There exist various mutual fund schemes to cater to the needs such as financial position, risk tolerance and return expectations etc.
The content below gives an overview of the existing types of mutual fund schemes in the industry.
Open-ended schemes are mutual funds that can issue and redeem their shares at any time. Open-ended funds do not have restriction on the amount of shares the fund will issue. They offer units for sale without specifying any duration for redemption. If demand is high enough, the fund will continue to issue shares, no matter how many investors are there. Open-ended funds also buy back shares when investors wish to sell. Investors can conveniently buy and sell units of open-ended funds directly from the fund house at the prevalent Net Asset Value (NAV) prices. One of the key features of open-end schemes is the liquidity that these funds offer to investors.
Close-ended schemes are mutual funds with a fixed number of shares (or units). Unlike open-ended funds, new shares/units are not created by managers to meet demand from investors but the shares can only be purchased (and sold) in the secondary market.
Close-ended funds raise a fixed amount of capital through a New Fund Offer (NFO). The fund is then structured, listed and traded like a stock, on a stock exchange. The price per share is determined by the market and is usually different from the underlying value or net asset value (NAV) per share of the investments held by the fund. The price is said to be at a discount or premium to the NAV when it is below or above the NAV, respectively. A premium might be due to the market's confidence in the investment manager’s ability to produce above-market returns. A discount might reflect the charges to be deducted from the fund in future by the fund managers.
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, that is, either repurchase facility or through listing on stock exchanges. These mutual funds schemes disclose NAV generally on weekly basis.
Interval schemes are those that combine the features of both 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.
Growth or Equity-Oriented Schemes
The aim of growth funds is to provide capital appreciation over medium to long- term. These schemes normally invest a major part of their portfolio in equities and have comparatively high risks. They provide different options to the investors like dividend option, capital appreciation, etc. and investors may choose one depending on their preferences. 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.
It can be further classified into following depending upon objective:
Income or Debt oriented Schemes
- Large-Cap Funds: These funds invest in companies from different sectors. However, they put a restriction in terms of the market capitalization of a company, i.e., they invest largely in BSE 100 and BSE 200 Stocks.
- Mid-Cap Funds: These funds invest in companies from different sectors. However, they put a restriction in terms of the market capitalization of a company, i.e., they invest largely in BSE Mid Cap Stocks.
- Sector Specific Funds: These are schemes that invest in a particular sector, for example, IT.
- Thematic: These schemes invest in various sectors but restrict themselves to a particular theme e.g., services, exports, consumerism, infrastructure etc.
- Diversified Equity Funds: All non-theme and non-sector funds can be classified as equity diversified funds.
- Tax Savings Funds (ELSS): Investments in these funds are exempt from income tax at the time of investment, upto a limit of Rs 1 lakh.
The aim of income funds is to provide regular and steady income to investors. These schemes generally invest in fixed-income securities such as bonds, corporate debentures, Government Securities and money-market instruments and are less risky compared to equity schemes. However, opportunities of capital appreciation are limited in such funds. The NAVs of such funds are impacted because of change in interest rates in the economy. If the interest rates fall, NAVs of such funds are likely to increase in the short run and vice versa. However, long-term investors do not bother about these fluctuations.
The aim of the balanced funds is to provide both growth and regular income as such schemes invest both in equities and fixed income instruments in the proportion indicated in their offer documents. These are appropriate for investors looking for moderate growth. They generally invest between 65% and 75% in equity and the rest in debt instruments. They are impacted because of fluctuation in stock markets but NAVs of such funds are less volatile compared to pure equity funds.
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 Deposits, Commercial Paper and inter-bank call money, Government Securities, etc. Returns of these schemes fluctuate much less than other funds. These are appropriate for investors as a means of short-term investments.
These funds invest exclusively in Government Securities. 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.
Fund of Funds Schemes
Fund of Funds invests in other mutual fund schemes. A traditional mutual fund comprises a portfolio of shares, but a Fund of Funds comprises a portfolio of different mutual fund schemes. A Fund of Funds helps the investor to reduce his chances of selecting the wrong mutual fund.
Gold Exchange Traded Funds
It is an open-ended Exchange Traded Fund. The investment objective of the scheme is to generate returns that are in line with the returns on investment in physical gold, subject to tracking error.
Floating Rate Funds
These are open-ended income schemes seeking to generate reasonable returns with commensurate risk from a portfolio which comprises floating rate debt instruments and fixed rate debt instruments swapped for floating rate returns. The scheme may also invest in fixed rate money market and debt instruments
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 like Equity Linked Savings Schemes (ELSS). ELSS is a type of diversified equity mutual fund, which is qualified for tax exemption under Section 80C of the Income Tax Act, and offers the twin-advantage of capital appreciation and tax benefits. It comes with a lock-in period of three years.
The Rajiv Gandhi Equity Savings scheme (RGESS), which was revised in the Union Budget 2013-14, would provide a 50% tax deduction on investments up to Rs. 50,000 to first time investors in equity whose annual taxable income is below Rs. 12 lakh.
Index funds replicate the portfolio of a particular index such as the BSE Sensitive index, S&P NSE 50 index (Nifty), etc. 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". Necessary disclosures in this regard are made in the offer document of the scheme.
There are also exchange traded index funds launched by the mutual funds which are traded on the stock exchanges.
Sector Specific schemes
These are the funds which invest in the securities of only those sectors or industries as specified in the offer documents like Pharmaceuticals, Software, FMCG, Petroleum stocks etc. The returns of 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.
Load or No-Load Funds
A load fund is one that charges a percentage of NAV for exit. That is, each time one sells units in the fund, a charge will be payable. This charge is used by the Mutual fund for marketing and distribution expenses.
A no-load fund is one that does not charge for exit. It means the investors can exit the fund at no additional charges during sale of units.
In accordance with the SEBI circular no. SEBI/IMD/CIR No.4/168230/09 dated June 30, 2009, no entry load will be charged for purchase / additional purchase / switch-in accepted by the fund with effect from August 1, 2009. Similarly, no entry load will be charged with respect to applications for registrations under Systematic Investment Plan/ Systematic Transfer Plan / Systematic Investment Plan Plus accepted by the fund with effect from August 1, 2009.
Dividend Payout Schemes
Mutual Fund companies as when they keep on making profit, distribute a part of the money to the investors by way of dividends. If one wants to keep on taking part of profit regularly, he may select this option.
Dividend Reinvestment Schemes
This option is similar to the first option except that the dividend declared is re-invested in the same fund on the same day’s NAV.