Let’s Have an Overview on Variety of Mutual Fund Schemes
Last Updated : June 14, 2016, 7:57 a.m.
When it comes to mutual fund houses, there is no denying of the fact that they offer various types of schemes. Yes, whether you are a risk-taking investor or a risk-averse one, it is absolutely easy to find a mutual fund scheme that best suits your needs. Yes, whether you want to enjoy the gyrations of the stock markets or are you more comfortable with the stable, but steady growth of your money? No matter what your choice is, mutual funds are suitable for you. Well, if you enjoy taking risks in life, and look forward with the possibility of getting great returns, you may go for equity funds. However, if you are looking for safer investment options, debt funds are an ideal choice for you. However, what, if you want both of them little? Well, you just need to opt for balanced or hybrid funds, which help you in investing both debt as well as equity.
Now, let’s discuss the different types of mutual fund schemes in detail:
Based on Structure
Open-ended Schemes
The open-ended funds are always open for you to invest or exit any time. These schemes have no end date, and they provide you the convenience of buying or redeeming the unites during any business day at the prevailing NAV, which stands for Net Assest Value.
Close-ended Schemes
The closed fund schemes remain open for the investment only for a short period of time, especially during the New Fund Offer period. Once this offer gets closed, no new investments are permitted. However, besides this fact,this scheme gets closed after a particular time frame. Subsequent to the closing of the scheme, investors tend to get their money back.
Moreover, these schemes are listed on the stock exchanges so that when an investor is willing to exit, he/she can easily sell his/her units at the market price via exchange. However, one thing that needs to be mentioned here is the fact that many schemes start-off as being the close-ended, and then become open-ended in the later stage, closer to their redemption date.
Based on Underlying Assets
1. Equity Funds
In equity funds, the investment will be predominantly in equities with just a small chunk of money market securities. Moreover, the main objective here is to generate the potentially superior returns despite the fact that the risks are huge in these funds. However, as these funds invest in stocks, it would not be wrong to say that returns will start fluctuating, thus posing higher risks. Thus, these kinds of funds are not meant for risk-averse investors.
Equity funds can be classified as:
Diversified funds
The diversified funds invest in equity of the companies across the market capitalizations and sectors. Moreover, Rajiv Gandhi Equity Schemes (RGESS) and Equity Linked Savings Schemes (ELSS) both are the variants of these, giving a slew of tax benefits to the investors. Just hold your investment in the fund for over a year and get free from the tax liability on the capital appreciation. However, always keep in mind that you need to invest for at least three years so as to get the maximum tax benefits.
Sectoral funds
The sectoral funds invest in the stocks of companies belonging to specific sectors of the economy. For example-the funds in IT sector will invest in IT companies only, whereas the fund in banking sector will invest in banking stocks only. Well, these kinds of funds are at higher risk because of their sector concentration. More to the point, and then there are some funds like infrastructure funds which invest in a specific investment theme.
Index funds
The index funds invest in the equities of the companies, forming part of the stock market index. These funds invest in the stocks of the companies in the proportion sameas their weightage in the index. Hence, it would not be wrong to say that returns offered by these funds completely match the returns originated by the underlying index which is subject to certain tracking error.
2. Debt Funds
The debt funds invest in fixed income bearing instruments such as corporate bonds, debentures, government securities, commercial paper and various other money market instruments. Furthermore, these funds are basically low-risk-low-return schemes. The return from debt funds usually include the interest receipts, and the capital gains. If you are looking for stable performance, these schemes are definitely apt for you.
Debt funds can be further classified into-
Money market or liquid income schemes
These funds invest for a very short period of time and so are suitable for those who want to park surplus money for a shorter duration.
Gilt funds
In the case of gilt funds, they invest in sovereign securities such as central and state government bonds. The gilt funds has no credit risk, but are subject to interest rate risks. The prices of these securities fluctuate with the movement of interest rates. Not only this, these funds have variable investment periods in order to suit the needs of investors.
Income funds
The income funds invest in government securities, corporate binds and debentures, besides the money market instruments. These types of funds have a slightly higher risk as compared to gilt funds because of their exposure to credit risk.These funds come with plenty of investment horizons such as ultra-short term, short term, medium term and long-term funds so as to suit the needs of all the investors.
Fixed Maturity Plans
Fixed Maturity Plans (FMPs) are close-ended debt funds that come with a pre-specified maturity date. Other features of the product include lock-in period till the maturity date, risk adjusted returns, indexation benefits on assets held for a term of say 1-3 years. These funds invest in debt instruments such as certificates of deposits (Cds), corporate debt and commercial papers (CPs) that have a fixed date of maturity.
3. Hybrid Funds
The hybrid funds invest in equities as well as debt investment, but in varying proportions. Moreover, the balanced funds predominantly invest in equities with remaining in debt. These funds are more stable as compared to pure equity funds.
However, in Monthly Income Plans invest is nearly about 75-80% of the corpus in debt, and the remaining in equities. The main objective here is for the steady returns, provided by debt with best possible capital appreciation provided by the equity.
Furthermore, there are some other funds also, known as Assest Allocation funds that vary in their equity exposure, say widely from 0%- 90% depending on the market outlook. Well, actually these types of funds don’t have the fixed assest allocation.
Other Types of Funds
Exchange Traded Funds (ETF)
Exchange traded funds are those types of funds in which units trade just like a stock on the stock exchange. These might be based on the stock index or another type pf underlying assest. These types of funds can be bought and sold in the stock market only at real time costs, which might be different from its unit. They have lower ratios as compared to index funds and any other equity funds. In order to invest in these funds, you need to require a demat account. Lastly, these funds aim to closely mirror the returns obtained by the underlying assest.
Gold ETFs
Gold ETFs are the type of funds, solely based on gold. Moreover, one can bet on gold without even buying the physical gold with the help of investing in gold ETFs. Through these types of funds, you are not only relieved the hassles of safekeeping the gold, but are also be assured with he gold purity as these funds usually invest in high-quality, certified gold bars. Not only this, you are also spared with the wastage and making charges, when you buy gold from jewellers. However, with few forms of paper gold, you can also have the option of converting this into physical gold with selected jewellers.
Fund of Funds (FoF)
The FoF invest in other types of mutual funds either of the same fund or others. These types of funds are invested in mutual funds abroad. However, one thing that needs to be mentioned here is the fact that multi asset funds also invest in units of equity, debts and gold also. Well, it is easy to get the diversification with lower risks in FoF, besides the higher management expenses.