TYPES OF MUTUAL FUND SCHEMES
DETAILS
When it comes to mutual funds, there are many different varieties designed to meet various investor goals. These mutual funds can be broadly classified based on several factors, including:
Organisation Structure - Mutual funds can be categorized as open-ended, closed-ended, or interval funds, depending on how they operate.
Management of Portfolio - Mutual funds can be actively or passively managed, depending on how the portfolio is managed by the fund manager.
Investment Objective - Mutual funds can be categorized based on the investment objective, such as growth, income, or liquidity.
Underlying Portfolio - Mutual funds can invest in various asset classes such as equity, debt, hybrid, money market instruments, multi-asset, etc.
Thematic / solution-oriented - Mutual funds can be designed to serve specific purposes such as tax-saving, retirement benefits, child welfare, arbitrage, etc.
Exchange-Traded Funds - These funds are traded on stock exchanges like individual stocks and invest in a range of assets such as stocks, bonds, or commodities.
Overseas Funds - These mutual funds invest in assets that are located in other countries, providing investors with exposure to international markets.
Fund of Funds - These mutual funds invest in other mutual funds, allowing investors to access a diverse range of asset classes with a single investment.
Scheme Classification By Organization Structure
• Open-ended schemes are perpetual, and open for subscription and repurchase on a continuous basis on all business days at the current NAV.
• Close-ended schemes have a fixed maturity date. The units are issued at the time of the initial offer and redeemed only on maturity. The units of close-ended schemes are mandatorily listed to provide exit route before maturity and can be sold/traded on the stock exchanges
• Interval schemes allow purchase and redemption during specified transaction periods (intervals). The transaction period has to be for a minimum of 2 days and there should be at least a 15-day gap between two transaction periods. The units of interval schemes are also mandatorily listed on the stock exchanges.
Scheme classification by organization structure
Active Funds: An active fund is managed by a fund manager who actively selects and manages the portfolio's securities. The fund manager adopts different strategies and styles to create and manage the portfolio. The investment strategy and style are described upfront in the Scheme Information document. Active funds aim to generate better returns than the benchmark index by implementing strategies to select the stocks for the portfolio. The risk and return in the fund will depend on the strategy adopted.
Passive Funds: A passive fund holds a portfolio that replicates a stated index or benchmark, such as index funds or exchange-traded funds (ETFs). In a passive fund, the fund manager has a passive role as the stock selection decision is driven by the benchmark index, and the fund manager merely needs to replicate the same with minimal tracking error.
Active vs Passive Funds: Active funds rely on professional fund managers who manage investments and aim to outperform the benchmark index. They are suited for investors who wish to take advantage of fund managers' alpha generation potential. Passive funds invest in holdings that mirror and closely track a benchmark index. They are suited for investors who want to allocate exactly as per the market index. Passive funds have lower expense ratios, hence lower costs to investors and better liquidity.
Scheme classification by Investment objective
Mutual funds offer products that cater to different investment objectives, such as:
- Capital Appreciation (Growth)
- Capital Preservation
- Regular Income
- Liquidity
- Tax-Saving
Mutual funds also offer investment plans, such as growth and dividend options, to help tailor the investment to the investors’ needs.
Growth Funds:
Growth funds are schemes designed to provide capital appreciation. They primarily invest in growth-oriented assets such as equity. Investment in growth-oriented funds requires a medium to long-term investment horizon. Historically, equity as an asset class has outperformed most other kinds of investments held over the long term. However, returns from growth funds tend to be volatile over the short-term since the prices of the underlying equity shares may change. Hence investors must be able to take volatility in the returns in the short-term.
Income Funds:
The objective of income funds is to provide regular and steady income to investors. Income funds invest in fixed income securities such as corporate bonds, debentures, and government securities. The fund’s return is from the interest income earned on these investments as well as capital gains from any change in the value of the securities. The fund will distribute the income provided the portfolio generates the required returns. There is no guarantee of income. The returns will depend upon the tenor and credit quality of the securities held.
Liquid/Overnight/Money Market Mutual Funds:
Liquid schemes, overnight funds, and money market mutual funds are investment options for investors seeking liquidity and principal protection, with commensurate returns. These funds invest in money market instruments with maturities not exceeding 91 days. The return from the funds will depend upon the short-term interest rate prevalent in the market. These are ideal for investors who wish to park their surplus funds for short periods. Investors who use these funds for longer holding periods may be sacrificing better returns possible from products suitable for a longer holding period.
Scheme classification by Investment Portfolio
Mutual funds can be classified based on their underlying portfolio composition, which can be categorized into two levels:
- i. Asset class: The first level of categorization is based on the asset class the fund invests in, which can be:
- Equity: Equity funds invest primarily in stocks of companies listed on the stock exchange.
- Debt: Debt funds invest in fixed income securities such as corporate bonds, government securities, and money market instruments.
- Hybrid/Multi-Asset: Hybrid funds invest in a mix of equity and debt instruments, while multi-asset funds invest in a combination of multiple asset classes, including equity, debt, gold, etc.
- Money market instruments: Money market funds invest in highly liquid and low-risk debt securities with short-term maturities of up to 91 days.
- Gold: Gold funds invest in physical gold or gold-related securities.
- ii. Investment strategies and styles: The second level of categorization is based on the strategies and styles used to create the portfolio. Some examples of these categories include:
- Large-cap/Mid-cap/Small-cap Equity Funds: These funds invest in stocks of large, mid-sized, or small-sized companies respectively.
- Value funds: These funds invest in undervalued stocks with the expectation that their true value will eventually be recognized by the market.
- Growth funds: These funds invest in stocks of companies that are expected to grow at a faster rate than the market average.
- Index funds: These funds aim to replicate the performance of a specific index such as the Nifty 50 or the BSE Sensex.
- Dynamic bond funds: These funds invest in a mix of debt instruments of varying maturities with the aim of optimizing returns based on changing market conditions.
- Infrastructure funds: These funds invest in stocks of companies that are involved in infrastructure-related activities such as construction, power, and transportation.
The portfolio composition of a mutual fund scheme flows out of its investment objectives and strategy. It is important for investors to understand the asset class and investment strategy of a mutual fund before investing in it to ensure that it aligns with their investment objectives and risk tolerance.