Equity, Debt and Hybrid Funds: Types of Mutual Funds Explained
Published 2026-11-05 · Aadarna Stock Broking Pvt. Ltd.
Key takeaways
- SEBI requires every mutual fund scheme to fit into a defined category, so funds with the same label follow similar investment rules.
- Equity funds mainly invest in company shares. Their value can rise and fall sharply, especially over short periods.
- Debt funds invest in bonds and money market instruments. They carry interest rate, credit and liquidity risks, so they can also lose value.
- Hybrid funds mix equity, debt and sometimes other assets. Their risk depends on how much they hold in each.
- Before investing, read the riskometer, the Scheme Information Document and the fund's portfolio, and match them to your own goals and time frame.
When you start looking at mutual funds, you see hundreds of schemes with long names. It can feel confusing. But most schemes fall into a few broad families: equity, debt and hybrid. Once you know what each family invests in, the names start to make sense.
This article explains how SEBI groups mutual funds, what each broad type holds, and the main risks of each. It does not tell you which type to choose. That depends on your goals, your time frame and how much loss you can handle.
How does SEBI categorise mutual funds?
SEBI, the market regulator, has set rules on how mutual fund schemes are grouped and named. Under these rules, each scheme must belong to a defined category. A category is a group of schemes that follow the same basic investment limits. For example, every scheme called a 'large cap fund' must invest mainly in large companies, as defined by SEBI.
SEBI also limits how many schemes a fund house can run in most categories. This makes it easier for you to compare like with like. The broad groups are:
- Equity schemes – invest mainly in shares of companies.
- Debt schemes – invest mainly in bonds and money market instruments.
- Hybrid schemes – invest in a mix of equity, debt and sometimes other assets.
- Solution-oriented schemes – built around a goal, such as retirement or a child's education, usually with a lock-in period.
- Other schemes – such as index funds, exchange traded funds (ETFs) and fund of funds.
You can read the official category definitions on the AMFI website and the SEBI website.
What do equity funds invest in, and how risky are they?
An equity fund puts most of its money into shares of listed companies. When you own units of the fund, you indirectly own small parts of many companies. The value of your units moves with the share prices of those companies.
Equity categories differ mainly by the size of companies they buy or the style they follow:
- Large cap funds – invest mainly in the biggest listed companies by market value.
- Mid cap and small cap funds – invest mainly in medium-sized and smaller companies. These shares can swing more in price.
- Multi cap and flexi cap funds – invest across company sizes, with different rules on how much goes into each.
- Sectoral and thematic funds – invest in one industry or one theme. Because they are less spread out, one bad phase in that area can hurt the whole fund.
- Equity linked savings schemes (ELSS) – equity funds with a lock-in period. Their tax aspects are outside the scope of this article.
Risk profile: Equity funds are generally the most volatile of the three broad types. Volatility means how much and how quickly the value goes up and down. Your investment can fall below what you put in, sometimes for long periods. Holding many shares spreads the risk across companies, but it does not remove market risk.
What do debt funds invest in, and what are their risks?
A debt fund lends money by buying bonds and similar instruments. These are issued by the government, banks, companies and other bodies. The fund earns interest and may gain or lose when bond prices change.
Debt categories differ mainly by two things: how long the bonds last before repayment (called duration or maturity) and who issued them. Some examples:
- Overnight and liquid funds – hold instruments that mature in a very short time.
- Short, medium and long duration funds – hold bonds of different average lengths.
- Gilt funds – invest mainly in government securities.
- Corporate bond and credit risk funds – invest mainly in bonds issued by companies, with different levels of credit quality.
- Dynamic bond funds – can change their duration based on the fund manager's view.
Risk profile: Debt funds usually move less than equity funds, but they can still lose money. The main risks are:
- Interest rate risk – when interest rates rise, existing bond prices usually fall. Funds holding longer bonds feel this more.
- Credit risk – a borrower may delay or fail to repay. A downgrade in a bond's rating can also cut its price.
- Liquidity risk – some bonds are hard to sell quickly at a fair price.
A debt fund is different from a bank deposit. Its value changes every day, and what you earn can go up or down.
What are hybrid funds and how do they behave?
A hybrid fund holds a mix of asset types in one scheme. The mix decides how it behaves. A fund that holds mostly equity will behave more like an equity fund. A fund that holds mostly debt will behave more like a debt fund.
- Conservative hybrid funds – mostly debt, with a smaller equity portion.
- Aggressive hybrid funds – mostly equity, with some debt.
- Balanced advantage or dynamic asset allocation funds – change the equity–debt mix based on a model or the manager's view.
- Multi-asset allocation funds – invest in equity, debt and at least one more asset type, such as gold.
- Arbitrage funds – try to earn from small price differences between the cash and derivatives markets.
- Equity savings funds – combine equity, arbitrage positions and debt.
Risk profile: Mixing assets can soften some ups and downs, but it does not remove risk. The equity part can still fall, and the debt part still carries interest rate and credit risk. Always check the actual mix, not just the word 'hybrid' in the name.
What about index funds, ETFs and fund of funds?
These sit in SEBI's 'other schemes' group. An index fund tries to copy a market index by holding the same securities in the same proportion. An ETF does the same but is bought and sold on a stock exchange like a share, so you need a demat and trading account. A fund of funds invests in other mutual fund schemes instead of buying shares or bonds directly.
Their risk depends on what they track or hold. An index fund that tracks an equity index carries equity risk. One that tracks a bond index carries debt risk. ETFs may also have trading costs, which are as per Angel One's prevailing tariff when traded through Angel One.
How can you check a fund's type and risk before investing?
Every scheme publishes documents that tell you its category and risks. Read them before you invest:
- Riskometer – a dial showing the scheme's risk level, from low to very high. Fund houses review it regularly, so check the latest one.
- Scheme Information Document (SID) and Key Information Memorandum (KIM) – explain the category, investment limits, costs, exit load and risks.
- Monthly portfolio and factsheet – show what the fund actually holds right now.
- Total expense ratio – the yearly cost charged by the fund, which reduces your returns.
Ask yourself simple questions: How long can I stay invested? Can I handle my investment falling in value? Does this category match what I need the money for? The SEBI investor website has more learning material. Aadarna is an AMFI-registered mutual fund distributor and can help you find these documents, but the choice of category is yours.
Frequently asked questions
Can a debt fund lose money?
Yes. Debt funds can lose value if interest rates rise, if a borrower fails to repay, or if bonds become hard to sell. What you earn from them can go up or down, unlike a bank deposit. Check the riskometer and the portfolio to understand the level of risk.
Is a hybrid fund always less risky than an equity fund?
Not always. It depends on how much the hybrid fund holds in equity. An aggressive hybrid fund can hold mostly shares and behave much like an equity fund. Read the scheme's asset allocation in its SID.
Do I need to complete KYC separately for each fund house?
No. KYC is a one-time exercise. Once you complete it through a SEBI-registered intermediary, you do not need to repeat it with another intermediary. You may still need to update your details if they change.
Can a fund change its category after I invest?
A fund house cannot quietly change a scheme's basic nature. Changes to fundamental features need to follow SEBI's rules, including informing existing investors and giving them a chance to exit. Read any notices the fund house sends you.
Sources
- SEBI – official website (mutual fund regulations and KYC)
- SEBI – investor education website
- AMFI – mutual fund categories and investor information
- Angel One – tariff and account information
Risk disclosures on derivatives
- 9 out of 10 individual traders in equity Futures and Options Segment, incurred net losses.
- On an average, loss makers registered net trading loss close to ₹50,000.
- Over and above the net trading losses incurred, loss makers expended an additional 28% of net trading losses as transaction costs.
- Those making net trading profits, incurred between 15% to 50% of such profits as transaction cost.
Source: SEBI study dated January 25, 2023 on "Analysis of Profit and Loss of Individual Traders dealing in equity Futures and Options (F&O) Segment", wherein Aggregate Level findings are based on annual Profit/Loss incurred by individual traders in equity F&O during FY 2021-22.