It is common to note that a small investor saves a part of his income to meet future expenses like education, marriage, medical expenses and purchase of products. These diverse needs are expressed in terms of investment objectives as safety, liquidity and high returns.
To meet these diverse needs of a multitude of investors, mutual funds have designed and offered a wide variety of mutual fund schemes. As per the structure and objectives of schemes, mutual fund schemes are classified on the following basis.
Table of Contents
- 1 Types of Mutual Fund
- 1.1 Open-end funds
- 1.2 Closed-end funds
- 1.3 Debt/Income funds
- 1.4 Equity /Growth funds
- 1.5 Balanced funds
- 1.6 Domestic funds
- 1.7 Offshore funds
- 1.8 Money market mutual funds
- 1.9 Gilt funds
- 1.10 Load funds
- 1.11 Tax-exempt funds
- 1.12 Sector specific funds
- 1.13 Equity index funds
- 1.14 Commodity funds
- 1.15 Real estate fund
- 1.16 Exchange traded funds (ETF)
- 1.17 Fund of fund
- Schemes according to Maturity Period
- Schemes according to Investment Objective
- Schemes according to Geographical Location
- Other Schemes
Types of Mutual Fund
- Open-end funds
- Closed-end funds
- Debt/Income funds
- Equity /Growth funds
- Balanced funds
- Domestic funds
- Offshore funds
- Money market mutual funds
- Gilt funds
- Load funds
- Tax-exempt funds
- Sector specific funds
- Equity index funds
- Commodity funds
- Real estate fund
- Exchange traded funds (ETF)
- Fund of fund
Schemes according to Maturity Period
An open-ended fund or scheme is one that is available for subscription and repurchase on a continuous basis. These schemes do not have a fixed maturity period. Investors can conveniently buy and sell units at Net Asset Value (NAV) related prices which are declared on a daily basis.
The key feature of open-end schemes is liquidity. As investors can withdraw at any point of time, fund managers have to perform well to keep the scheme attractive to new investors.
A close-ended fund or scheme has a stipulated maturity period e.g. 5-7 years. The fund is open for subscription only during a specified period at the time of launch of the scheme. Investors can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units of the scheme on the stock exchanges where the units are listed.
In order to provide an exit route to the investors, some close-ended funds give an option of selling back the units to the mutual fund through periodic repurchase at NAV related prices. SEBI Regulations stipulate that at least one of the two exit routes is provided to the investor i.e. either repurchase facility or through listing on stock exchanges. These mutual funds schemes disclose NAV generally on weekly basis.
Schemes according to Investment Objective
Mutual Funds that invest their money in medium to long-term debt instruments issued by companies, banks, other financial institutions, governments and other entities belonging to various sectors (like infrastructure companies etc.) are known as Income Funds. Such funds are low-risk profile funds that seek to generate fixed current income to investors.
In order to ensure regular income to investors, debt funds distribute large fraction of their surplus to investors in form of interest. Debt funds are subject to credit risk (risk of default by counterparty) by the issuer at the time of interest or principal payment.
To minimize and protect the investor from risk of default, debt funds usually invest in securities from issuers who are rated by credit rating agencies (CRISIL, CARE, ICARA, Fitch etc.) and are considered to be of “Investment Grade”.
Equity /Growth funds
The aim of growth funds is to provide capital appreciation over the medium to long- term. Such schemes normally invest a major part of their corpus in equities. Such funds have comparatively high risks. These schemes provide different options to the investors like dividend option, capital appreciation, etc. and the investors may choose an option depending on their preferences.
The investors must indicate the option in the application form. The mutual funds also allow the investors to change the options at a later date. Growth schemes are good for investors having a long-term outlook seeking appreciation over a period of time
The aim of balanced scheme is to provide both capital appreciation and regular income. They divide their investment between equity shares and fixed nice bearing instruments in such a proportion that, the portfolio is balanced.
The portfolio of such funds usually comprises of companies with good profit and dividend track records. Their exposure to risk is moderate and they offer a reasonable rate of return.
Schemes according to Geographical Location
Funds which mobilize resources from a particular geographical locality like a country or region are domestic funds. The market is limited and confined to the boundaries of a nation in which the fund operates. They can invest only in the securities which are issued and traded in the domestic financial markets.
Offshore funds attract foreign capital for investment in ‘the country of the issuing company. They facilitate cross-border fund flow which leads to an increase in foreign currency and foreign exchange reserves. Such mutual funds can invest in securities of foreign companies. They open domestic capital market to international investors
Money market mutual funds
A money market mutual fund (MMMF) is a mutual fund open-ended scheme that invests solely in cash/cash equivalent securities with less than one-year maturity, which are also often referred to as money market instruments. These investments are short-term very liquid investments with high credit rating.
The money market fund’s purpose is to provide investors with a safe place to invest in easily accessible cash-equivalent assets characterized as a low-risk, low-return investment. The typical investment options for liquid funds include Treasury Bills and Repurchase Agreements (issued by governments), Commercial papers (issued by companies) and Certificates of Deposit (issued by banks). UTI – Money Market Fund is one such example of MMMF in India.
Also known as Government Securities in India, Gilt Funds invest in government securities (Govt. Bonds etc.) having medium to long term maturity period. Issued by the Government of India, these investments have little credit risk (risk of default) and provide safety of principal to the investors.
However, like all debt funds, gilt funds too are exposed to interest rate risk. L&T Gilt Fund (G), Birla Sun Life G-Sec. Fund – Long Term (G), SBI Magnum Gilt – Long Term Plan (G) and UTI Gilt Advantage Fund – LTP- PF (G) etc. are few examples of Gilt funds in India market.
Mutual Funds incur various expenses on marketing of scheme, distribution, advertising & promotion of scheme, portfolio management, fund manager’s salary etc. Many funds recover these expenses from the investors in the form of load. These funds are known as Load Funds.
A load fund may impose entry and exit load on the fund and can recover the amount of load from the investors. Recently in India, the industry regulator, SEBI has instructed that no entry load be charged for all MF schemes launched on or after August 1, 2009.
Distributors receive commission from the investors based on investor’s assessment of various factors including service rendered. Exit loads may or may not be charged to the investors and it varies depending on the period they stay invested in the scheme
Funds that invest the money collected from investors in securities free from tax are known as Tax-exempt Funds. All open-end equity oriented funds are exempt from distribution tax (tax for distributing income to investors). Long term capital gains and dividend income in the hands of investors are tax-free. These types of funds offers tax benefits to investor under the Income Tax Act 1961.
Sector specific funds
The funds which invest into stock of a particular industry or sector are called sector funds. For example SBI Pharma Fund (G) is a fund from SBI mutual fund that invests in the pharmaceutical companies. The scheme seeks maximum growth opportunities by investing in Pharma companies listed on Indian stock exchanges.
Since these funds invest their money in a particular sector, diversification is limited to companies only and only informed investor invest in these funds.
Equity index funds
Equity index funds have the objective to match the performance of a specific stock market index. Such funds hold securities in the same proportion as the index- which reflect the composition of broad market.
Index funds that follow broad indices such as S&P CNX Nifty, S&P Sensex are less risky than equity index funds that follow narrow sector specific indices like BSEBANKEX (banks specific index). The value of such funds changes with the market index. Similarly, the performance of the index fund is influenced by the performance of stock index.
In the recent past, commodity has emerged as investment alterative to financial assets. Those funds that focus on investing in different commodities (like metals, Gold, food grains, crude oil etc.) or commodity companies or commodity futures contracts are termed as Commodity Funds.
A commodity fund that invests in a single commodity or a group of commodities is a specialized commodity fund and a commodity fund that invests in all available commodities is a diversified commodity fund and bears less risk than a specialized commodity fund. “Precious Metals Fund” and Gold Funds (that invest in gold, gold futures or shares of gold mines) are common examples of commodity funds.
Real estate fund
Mutual Funds that invest directly in real estate or lend to real estate developers or invest in shares/securitized assets of housing finance companies, are known as Real Estate Funds.
The objective of these funds may be to generate regular income for investors or capital appreciation. Kotak India Real Estate Funds, ING Global Real Estate Fund, ICICI prudential Real Estate fund, and HDFC Property fund are few examples of real estate funds offered by Indian mutual funds companies.
Exchange traded funds (ETF)
An exchange traded fund looks like a mutual fund that tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock on an exchange. ETFs experience price changes throughout the day as they are bought and sold. When you buy shares of an ETF, you are buying shares of a portfolio that tracks the yield and return of its native index.
Exchange Traded Funds provide investors with combined benefits of a closed-end and an open-end mutual fund. Exchange Traded Funds follow stock market indices and are traded on stock exchanges like a single stock at index linked prices. The biggest advantage offered by these funds is that they offer diversification, flexibility of holding a single share (tradable at index linked prices) at the same time.
Recently introduced in India, these funds are quite popular abroad. Goldman Sachs Hang Seng BeES, Kotak PSU Bank ETF, Birla Sunlife Gold ETF, Goldman Sachs Nifty ETS, IDBI Gold ETF and UTI Gold ETF are few examples of ETF traded in India.
Fund of fund
Fund of Fund are those Mutual funds that do not invest in financial or physical assets, but do invest in other mutual fund schemes offered by different AMCs (Assets Management companies).
Fund of Funds maintain a portfolio comprising of units of other mutual fund schemes, just like conventional mutual funds maintain a portfolio comprising of equity/debt/money market instruments or non financial assets.
This type of funds provide investors with an added advantage of diversifying into different mutual fund schemes with even a small amount of investment, which further helps in diversification of risks. But, the expenses of Fund of Funds are quite high on account of compounding expenses of investments into different mutual fund schemes.