Types of Mutual Fund
Types of Mutual Fund Schemes
Schemes according to Maturity Period : A mutual fund scheme can
be classified into open-ended scheme or close-ended scheme depending on its maturity
Open-ended Fund/ Scheme : An open-ended fund or scheme is one that
is available for subscription and repurchase on a continuous basis. These schemes
do not have a fixed maturity period. Investors can conveniently buy and sell units
at Net Asset Value (NAV) related prices which are declared on a daily basis. The
key feature of open-end schemes is liquidity.
Close-ended Fund/ Scheme : A close-ended fund or scheme has a stipulated
maturity period e.g. 5-7 years. The fund is open for subscription only during a
specified period at the time of 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. SEBI Regulations stipulate that at least one of the two exit routes
is provided to the investor i.e. either repurchase facility or through listing on
stock exchanges. These mutual funds schemes disclose NAV generally on weekly basis.
Schemes according to Investment Objective
A scheme can also be classified as growth scheme, income scheme, or balanced scheme
considering its investment objective. Such schemes may be open-ended or close-ended
schemes as described earlier. Such schemes may be classified mainly as follows:
Growth / Equity Oriented Scheme : The aim of growth funds is to
provide capital appreciation over the medium to long- term. Such schemes normally
invest a major part of their corpus in equities. Such funds have comparatively high
risks. These schemes provide different options to the investors like dividend option,
capital appreciation, etc. and the investors may choose an option depending on their
preferences. The investors must indicate the option in the application form. The
mutual funds also allow the investors to change the options at a later date. Growth
schemes are good for investors having a long-term outlook seeking appreciation over
a period of time.
Income / Debt Oriented Scheme :The aim of income funds is to provide
regular and steady income to investors. Such schemes generally invest in fixed income
securities such as bonds, corporate debentures, Government securities and money
market instruments. Such funds are less risky compared to equity schemes. These
funds are not affected because of fluctuations in equity markets. However, opportunities
of capital appreciation are also limited in such funds. The NAVs of such funds are
affected because of change in interest rates in the country. If the interest rates
fall, NAVs of such funds are likely to increase in the short run and vice versa.
However, long term investors may not bother about these fluctuations.
Balanced Funds : The aim of balanced funds is to provide both growth
and regular income as such schemes invest both in equities and fixed income securities
in the proportion indicated in their offer documents. These are appropriate for
investors looking for moderate growth. They generally invest 40-60% in equity and
debt instruments. These funds are also affected because of fluctuations in share
prices in the stock markets. However, NAVs of such funds are likely to be less volatile
compared to pure equity funds.
Money Market or Liquid Fund : These funds are also income funds
and their aim is to provide easy liquidity, preservation of capital and moderate
income. These schemes invest exclusively in safer short-term instruments such as
treasury bills, certificates of deposit, commercial paper and inter-bank call money,
government securities, etc. Returns on these schemes fluctuate much less compared
to other funds. These funds are appropriate for corporate and individual investors
as a means to park their surplus funds for short periods.
Gilt Fund : These funds invest exclusively in government securities.
Government securities have no default risk. NAVs of these schemes also fluctuate
due to change in interest rates and other economic factors as is the case with income
or debt oriented schemes.
Index Funds : Index Funds replicate the portfolio of a particular
index such as the BSE Sensitive index, S&P NSE 50 index (Nifty), etc These schemes
invest in the securities in the same weightage comprising of an index. NAVs of such
schemes would rise or fall in accordance with the rise or fall in the index, though
not exactly by the same percentage due to some factors known as "tracking error"
in technical terms. Necessary disclosures in this regard are made in the offer document
of the mutual fund scheme. There are also exchange traded index funds launched by
the mutual funds which are traded on the stock exchanges.
Sector specific funds/schemes : These are the funds/schemes which
invest in the securities of only those sectors or industries as specified in the
offer documents. e.g. Pharmaceuticals, Software, Fast Moving Consumer Goods (FMCG),
Petroleum stocks, etc. The returns in these funds are dependent on the performance
of the respective sectors/industries. While these funds may give higher returns,
they are more risky compared to diversified funds. Investors need to keep a watch
on the performance of those sectors/industries and must exit at an appropriate time.
They may also seek advice of an expert.
Tax Saving Schemes : These schemes offer tax rebates to the investors
under specific provisions of the Income Tax Act, 1961 as the Government offers tax
incentives for investment in specified avenues. e.g. Equity Linked Savings Schemes
(ELSS). Pension schemes launched by the mutual funds also offer tax benefits. These
schemes are growth oriented and invest pre-dominantly in equities. Their growth
opportunities and risks associated are like any equity-oriented scheme.
Fund of Funds (FoF) scheme : A scheme that invests primarily in
other schemes of the same mutual fund or other mutual funds is known as a FoF scheme.
An FoF scheme enables the investors to achieve greater diversification through one
scheme. It spreads risks across a greater universe.
What is the difference between Growth Plan and Dividend Reinvestment Plan?
Under the Growth Plan, the investor realizes the capital appreciation of his/her
investments while under the Dividend Reinvestment Plan, the dividends declared are
reinvested automatically in the scheme.
What is Portfolio?
A portfolio of a mutual fund scheme is the basket of financial assets held by that
scheme. It comprises of investments in a variety of securities and asset classes.
This diversification helps reduces the overall risk. A mutual fund scheme states
the kind of portfolio it seeks to construct as well as the risks involved under
each asset class.
What is Net Asset Value (NAV)?
Net Asset Value (NAV) is the actual value of one unit of a given scheme on any given
business day. The NAV reflects the liquidation value of the fund's investments on
that particular day after accounting for all expenses. It is calculated by deducting
all liabilities (except unit capital) of the fund from the realisable value of all
assets and dividing it by number of units outstanding.
What is Load?
The charge collected by a Mutual Fund from an investor for selling the units or
investing in it.
When a charge is collected at the time of entering into the scheme it is called
an Entry load or Front-end load or Sales load. The entry load percentage is added
to the NAV at the time of allotment of units.
An Exit load or Back-end load or Repurchase load is a charge that is collected at
the time of redeeming or for transfer between schemes (switch). The exit load percentage
is deducted from the NAV at the time of redemption or transfer between schemes.
Some schemes do not charge any load and are called "No Load Schemes"
What is Sale Price?
It is the price paid by an investor when investing in a scheme of a Mutual Fund.
This price may include the sales or entry load.
What is Redemption/Repurchase Price?
Redemption or Repurchase Price is the price at which an investor sells back the
units to the Mutual Fund. This price is NAV related and may include the exit load.
What is Repurchase or Back End Load?
It is the charge collected by the scheme when it buys back the units from the unit
What is a Switching Facility?
Switching facility provides investors with an option to transfer the funds amongst
different types of schemes or plans. Investors can opt to switch units between Dividend
Plan and Growth Plan at NAV based prices. Switching is also allowed into/from other
select open-ended schemes currently within the Fund family or schemes that may be
launched in the future at NAV based prices. While switching between Debt and Equity
Schemes, one has to take care of exit and entry loads. Switching from a Debt Scheme
to Equity scheme involves an entry load while the vice versa does not involve an
What is the applicable NAV for switch?
Switch requests get effected the day the request for switch is received. The Applicable
NAV for the switch will be the NAV on the day that the request for switch is received
What is an Account Statement?
An Account Statement is a non-transferable document that serves as a record of transactions
between the fund and the investor. It contains details of the investor, the units
allotted or redeemed and the date of transaction. The Account Statement is issued
every time any transaction takes place.
Who is a Registrar?
A Registrar accepts and processes unit holders' applications, carries out communications
with them, resolves their grievances and despatches Account Statements to them.
In addition, the registrar also receives and processes redemption, repurchase and
switch requests. The Registrar also maintains an updated and accurate register of
unit holders of the Fund and other records as required by SEBI Regulations and the
laws of India. An investor can get all the above facilities at the Investor Service
Centers of the Registrar.
Who is a Custodian?
Custodian is the agency which will have the physical possession of all the securities
purchased by the mutual fund.
How do I track the performance of the Fund?
The NAVs are published in financial newspapers and also available on the AMFI website
on a daily basis.
What is a Systematic Investment Plan?
This is an investment technique where you deposit a fixed, small amount regularly
into the mutual fund scheme (every month or quarter as per your convenience) at
the then prevailing NAV (Net Asset Value), subject to applicable load.
What is a Systematic Withdrawal Plan?
The unit holder may set up a Systematic Withdrawal Plan on a monthly, quarterly
or semi-annual or annual basis to redeem a fixed number of units.