Mutual funds based on fund scheme:
There are two key kinds of mutual funds on the basis of the constitution of the fund. This basically affects when investors can buy fund units and sell them.
- Close-ended schemes:
These schemes have fixed maturity periods. Investors can buy into these funds during the period when these funds are open in the initial issue. Once that window closes, such schemes cannot issue new units except in case of bonus or rights issues.After that period, you can only buy or sell already-issued units of the scheme on the stock exchanges where they are listed. The market price of the units could vary from the NAV of the scheme due to demand and supply factors, investors’ expectations and other market factors.
- Open-ended schemes:
These funds, unlike close-ended schemes, do not have a fixed maturity period. Investors can buy or sell units at NAV-related prices from and to the mutual fund, on any business day. This means, the fund can issue units whenever it wants. These schemes have unlimited capitalization, do not have a fixed maturity date, there is no cap on the amount you can buy from the fund and the total capital can keep growing.These funds are not generally listed on any exchange.
Open-ended schemes are preferred for their liquidity. Such funds can issue and redeem units any time during the life of a scheme. Hence, unit capital of open-ended funds can fluctuate on a daily basis.
Mutual funds based on assets invested in:
- Equity funds:
These are funds that invest only in stocks. As a result, they are usually considered high risk, high return funds. Most growth funds – the ones that promise high returns over a long-term – are equity funds.These funds have less tax liability in the long-run as compared to debt funds. Equity funds can be further classified into types based on the investment objective into index funds, sector funds, tax-saving schemes and so on. We shall go through these in detail later.
These are funds which invest in both equities as well as debt instruments. For this reason, they are less risky than equity funds, but more than debt funds. Similarly, they are likely to give you higher returns than debt funds, but lower than equity funds. As a result, they are often called ‘balanced funds’.
These funds invest in debt-market instruments like bonds, government securities, debentures and so on. These are called debt instruments because they are a kind of borrowing mechanism for companies, banks as well as the government.
Simply put, you give them money, which the company returns with interest over a period of time. After which, it matures. Since the interest payments are fixed as well as the return of the principle amount, debt instruments are considered low-risk, low-return financial assets. For the same reason, debt funds are relatively safer.
They are usually preferred for the regular interest payments. Debt funds are further classified on the basis of the maturity period of the underlying assets – long-term and short-term. Some debt funds also invest in just a single type of debt instrument. Gilt funds are an example of such a fund.
Mutual funds based on investment objective:
These are schemes that promise capital returns in the long-term. They usually invest in equities. As a result, growth funds are usually high risk schemes. This is because the values of assets are subject to lot of fluctuations.
Also, unlike fixed-income schemes, growth funds usually pay lower dividends. They may also prefer to reinvest the dividend money into increasing the assets under management.
As the name suggests, these schemes try to strike a balance between risk and return. They do so by investing in both equities and debt instruments. As a result, they are a kind of hybrid fund. Their risk is lower than equity or growth funds, but higher than debt or fixed-income funds.
These are schemes that promise regular income for a period of time. For this reason, fixed-income funds are usually a kind of debt fund. This makes fixed-income funds low-risk schemes, which are unlikely to give you a large amount of profit in the long-run.
They pay higher dividends than growth funds. As with debt funds, they may be further classified on the basis of the specific assets invested in or on the basis of maturity.