Types of Mutual Funds in India: All 40 SEBI Categories, What Each Is For, and How They Are Taxed in 2026

SEBI’s rulebook now recognises 40 kinds of mutual fund. Thirteen are equity funds, seventeen are debt funds, seven are hybrids, and the rest are index funds, exchange-traded funds, funds of funds and a new family called life cycle funds. That list was rewritten on 26 February 2026, and a good deal of what you will read about mutual fund types online still describes the version from 2017.

If you already own funds, look at these first. The “solution-oriented” category, home of retirement and children’s funds, has been scrapped: those schemes stopped taking new money on the day of the circular and have to merge into other funds. And every fund’s name must now be the same as its category, so the marketing names are going. Fund houses had six months to comply.

This guide goes through every category in plain terms: what it holds, what it is for, how its gains are taxed under the new Income-tax Act, and what it is allowed to charge you.

Start with what the money is for

The most common mistake is choosing a fund by last year’s return. Returns follow from the category, and the category should follow from when you need the money. A fund that suits money you will spend in eight months is the wrong place for money you will spend in eighteen years, however well it did last year.

Equity funds: 13 categories, one question about size and style

Every equity fund must keep most of its money in shares, and SEBI sets the floor. What separates the categories is which shares. Company size is defined by a ranking of full market value: the top 100 companies are large caps, numbers 101 to 250 are mid caps, and everything from 251 down is small cap. AMFI publishes the list every six months, so a company can move between bands.

Funds defined by company size

• Large cap fund: at least 80% in the top 100 companies. The steadiest equity option, and the one most active managers struggle to beat after costs, which is why many investors use an index fund here instead.
• Mid cap fund: at least 65% in companies ranked 101 to 250. More room to grow, and bigger falls in bad years.
• Small cap fund: at least 65% in companies ranked 251 and below. The most volatile of the size-based funds, and the hardest to sell out of quickly when everyone wants to at once.
• Large and mid cap fund: at least 35% in each of large and mid caps.
• Multi cap fund: at least 75% in equity, with a minimum of 25% each in large, mid and small caps. The manager cannot avoid small caps even when they look expensive.
• Flexi cap fund: at least 65% in equity, spread across sizes however the manager likes. This freedom is the whole point, and the reason two flexi cap funds can look very different.

Funds defined by style or focus

• Value fund and contra fund: both follow out-of-favour shares, at least 80% in equity. Until February 2026 a fund house could run one or the other. It may now run both, provided their portfolios overlap by no more than 50%.
• Dividend yield fund: at least 80% in equity, mostly in companies that pay steady dividends.
• Focused fund: no more than 30 stocks, which concentrates both the wins and the mistakes.
• Sectoral and thematic funds: at least 80% in one sector (banking, pharma, technology) or one theme spanning several sectors. These are bets on a story, not a core holding. New rules require them to overlap no more than 50% with the same fund house’s other equity funds, apart from its large cap fund, so that a “theme” is not just a diversified fund with a new label. Existing schemes have three years to get there, or they will be merged.
• ELSS (tax saver) fund: at least 80% in equity, with a three-year lock-in on every instalment. Its tax break is now the “section 123” deduction of up to ₹1.5 lakh a year in the Income-tax Act, 2025, which replaced section 80C, and it applies only if you file under the old tax regime. Under the default new regime, an ELSS is simply an equity fund with a lock-in.

Where the money is going says something about mood. In September 2026, equity funds took in a net ₹38,307 crore, and the smallest companies drew the most:

Small caps drew ten times what large caps did. That is a fair description of investor appetite, and a poor guide to what to buy: money tends to arrive in a category after it has already done well.

Debt funds: the duration ladder

Debt funds lend money to governments, banks and companies, and earn the interest. Their risk comes from two places. One is the borrower failing to pay, which is credit risk. The other is interest rates rising, which pushes down the price of bonds a fund already holds. The longer a fund’s bonds run, the bigger that effect, and SEBI measures it with Macaulay duration, roughly the average time until the fund gets its money back. As a rough rule, a fund with a duration of five years loses about 5% of its value if interest rates rise by one percentage point.

The remaining debt categories are defined by who they lend to rather than for how long:

• Corporate bond fund: at least 80% in bonds rated AA+ or higher.
• Banking and PSU debt fund: at least 80% in debt of banks, public sector companies, public financial institutions and municipal bodies.
• Credit risk fund: at least 65% in bonds rated AA or below. The extra interest is payment for the higher chance of a default, and this is the category where defaults have actually hurt investors.
• Dynamic term fund: moves across durations as the manager reads interest rates.
• Floating rate fund: at least 65% in bonds whose interest resets with market rates.
• Sectoral debt fund: new in 2026. At least 80% in bonds from one sector, limited to financial services, energy, infrastructure, housing and real estate, and only AA+ or better.

Debt funds can move large sums in a single month. In September 2026 they saw net withdrawals of about ₹1.83 lakh crore. Swings that size are common at the end of a quarter, when companies draw down cash parked in liquid and money market funds, so a single month says little about what households are doing.

Hybrid funds: how much equity is in the mix

A hybrid fund holds more than one asset class, and its category tells you the range of equity it carries. That range decides both the risk and, as the tax section shows, how the gains are taxed.

Arbitrage funds deserve a word. They buy a share in the cash market and sell it at the same time in the futures market, earning the small gap between the two prices. The return looks like a liquid fund’s, but because the fund holds at least 65% in Indian shares, its gains are taxed as equity. For someone in the 30% bracket parking money for a few months, that difference can be worth more than the return itself.

Life cycle funds replace retirement and children’s funds

The new life cycle fund is built around a target year, which must appear in its name: a Life Cycle Fund 2045, a Life Cycle Fund 2055. It starts with mostly equity and moves money into debt as the year approaches, on a schedule SEBI has fixed. For a 30-year fund, equity runs between 65% and 95% while more than 15 years remain, falls to 35–50% in the last five years, and to 5–20% in the final year.

A fund house can offer these in tenures from 5 to 30 years, in steps of five, with no more than six open at once. To stop people treating them as short-term holdings, SEBI set an unusually steep exit load: 3% if you leave within one year, 2% within two, 1% within three.

The idea is the one retirement and children’s funds were sold on, made automatic: the fund de-risks for you as the goal gets closer. Whether it suits you depends on whether the target year matches your goal, and whether you would rather manage that shift yourself.

Index funds, ETFs and funds of funds

An index fund or exchange-traded fund (ETF) must hold at least 95% in the securities of the index it tracks. It does not try to beat the market; it tries to match it cheaply. The difference between the two is how you buy: an index fund is bought from the fund house at the day’s NAV, while an ETF trades on the stock exchange during the day and needs a demat account.

A fund of funds (FoF) puts at least 95% into other funds. That is how most Indians invest abroad through mutual funds, and how many hold gold or silver without a demat account. The gold options, including how a gold FoF compares with a gold ETF and digital gold, are worked through in our guide to the three ways to hold gold. An FoF charges its own expenses on top of the underlying fund’s, so check the total.

Beyond ordinary mutual funds sits the specialised investment fund, a separate product for investors with at least ₹10 lakh that can take short positions. It is not one of the 40 categories above, and its rules are different.

How each type is taxed now

The Income-tax Act, 2025 took effect on 1 April 2026 and renumbered almost everything, but the rates for mutual funds carried over. What decides your tax is not the fund’s name but how much of it sits in Indian shares and how much in debt. The Act sorts funds into three groups:

• Equity-oriented funds, which keep at least 65% in shares of listed Indian companies. This covers equity funds, aggressive hybrids, arbitrage and equity savings funds, and most index funds on Indian indices. Hold for more than 12 months and gains above ₹1.25 lakh a year are taxed at 12.5% (section 198). Sell within 12 months and the rate is 20% (section 196).
• Specified mutual funds, which keep more than 65% in debt and money market instruments: almost all debt funds and conservative hybrids. For units bought on or after 1 April 2023, every gain is treated as short-term and added to your income at your slab rate, however long you hold (section 76, the old section 50AA).
• Everything in between: gold and silver funds, international funds, balanced hybrids and many multi asset funds. These are taxed at 12.5% as long-term gains after 24 months (12 months for a listed ETF), and at your slab rate if sold sooner. This middle group is the one most explainers get wrong, by lumping it in with debt funds.

Two consequences follow. Debt funds have lost their old tax advantage over fixed deposits for most investors, so choose them for liquidity and flexibility, not tax. And for money parked for a few months, an arbitrage fund taxed at 20% can leave more in your hand than a liquid fund taxed at 30%, even if its return is slightly lower.

What a fund is allowed to charge you

Since 1 April 2026, the cap on a fund’s running costs is called the Base Expense Ratio, and it no longer includes government levies such as GST and stamp duty, which are now charged separately on actuals. For open-ended equity funds the cap starts at 2.10% for the first ₹500 crore of assets and falls in steps to 0.95% for the part of a fund above ₹50,000 crore. Index funds and ETFs are capped at 0.90%; equity funds of funds at 2.10% and other funds of funds at 1.85%.

As Value Research has pointed out, much of the headline “cut” is levies moving outside the cap rather than lower fees, so look at the total expense ratio a fund actually reports, not the cap.

The bigger lever is in your hands. Every fund comes in a regular plan, which pays a commission to whoever sold it to you, and a direct plan, which does not. The portfolio is identical. Only the expense ratio differs.

A regular plan can be worth it if the adviser is genuinely advising you. If you are choosing funds yourself, you are paying for a service you are not using.

Reading a fund before you buy it

Every scheme document and factsheet carries the same few pieces of information. Look for these:

1. The category in the name. After the 2026 rules, the name must be the category. A fund called “Large Cap Fund” has to behave like one.
2. The riskometer, which runs in six steps from Low to Very High. Most equity funds sit at Very High. That is not a warning to avoid them; it describes how far they can fall.
3. The expense ratio of the direct plan, and the exit load: the charge for leaving early, often 1% within a year for equity funds, and a fixed 3% in the first year for life cycle funds.
4. Portfolio overlap. Fund houses now publish, every month, how much their schemes overlap with each other. Two funds that hold the same shares are one fund paid for twice.
5. The benchmark and the fund’s record against it over five years or more, not one.

And add a nominee to every folio while you are at it. The rules on that changed in 2026 too, as set out in our explainer on SEBI’s nomination circular.

A sensible core and the optional extras

Forty categories do not mean forty decisions. For most people saving for something more than five years away, one or two broad equity funds (a flexi cap or a large cap index fund) do most of the work. A short term or liquid fund covers money needed soon. Everything else, from small cap to sectoral to gold, is a choice to tilt the mix, worth making only when you can say why you want that tilt and how much of a fall you could sit through. For where mutual funds fit alongside fixed deposits, PPF and the rest, see our guide to where to invest in India.