Mutual funds, once a small player in the financial market, have risen to wield significant influence in valuing tradable assets like stocks and bonds.
As an investor, owning units in a mutual fund means holding a portion of the fund based on your investment amount. The fund’s value appreciation is distributed proportionally to investors after deducting expenses.
While mutual funds offer advantages and disadvantages compared to direct securities investing, they now play a vital role in retirement planning.
In this post, we will explore the various types of mutual fund schemes that have become crucial instruments in modern-day investment strategies.
Let’s dive in!
Types of Mutual Funds
Mutual funds offer diverse investment options, categorised based on investment structure, asset class, and investment objective.
This array of choices allows investors to tailor their selections according to risk tolerance, investment amount, goals, and time horizon, facilitating a personalised and strategic approach to wealth creation.
Schemes Based on the Investment Structure
Mutual funds are categorised into open-ended and closed-ended funds based on their investment structure, with significant differences between the two types.
1. Open-Ended Scheme
This mutual fund scheme is an open-end mutual fund where investors can buy or sell units at any time without a fixed maturity date.
The process involves dealing directly with the Mutual Fund for investment and redemption, offering liquidity.
Units can be conveniently bought or sold at net asset value (]NAV) prices. Open-end funds represent around 59% of the total mutual funds available.
2. Close-Ended Scheme
Close-ended schemes have a fixed maturity period; investors can only invest during the New Fund Offer (NFO) launch period.
After the offer closes, no new investments are allowed. The market price may differ from the scheme’s Net Asset Value (NAV) due to various factors.
Some schemes offer the option to sell units directly to the mutual fund through periodic repurchases at NAV-related prices, ensuring at least one exit route for investors as per SEBI Regulations.
Schemes Based on the Asset Classes
Mutual fund schemes are categorised based on the asset classes in which they invest. The main asset classes include the following:
Equity Funds: These funds invest primarily in stocks or shares of companies. They aim for long-term capital appreciation and are suitable for investors with higher risk tolerance.
Debt Funds: Debt funds invest in fixed-income instruments like government and corporate bonds, debentures, and money market securities. They are considered less risky than equity funds and provide regular income.
Hybrid Funds: These funds are known as balanced funds. They invest in a mix of both equity and debt instruments. They offer a balanced approach to risk and return.
Schemes Based on the Investment Objectives
Schemes based on investment objectives are classified as growth, income, or balanced schemes. They can be either open-ended or close-ended, as explained earlier.
The main classification categories are growth, dividend, and balanced schemes.
1. Income/Dividend Oriented Scheme:
Income funds aim to provide regular and steady income by investing in fixed-income securities like bonds, debentures, and government securities. They are less risky than equity schemes and unaffected by equity market fluctuations.
Capital appreciation opportunities are limited. NAVs are influenced by changes in interest rates; lower rates may increase NAVs in the short run, and vice versa. Long-term investors may not be concerned with these fluctuations.
2. Growth/Equity-Oriented Scheme
Growth funds aim to achieve capital appreciation over the medium to long term, predominantly investing in equities.
These types of mutual fund schemes carry higher risks but offer various options like dividends or capital appreciation.
Investors can select their preferred option at the time of application and may change it later. These schemes suit investors with a long-term outlook who seek appreciation over time.
3. Balanced Scheme
Balanced funds aim to offer both growth and regular income by investing in equities and fixed-income securities as per their offer documents.
Suitable for investors seeking moderate growth, they typically allocate 40–60% to equities and debt instruments.
While stock market fluctuations impact them, their NAVs tend to be less volatile than those of pure equity funds.
4. Index Funds
Index Funds mirror the portfolio of a specific index, like the BSE Sensitive Index or Nifty. They invest in the same securities with the same weight age as the index.
The NAV of these funds moves in line with the index, though not precisely due to “tracking error.”
The mutual fund scheme’s offer document discloses details regarding tracking errors and other relevant information.
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5. Exchange Traded Funds (ETFs)
Exchange-traded funds (ETFs) are similar to index funds, in that they track the performance of specific market indices. Unlike mutual funds, ETFs trade on stock exchanges like individual stocks.
They offer diversification, liquidity, and low expense ratios. Investors can buy and sell ETF units throughout the trading day at market prices.
Conclusion
Understanding the different types of mutual fund schemes is essential for making informed investment decisions and achieving long-term financial success. From equity funds for higher returns to debt funds for stability, and hybrid funds offering a balanced approach, these options provide ample opportunities for wealth creation and portfolio diversification. So no matter whether you’re a novice investor or a seasoned one, explore and select the right mutual fund scheme that aligns with your financial goals.
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