Types of Mutual Fund Schemes
Schemes according to Maturity Period
A mutual fund scheme can be classified into open-ended scheme or close-ended scheme
depending on its maturity period.
Open-ended Fund/ Scheme
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.
Close-ended Fund/ Scheme
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 A scheme can also
be classified as growth scheme, income scheme, or balanced scheme considering its
investment objective. Such schemes may be open-ended or close-ended schemes as described
earlier. Such schemes may be classified mainly as follows:
Growth / Equity Oriented Scheme
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.
Income / Debt Oriented Scheme
The aim of income funds is to provide regular and steady income to investors. Such schemes generally invest in fixed income securities such as bonds, corporate debentures,
Government securities and money market instruments. Such funds are less risky compared
to equity schemes. These funds are not affected because of fluctuations in equity
markets. However, opportunities of capital appreciation are also limited in such
funds. The NAVs of such funds are affected because of change in interest rates in
the country. If the interest rates fall, NAVs of such funds are likely to increase
in the short run and vice versa. However, long term investors may not bother about
these fluctuations.
Balanced Funds
The aim of balanced funds is to provide both growth and regular income as such schemes
invest both in equities and fixed income securities in the proportion indicated in their offer documents. These are appropriate for investors looking for moderate growth. They generally invest 40-60% in equity and debt instruments. These funds
are also affected because of fluctuations in share prices in the stock markets.
However, NAVs of such funds are likely to be less volatile compared to pure equity
funds.
Money Market or Liquid Fund
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.
Gilt Fund
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.
Index Funds
Index Funds replicate the portfolio of a particular index such as the BSE Sensitive
index, S&P NSE 50 index (Nifty), etc These schemes invest in the securities
in the same weightage comprising of an index. NAVs of such schemes would rise or
fall in accordance with the rise or fall in the index, though not exactly by the
same percentage due to some factors known as "tracking error" in technical terms.
Necessary disclosures in this regard are made in the offer document of the mutual
fund scheme. There are also exchange traded index funds launched by the mutual funds
which are traded on the stock exchanges.
Sector specific funds/schemes
These are the funds/schemes which invest in the securities of only those sectors
or industries as specified in the offer documents. e.g. Pharmaceuticals, Software,
Fast Moving Consumer Goods (FMCG), Petroleum stocks, etc. The returns in these funds
are dependent on the performance of the respective sectors/industries. While these
funds may give higher returns, they are more risky compared to diversified funds.
Investors need to keep a watch on the performance of those sectors/industries and
must exit at an appropriate time. They may also seek advice of an expert.
Tax Saving Schemes
These schemes offer tax rebates to the investors under specific provisions of the Income Tax Act, 1961 as the Government offers tax incentives for investment in specified avenues. e.g. Equity Linked Savings Schemes (ELSS). Pension schemes launched by
the mutual funds also offer tax benefits. These schemes are growth oriented and
invest pre-dominantly in equities.
Their growth opportunities and risks associated
are like any equity-oriented scheme.
Fund of Funds (FoF) scheme
A scheme that invests primarily in other schemes of the same mutual fund
or other mutual funds is known as a FoF scheme. An FoF scheme enables the investors
to achieve greater diversification through one scheme. It spreads risks across a
greater universe.
Load or no-load Fund
A Load Fund is one that charges a percentage of NAV for entry or exit. That is,
each time one buys or sells units in the fund, a charge will be payable. This charge
is used by the mutual fund for marketing and distribution expenses. Suppose the
NAV per unit is Rs.10. If the entry as well as exit load charged is 1%, then the
investors who buy would be required to pay Rs.10.10 and those who offer their units
for repurchase to the mutual fund will get only Rs.9.90 per unit. The investors
should take the loads into consideration while making investment as these affect
their yields/returns. However, the investors should also consider the performance
track record and service standards of the mutual fund which are more important.
Efficient funds may give higher returns in spite of loads.
A no-load fund is one that does not charge for entry or exit. It means the investors
can enter the fund/scheme at NAV and no additional charges are payable on purchase
or sale of units.