People keep me asking why there are so many different types of mutual funds schemes in India. We have to understand that a mutual fund is just the connecting bridge or a financial intermediary that allows a group of investors to pool their money together with a predetermined investment objective. And due to different investment objectives, there are different types of mutual funds.
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The mutual fund will have a fund manager (team of experts) who is responsible for investing the gathered money into specific securities (stocks or bonds). When you invest in a mutual fund, you are buying units or portions of the mutual fund and thus on investing becomes a shareholder or unitholder of the fund.
The profits or losses are shared by the investors in proportion to their investments. The mutual funds normally come out with a number of schemes with different investment objectives which are launched from time to time. A mutual fund is required to be registered with the Securities and Exchange Board of India (SEBI) which regulates securities markets before it can collect funds from the public.
What are the types of Mutual Funds In India
|By Nature||By Structure||By Investment Objective|
|Equity, Debt, Balance||Closed-Ended Funds, Open-Ended, Funds Interval funds||Growth Schemes, Income Schemes, Balanced Schemes, Index Funds|
Let us discuss each of these types in detail:
Based On Nature
Equity mutual funds
These funds invest a maximum part of their corpus into equities holdings. The structure of the fund may vary differently for different schemes and the fund manager’s outlook on different stocks. The Equity Funds are sub-classified depending upon their investment objective, as follows:
- Diversified Equity Funds
- Multi-Cap Fund
- Value Fund
- Dividend Yield Fund
- Mid-Cap Funds
- Small-Cap Funds
- Sector Funds
- Tax Savings Funds (ELSS)
Equity investments are meant for a longer time horizon, thus Equity funds rank high on the risk-return matrix.
Debt mutual funds
The objective of these Funds is to invest in debt papers. Government authorities, private companies, banks, and financial institutions are some of the major issuers of debt papers. By investing in debt instruments, these funds ensure low risk and provide stable income to the investors. Debt funds are further classified as:
- Gilt Funds
- Income Funds
- Monthly Income Plans – MIP
- Short Term Plans
- Liquid Funds
Balanced Funds / Hybrid funds
As the name suggests they, are a mix of both equity and debt funds. They invest in both equities and fixed income securities, which are in line with a pre-defined investment objective of the scheme. These schemes aim to provide investors with the best of both worlds. The equity part provides growth and the debt part provides stability in returns.
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Money Market Funds
A money market fund is a type of mutual fund that invests in highly liquid, short-term securities. These may include cash, cash equivalents, and high-credit-rating debt-based securities with a short-term maturity. Money market funds are designed to offer investors high liquidity with a very low level of risk. Money market funds are also called money market mutual funds.
Based on the Investment objective
Growth Schemes are also known as equity schemes. The aim of these schemes is to provide capital appreciation over the medium to long term. These schemes normally invest a major part of their fund in equities and are willing to bear a short-term decline in value for possible future appreciation.
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Income Schemes are also known as debt schemes. The aim of these schemes is to provide regular and steady income to investors. These schemes generally invest in fixed-income securities such as bonds and corporate debentures. Capital appreciation in such schemes may be limited.
Index schemes attempt to replicate the performance of a particular index such as the BSE Sensex or the NSE 50. The portfolio of these schemes will consist of only those stocks that constitute the index. The percentage of each stock to the total holding will be identical to the stock’s index weight age. And hence, the returns from such schemes would be more or less equivalent to those of the Index.
Based On Structure
Close Ended Fund
A close-ended fund or scheme has a stipulated maturity period For eg. 5-7 years. The fund is open for subscription only during a specified period at the time of the 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 or they are listed in the secondary market.
An open-ended mutual fund is the most common type of mutual fund available for investment. An investor can choose to invest or transact in these schemes whenever he likes to. 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 are that scheme, which combines 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. FMP or Fixed Maturity Plans are examples of these types of schemes.