TYPES OF MUTUAL FUNDS

TYPES OF MUTUAL FUNDS

                      Mutual funds are basically classified as follows below chart

     By constitution :

                                 Mutual funds are classified by constitution three types, thus are classified based on a particular period of time.

Open-Ended Funds: Open-ended funds are open for investors to enter or exit at any time, even after the NFO. When existing investors acquire additional units or new investors acquire units from the open-ended scheme, it is called a sale transaction. It happens at a sale price, which is linked to the NAV. When investors choose to return any of their units to the scheme and get back their equivalent value (in terms of units), it is called a re-purchase transaction. This happens at a re-purchase price that is linked to the NAV. 

Close-Ended Funds: Close-ended funds have a fixed maturity. Investors can buy units of a close-ended scheme, from the fund, only during its NFO. The fund makes arrangements for the units to be traded, post-NFO in a stock exchange. This is done through listing of the scheme in a stock exchange. Such listing is compulsory for close-ended schemes. Therefore, after the NFO, investors who want to buy units will have to find a seller for those units in the stock exchange. Similarly, investors who want to sell units will have to find a buyer for those units in the stock exchange.

Interval Funds: Interval funds combine features of both open-ended and close-ended schemes. They are largely closeended, but become open-ended at pre-specified intervals. For instance, an interval scheme might become open-ended between January 1 to 15, and July 1 to 15, each year. The benefit for investors is that, unlike in a purely close-ended scheme, they are not completely dependent on the stock exchange to be able to buy or sell units of the interval fund. However, between these intervals, the units have to be compulsorily listed on stock exchanges to allow investors an exit route. 

                       The periods when an interval scheme becomes open-ended, are called ‘transaction periods’; the period between the close of a transaction period, and the opening of the next transaction period is called ‘interval period’. Minimum duration of transaction period is 2 days, and minimum duration of interval period is 15 days. No redemption/repurchase of units is allowed except during the specified transaction period

By Investment Objective : 

                       Mutual funds are based on investment objectively four types. thus are described below

Equity Funds: The portfolio of a mutual fund scheme will be driven by the stated investment objective of the scheme. A scheme might have an investment portfolio invested largely in equity shares and equity-related investments such as convertible debentures. The investment objective of such funds is to seek capital appreciation through investment in these growth assets. Such schemes are called equity schemes. 

                      And equity funds have four sub types, thus are diversified funds, tax saving funds, index funds, and sector funds.

      Diversified Funds: Diversified equity fund is a category of funds that invest in a diverse mix of securities that cut across sectors and market capitalization. The risk of the fund’s performance being significantly affected by the poor performance of one sector or segment is low.

     Tax Saving Funds: It is also called Equity Linked Savings Schemes (ELSS). Equity Linked Savings Schemes (ELSS) are diversified equity funds that offer tax benefits to investors under section 80 C of the Income Tax Act up to an investment limit of Rs. 150,000 a year. ELSS are required to hold at least 80 percent of its portfolio in equity instruments. The investment is subject to 26 lock-in for a period of 3 years during which it cannot be redeemed, transferred or pledged. However, this is subject to change in case there are any amendments in the ELSS Guidelines with respect to the lock-in period.

    Index Funds:An index fund is a type of mutual fund with a portfolio constructed to match or track the components of a market index, such as the Standerds & Pool's 500 index (S&P 500). An index mutual fund is said to provide broad market exposure, low opetating expenses and low portfolio turnover. These funds adhere to specific rules or standards (e.g. efficient tax management or reducing tracking errors) that stay in place no matter the state of the markets. 

Sector Funds:Sector funds invest in only a specific sector. For example, a banking sector fund will invest in only shares of banking companies. Gold sector fund will invest in only shares of gold-related companies. The performance of such funds can see periods of under-performance and out-performance as it is linked to the performance of the sector, which tends to be cyclical. Entry and exit into these funds need to be timed well so that the investor does not invest when the sector has peaked and exit when the sector performance falls. This makes the scheme more risky than a diversified equity scheme.

Debt Funds:Schemes with an investment objective that limits them to investments in debt securities such as Treasury Bills, Government Securities, Bonds and Debentures are called debt funds.Debt funds can be categorized on the basis of the type of debt securities they invest in. The distinction can be primarily on the basis of the tenor of the securities—short term or long term, and the issuer: government, corporate, PSUs and others. The risk and return of the securities will vary based on the tenor and issuer. The strategy adopted by the fund manager to create and manage the portfolio can also be a factor for categorizing debt funds.

Hybrid Funds:Hybrid funds have an investment charter that provides for investment in both debt and equity. Some of them invest in gold along with either debt or equity or both. Hybrid funds invest in a combination of asset classes such as equity, debt and gold. The combination of asset classes used will depend upon the investment objective of the fund. The risk and return in the scheme will depend upon the allocation to each asset class and the type of securities in each asset class that are included in the portfolio. The risk is higher if the equity component is higher. Similarly, the risk is higher if the debt component is invested in longer-term debt securities or lower rated instruments.

Money Market Funds:A money market fund is a kind of mutual fund which invests only in highly liquid cash and cash equivalent securities that have high credit ratings. Also called a money market mutual fund, these funds invest primarily in debt-based securities which have a short-term maturity of less than 13 months, and offer high liquidity with very low level of risk. Working on the lines of a standard mutual fund, money market funds issue redeemable units (also called shares) to investors, and are mandated to follow the guidelines drafted by the local regulators