Type of Mutual Fund with their Objective

5 Apr    Mutual Fund

Wide variety of Mutual Fund Schemes exists to cater to the needs such as financial position, risk tolerance and return expectations etc. Written below gives an overview into the existing types of schemes in the Industry.

By Structure

–          Open Ended Scheme: An open end fund is the one that sells and repurchase units at all times. An investor can buy or sell units from fund itself at prevailing NAV.

–          Close Ended Scheme: In close end fund, only one time sale of fixed number of units are made and investor can purchase units during that specific period. However to provide liquidity, close ended funds do have pre specific exit dates, where investors can withdraw money by paying some charges.

By Investment Objective

–          Equity Schemes: These types of funds invest investor’s money in equity shares. Among all categories of products these types of funds have potential to generate highest return but investors have to face highest risk. As money gets invested in equity market, the performance of these types of funds largely depend on equity markets but fund managers due to their expertise and research tend to outperform benchmark indices over a long investment horizon. Equity funds can be broadly classified into Large Cap Funds, Mid Cap Funds and Blend Funds.

    • Large Cap funds invest in blue chip companies which offer stable return with low volatility.
    • Mid Cap funds as name suggest try to generate higher return by investing in small & mid cap companies which offer higher growth potential.
    • Blend funds do not follow any market cap bias and create portfolio from any market universe.

–          Balanced Schemes: This type of scheme invests partly in stocks and partly in fixed-income securities, in order to maintain a ‘balance’ in returns and risk.

–          Tax Saving Schemes (ELSS): These schemes are similar to equity schemes with only difference being it comes with 3 year lock in period and provide Section 80 C benefit under income tax. By investing Rs.1 lakh in any of the ELSS scheme available, an investor can save tax by claiming deduction under Section 80 C. Like equity funds, ELSS also invests in equity shares and subject to risks associated with stock market.

–          Income Schemes: These are the debt category of funds. They invest in fixed income generating instruments and that is why they are broadly called income funds. They invest in large universe of debt instruments like money market instruments, T bill, corporate bonds, government securities etc. The main objective of Income funds is to generate steady return at lower level of risk. Based on underlying assets and duration these funds can be classified in different categories like gilt funds and income funds.

    • As name suggests gilt funds invest only in government securities, there is no default risk involved where as,
    • Income funds invest in corporate bonds and debentures along with G securities.

Both Income funds and Gilt funds are mainly affected by changes in interest rates in the economy.

–          Liquid Funds: These funds are normally used to park very short-term funds on a temporary basis. Investment horizon should ideally be from one day to three months. Investment is done in very short term debt instruments like inter bank call money market, T bills, Certificate of Deposits issued by government. As investment maturities are short, they are not vulnerable to interest rate risk.
As name suggests, liquidity level is very high as investor gets money credited in his/her account within 24 hours of redemption (depending on the bank services).

–          Index Scheme: These schemes objective is to invest in Index like NSE Based Index Funds, BSE Based Index Funds

–          Sector Specific Scheme: There are schemes which invest sector specifically like, Pharma schemes, Technology Schemes, FMCG Schemes, Banking Schemes etc.

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