Mutual Funds 1O1- Types (Part I)

The mutual funds launch various schemes from time to time in order to attract various types of investors. Each scheme has a specified investment objective like regular income, tax saving, growth etc. A mutual fund is required to be registered with Securities and Exchange Board of India (SEBI), capital market regulator, before it can mobilize funds from the public.  

1. Open Ended and Closed Ended Funds:

1.1 Open-ended Fund/ Scheme: An open ended scheme is open for sale and repurchase, all the time from the fund itself. It implies that investors can any time enter the scheme at prevailing NAV and can exit from the scheme any time at NAV minus exit load. If investors buy the unit during NFO, then units will be issued at face value. Thus for investors, open-ended schemes offer high liquidity. The unit capital of an open ended scheme is quite fluctuating in nature because of regular sale and repurchase by the fund itself based on investor subscription and redemption requests. 

1.2 Close-ended Fund / Scheme: A closed ended scheme has a fixed maturity period normally 3 to 5 years. Scheme is open for subscription only during NFO at face value and at maturity fund redeems all the units of investors at the prevailing NAV. During the tenure of the scheme, entry and exit is closed by the fund. In order to provide another exit route to the investors of closed ended schemes, SEBI has made listing of closed ended schemes mandatory on a nationwide stock exchange. However this listing practically doesn’t provides liquidity to investors as there is negligible trading of mutual fund schemes in the secondary market 

2. Equity Funds: Equity Funds invest the major portion of corpus in equity shares of companies. They are exposed to market fluctuations and offer no guaranteed payment of dividend. They are bought & sold at NAV based prices considered most risky. There are several types of equity funds like: 

2.1 Diversified Equity funds: The Diversified Equity Fund invests in a wide variety of stocks. Their diversified portfolio includes stocks from several industries. This diversification leads to reduction of risk. 

2.2 Sector specific funds/schemes: Sector funds invest the entire corpus in a specific sector with the expectations that sector will perform good and the value of the entire portfolio will go up. For example a sector fund may invest the pool of funds received from investors under the scheme in the FMCG sector or banking sector etc. They offer the highest risk-return combination to the investors. If the chosen sector performs as per expectations then value of investment goes up else investor’s entire fund loses its value. This does not happen in a diversified fund in which if one sector doesn’t perform then the other sector supports the investments and thus risk is reduced. 

2.3 Thematic Funds: These funds invest in the stocks of related sectors belonging to a particular theme. For example; Infrastructure funds invest in Power, steel, cement and related sectors. Their portfolio orientation is broader than sector funds but narrow in comparison to the diversified funds. Thus they are riskier than diversified funds but safe in comparison to sector funds. 

2.4 Equity Linked Savings Scheme:  ELSS means Equity Linked Saving Scheme. It is a diversified equity fund. Investments in an ELSS, fetch tax deduction under Section 80-C of the Income-Tax Act. An ELSS fund operates much like a plain equity fund, except that your investment is locked in for three years. ELSS funds come with all the usual trappings of an equity fund, which includes choice between dividend and growth options, and systematic investment plans. So in simple words it is a mutual fund with a Tax Benefit. ELSS schemes may be open ended or closed ended. If the scheme is open ended then scheme is open for entry and exit all the time but a particular investor can exit only after the completion of his three years investment in the scheme, those who have completed their respective three years can exit any time. If the ELSS scheme is closed ended then investor will enter during NFO and exit through redemption by fund at maturity which has to be minimum three years 

2.5 Equity Income or Dividend Yield: Equity-income funds own stocks of well-established companies that pay dividends. Therefore, equity-income funds tend to be somewhat conservative and show less volatility than stock growth funds. Equity-income funds are well suited for the conservative investor because they are less volatile. It is an equity oriented fund that seeks to provide regular income as well as long-term capital appreciation to the investors by investing in stocks of well-established companies that have a current or potentially attractive dividend yield. 

2.6 Equity Index Fund: Index Funds is a passive fund in which fund manager creates the mirror image of the portfolio of a particular index such as the BSE-Sensex, NSE-Nifty etc. Fund manager invests in the stocks of the selected index in the same proportion as in the index. He will regularly track the index and modify the portfolio as per the changes in the composition of index. NAVs of such schemes would rise or fall in accordance with the rise or fall in the index. Any difference in the fund performance and index performance is known as “tracking error” which is caused by any lag/error in following the index by the fund manager These funds usually give the same return as the respective index do. However return can be more or less than the return of the respective index. This difference is contingent on the skill of fund manager to track the index movements. 

To sum up, we discussed open and closed ended funds along with the different types of equity funds. 

Stay tuned for the next article wherein we will continue talking about the other types of mutual funds such as debt funds, fund of funds etc.