Types of Mutual Funds
Every investor has a different investment objective. Some go for stability and opt for safer securities such as bonds or government securities. Those who have a higher risk appetite and yearn for higher returns may want to choose risk-bearing securities such as equities. Hence, mutual funds come with different schemes, each with a different investment objective. Broadly, they have been categorized in three categories. Based on the structure, the mutual funds can be closed-ended, open-ended and interval funds. Based on the nature, they can be equity funds, debt funds and hybrid funds. Based on the investment objective, they can be classified as the growth funds, income funds, balanced funds and index funds.
Types of Mutual Funds by Structure
Close Ended Fund
A close ended fund or scheme has a predetermined maturity period (e.g., 5-7 years). The fund is open for subscription during the launch of the scheme for a specified period of time. Investors can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units on the stock exchanges where they 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 or they are listed in secondary market.
Open Ended Fund
The most common type of mutual fund available for investment is an open-ended mutual fund. Investors can choose to invest or transact in these schemes as per their convenience. In an open-ended mutual fund, there is no limit to the number of investors, shares, or overall size of the fund, unless the fund manager decides to close the fund to new investors in order to keep it manageable. The value or share price of an open-ended mutual fund is determined at the market close every day and is called the Net Asset Value (NAV).
Interval schemes combine the features of open-ended and close-ended schemes. The units may be traded on the stock exchange or may be open for sale or redemption during pre-determined intervals at NAV related prices. FMPs or Fixed maturity plans are examples of these types of schemes.
Types of Mutual Funds by Nature
Equity Mutual Funds
These funds invest maximum part of their corpus into equity holdings. The structure of the fund may vary for different schemes and the fund manager’s outlook on different stocks. The Equity funds are sub-classified depending upon their investment objective into diversified equity funds, mid-cap funds, small cap funds, sector specific funds and tax savings funds/ Equity Linked Savings Scheme (ELSS). Equity investments rank high on the risk-return grid and hence, are ideal for a longer time frame.
Debt Mutual Funds
These funds invest in debt instruments to ensure low risk and provide a stable income to the investors. Government authorities, private companies, banks and financial institutions are some of the major issuers of debt papers. Debt funds can be further classified into gilt funds, income funds, MIPs, short term plans and liquid funds.
They invest in both equities and fixed income securities which are in line with pre-defined investment objective of the scheme. The equity portion provides growth while debt provides stability in returns. This way, investors get to taste the best of both worlds.
Also known as equity schemes, these schemes aim at providing capital appreciation over medium to long term. These schemes normally invest a major portion of their fund in equities and are willing to withstand short-term decline in value for possible future appreciation.
Also known as debt schemes, they generally invest in fixed income securities such as bonds and corporate debentures. These schemes aim at providing regular and steady income to investors. However, capital appreciation in such schemes may be limited.
A combination of growth and income funds, also known as balanced funds, are those that have a mix of goals. They seek to provide investors with current income while still offering the potential for growth. Some funds buy stocks and bonds so that the portfolio will generate income whilst still keeping ahead of inflation. Equities provide the growth potential, while the exposure to fixed-income securities provides stability to the portfolio during volatile times in the equity markets. Growth and income funds have a low-to-moderate stability along with a moderate potential for current income and growth.
These schemes attempt to reproduce the performance of a particular index such as the BSE Sensex or the NSE 50. Their portfolios consist of only those stocks that constitute the index. The percentage of each stock to the total holding is identical to the stock index weightage. And hence, the returns from such schemes are more or less equivalent to those of the Index.
Money Market or Liquid Funds
These funds are also income funds and their aim is to provide easy liquidity, preservation of capital and moderate income. These schemes invest exclusively in safer short-term instruments such as treasury bills, certificates of deposit, commercial paper and inter-bank call money, government securities, etc. Returns on these schemes fluctuate much less compared to other funds. These funds are appropriate for corporate and individual investors as a means to park their surplus funds for short periods.
These funds invest exclusively in government securities. Government securities have no default risk. NAVs of these schemes also fluctuate due to change in interest rates and other economic factors as is the case with income or debt oriented schemes.