funds aim to offer higher returns on investments by investing in growth stocks. A growth fund’s portfolio typically comprises stocks of reputed and established companies.
• Capital Protection Funds
  The portfolios of these mutual funds comprise equities and fixed-income instruments. While these schemes ensure capital protection, their returns are taxable.
• Liquidity-based Funds
  Mutual funds can be categorised based on their high liquidity. Liquid funds and ultra-short-term liquid funds are examples of such schemes. An important feature of this mutual fund type is that they are ideal for short-term goals.
• Pension Funds
  The primary objective of pension funds is to provide investors a regular stream of income after retirement. Pension funds primarily invest in low-risk investment options to provide steady returns.
• Fixed-maturity Funds (FMF)
  These mutual funds invest in debt instruments that have the same/similar maturity period as that of the fund. For example, a 3-year FMF will invest in securities with a maturity period of 3 years or lower.

• High-risk mutual funds
  Generally, these are equity schemes that carry high risks. However, such funds could also have the potential to generate higher returns. Small cap funds are considered as high-risk mutual funds.
• Growth Funds
  Growth funds aim to offer higher returns on investments by investing in growth stocks. A growth fund’s portfolio typically comprises stocks of reputed and established companies.
• Medium-risk Mutual Funds
  These are hybrid schemes that invest both in equity and debt instruments. The hybrid portfolio construction offers diversification and mitigates risk.
• Low-risk Mutual Funds
  Low-risk mutual funds are funds that carry low risk and have a balanced mix of asset classes. Though flexi-cap and other hybrid mutual fund schemes fall under this category, the most popular low-risk mutual funds are debt funds.

A mutual fund pools money from many investors and invests it in stocks, debt instruments, short-term money market instruments, or a combination of securities depending on the fund's objective.

It is the AMC’s responsibility to decide whether a scheme will have one or multiple fund managers. The fund manager has to pick and invest in the underlying securities and track their performance. They decide whether assets have to be reallocated or not. The portfolio allocation depends on the underlying objective of a scheme and fund managers aim to generate optimal returns for a certain level of risk.

Each investor holds units of a mutual fund which represents his/her portion of holdings. One can purchase or redeem these units at the fund’s NAV (net asset value), which represents its market value. As the fund accumulates money from its various assets, it gets distributed among investors as per their initial investment. The expenses for managing a fund are deducted before the distribution of profits.

Mutual funds can be of two types based on their investing strategy - active and passive.

Differentiating Parameters	Active Funds	Passive Funds
Role of the fund manager	Fund managers follow a hands-on and active approach and they are quite involved in the entire investment process.	Considering that passive funds mirror benchmark indices, fund managers have a minor role.
Expense ratio	Their expense ratio is higher as the fund managers pick, invest and track the performances of underlying securities.	Their expense ratio is lower than active funds because there is no active buying/selling of securities.
Returns	Actively managed schemes are more volatile and fund managers leverage their knowledge and experience to make the funds generate maximum returns for investors.	Passive funds replicate benchmark indices and deliver the same/similar returns as the securities on the indices with minimal tracking error.
Risk	Actively managed funds can carry significant risk depending on the fund type. For example, an active equity fund will be riskier than an active debt fund.	Passive funds are less risky than active funds because they mirror the underlying index and don’t try to beat the market.

Index funds are passively-managed equity mutual funds that mirror a particular index like Nifty 50. The main objective of these passively managed schemes is to replicate the market returns of the benchmark index.

Considering these are passive funds, fund managers do not choose the securities of the portfolio. Instead, investments are made in the same securities which are present in the underlying benchmark index and the same proportion. In other words, index funds generate returns aligned with the underlying index.