Jul
17
2015

TYPES OF MUTUAL FUNDS:

Mutual Funds are a great tool to invest your savings and watch them grow for your future needs. But investing in them requires you to be aware of various types of funds available and select those that are inclined with your needs.

We have already discussed how important investments are and specifically how important is the investment with Mutual Funds. Let us now focus on their various types to take investment decision even more efficiently.

Basically MFs are categorized on different criterion as below:

  1. By Structure:
    • Open-ended
    • Close-ended
    • Interval Schemes
  2. By investment objective:
    • Growth
    • Income
    • balanced
  3. By type of investment:
    • Equity
    • Debt
    • Balanced
    • Money market
    • Gold
    • Sector
    • Index
  4. Others:
    • Tax saving/ELSS
    • Arbitrage
    • International
    • Fund of funds

Let us understand them individually.

 

Open-ended vs Close-ended Schemes:

Open ended schemes don’t have a specified maturity period and the investors can purchase and redeem their units directly from/to fund houses at existing NAV(Net Asset Value) at any time during the life of the scheme.

Close ended schemes on the other hand only allot units at the time of initial offer, i.e. at the time of NFO (New Fund Offer). They are not available for purchase at any time once NFO period expires. These have a fixed maturity period and if investors wish to sell units before their maturity then they have the option to sell the units in the secondary market (recognized stock exchanges). But this contains an element of supply-demand and not the existing NAV.

 

Interval Schemes:

These contain mixed traits of close and open ended schemes. These could be traded on stock exchanges and are also available for sale/redemption for pre-determined period by the AMCs at existing NAV.

 

Growth vs Income vs Balanced funds:

Growth funds are funds with the objective of providing good returns in medium to long term. They are not intended to provide parts of return to investors during the investment life. They are prone to encounter some dips in short term(as they are market linked) but are aimed at providing decent returns in long term.

Income funds on the other hand guarantee regular income to the investors. They generally invest in government bonds and securities and provide a fixed rate of return. At the end of the investment period the percentage of overall returns are not as high as growth funds. These are suitable for people with little or no fixed income or retired people, who need a fixed income from investment made.

As predicted by you already balanced funds are hybrid of growth and income funds. These schemes invest in a combination of equities and fixed income securities.

 

Equity Funds:

Equity funds are those that primarily invest in equity markets and hence are capable of delivering higher returns in medium to long term. But at the same time because of their nature of market linked these are risk prone as well.

 

Debt Funds:

As it could be predicted from the name these funds invest in fixed income securities like bonds, T-bills(Treasury bills), NCDs (Non Convertible Debentures) etc. Hence they also provide fixed returns and contain least risk. Since risk and returns are generally (NOT always though) inversely proportional and hence returns are quite low.

 

Balanced/Diversified Funds:

Balanced funds yet again, but remember these are according to the type of investment made and not investment objective. Again these are once that have features of both equity and debt funds. Thus they maintain a ratio of their portfolio both in equity and debt funds and thus ensuring good returns with less risk associated. Sometimes also referred as hybrid funds.

They generally maintain a percentage of 60-80% in equity markets and rest in debt or money market.

Money Market Funds:

These are open ended funds that invest in money market instruments such as T Bills, Certificates of Deposit (CDs) and Commercial Paper. They are generally short term funds and provide modest returns.

Gold Funds:

These funds invest in gold producing companies or Gold ETFs.

Sector Funds:

These are sector specific funds and invest in a selected sector. For instance we have schemes that invest only in one of the sectors like Pharma, IT, healthcare, Infrastructure, etc. If you are a type of investor interested in a certain sector only then they form a great choice.

Index Funds:

These form boon for investors who wish to earn equity equivalent profits but have little or no knowledge of selecting them. These funds maintain a portfolio that is similar to the benchmark index (eg BSE Sensex, NSE Nifty, etc). These funds invest in similar stocks as of the index they follow and try to maintain similar proportion as well. Thus they are expected to provide returns of the related benchmark.

Tax Saving/ELSS Funds:

These are aimed towards investment with tax benefit under section 80C of Indian Income Tax Act. They generally have a lock-in period of 3 years. Also known as ELSS(Equity Linked Savings Scheme).

Arbitrage Funds:

These funds leverage the price difference between the cash and derivatives market segment.

International Funds:

As the name defines these funds invest in International financial instruments. Their portfolio could include international equities or debt. One should be very cautious while selecting these as you need to be aware of the financial instrument where the fund invests.

Fund of Funds:

These funds are those that invest in other Mutual Funds instead of investing directly into any financial instrument. These could prove as a good means for investors who wish to invest in a couple of desired MFs but could not invest a large amount in individual schemes.

Now when we have seen almost all major types of Mutual Funds lets remind ourselves again that choosing a MF requires step by step approach which should be followed.

And as always Happy Investing !!! :)

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1 Comment + Add Comment

  • Hi,
    The article is very helpful for me,i like it,thanks a lot!

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