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Ritesh Sabharwal

(Part 3/5): 1000+ funds – Which MF type should you pick?

Published 7 months ago • 3 min read

Ritesh Sabharwal CFP®

W.M.W #29: (Part 3/5): 1000+ funds – Which MF type should you pick?

Reading time: 5 minutes - January 3, 2026

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Hey Reader

First, A very Happy New Year to everyone!!! Last year has been amazing for me. I started my newsletter again and this is the 29th edition. Thanks to the support of over 2,800+ subscribers.

In continuation to the Mutual fund series, last week I explained to you all NAV, AMC, expense ratio and other MF terminologies which I explained to my cousin.

Her immediate follow-up question:

Cousin: "Okay, I understand these terms. But I see 1,000+ funds. How do I even begin to choose?"
​Me: "Before picking funds, you need to understand the types of mutual funds - 4 main types. Once you know these, 80% of confusion disappears."
​Cousin: "Only 4 types? I thought there were hundreds!"
​Me: "There are hundreds of funds, but only 4 ways to classify them. Let me show you."

Here's what I explained - the 4 classification frameworks every investor must know.

Classification 1: Fund Structure (How You Buy/Sell)

Open-Ended Funds: You can buy or redeem units anytime based on daily NAV.

Key features:

  • Highly liquid: Buy/sell anytime at NAV
  • No fixed maturity: Available for perpetual investments
  • Flexible investment: Lump sum + SIP allowed
  • Fund size grows/shrinks: With inflows and redemptions
  • More volatile: Daily NAV changes
  • Full transparency: Complete performance history available

Closed-Ended Funds: You can only buy during NFO. After that, units trade on stock exchanges.

Key features:

  • Lower liquid: Only sell on stock exchange before maturity
  • Fixed maturity: Typically 3-7 years
  • Lump sum only: No SIP option during NFO
  • Fixed fund size: Limited units issued in NFO
  • Less volatile: Prices updated less frequently
  • Limited transparency: Performance history only from NFO period

Classification 2: Management Style (How Fund is Managed)

Active Funds: Fund manager actively decides which stocks to buy/hold/sell.

Key features:

  • Objective: Outperform the market/benchmark
  • Expense ratio: Higher (0.5% to 2.5%)
  • Risk: Higher due to stock picking and market timing
  • Manager's role: Critical - fund performance depends on manager's skill

Passive Funds (Index Funds/ETFs): Fund manager has a passive role—simply replicates the benchmark index.

Key features:

  • Objective: Match the market performance (not beat it)
  • Expense ratio: Lower (typically under 1%, often 0.1-0.5%)
  • Risk: Lower as it simply replicates the market
  • Manager's role: Minimal - just tracks the index

Classification 3: Mode of Investment (How You Invest)

Direct Plan: Invest DIRECTLY without any distributor/agent.

Key features:

  • Expense ratio: Lower
  • Investor involvement: Requires active participation as you choose the fund yourself
  • NAV: Higher (due to lower expenses)
  • Advice and support: No professional help

Regular Plan: Invest via distributor/agent who earns commission.

Key features:

  • Expense ratio: Higher due to distributor commission
  • Investor involvement: Suitable for passive investors who prefer professional guidance
  • NAV: Lower
  • Advice and support: Access to professional advice

Classification 4: Asset Type (What Fund Invests In)

Equity Funds: Primarily in equity shares and equity-related instruments

- Returns: High (10-15% long-term)
​ - Risk: High
​ - Best for: Long-term goals (5+ years)

Debt Funds: Debt or fixed-income securities (Corporate bonds, T-Bills, etc.)

- Returns: Moderate (6-8%)
​ - Risk: Low
​ - Best for: Short-term goals (1-3 years) or stability

Hybrid Funds: Blend both equity and debt to balance risk and reward

- Returns: Moderate (8-12%)
​ - Risk: Medium
​ - Best for: Moderate risk-takers, 3-5 year goals

What My Cousin Understood After This

After explaining these 4 classifications, she said:

Cousin: So basically:

  • Structure: Open-ended (flexible) vs Closed-ended (fixed maturity)
  • Management: Active (manager picks) vs Passive (tracks index)
  • Investment mode: Direct (DIY, lower cost) vs Regular (advisor, higher cost)
  • Asset type: Equity (high risk/return), Debt (low risk/return), Hybrid (balanced)

Me: Exactly. Now when you see a fund, you can decode it:

  • 'AMC1 Top 100 Direct Plan' = Direct mode
  • 'AMC2 Nifty 50 Index Fund' = Passive management
  • 'AMC3 Hybrid Fund' = Hybrid asset type

Cousin: "Got it! But how do I pick within Equity funds or Debt Fund or Hybrid Fund?
​Me: "That's next week."

The Bottom Line

Understanding these 4 classifications gives you a framework to evaluate ANY mutual fund.
When you see a fund, ask:

  1. Structure: Can I redeem anytime? (Open-ended ✓)
  2. Management: Is it actively managed or index? (Start with index)
  3. Mode: Direct or Regular? (Direct saves ₹10L+ over 20 years)
  4. Asset: Equity, Debt, or Hybrid? (Choose based on goal timeline)

Once you internalize this, you'll never feel lost looking at 1000+ funds again and you're no longer dependent on agents or advisors to decode mutual fund. You're in control.

And there is still more in Mutual fund universe. Next week, i will share more details about 'type of mutual funds basis the asset type i.e., Equity, Debt and Hybrid funds'.

Will also share frameworks on how to evaluate mutual fund schemes and then how to choose specific schemes.

Got questions about types of MFs scheme? Hit reply and ask - I read every email.

Connect with me on LinkedIn, I write every day to help you make smarter money decisions👇

Ritesh Sabharwal

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