The Three Types of Mutual Funds

The 3 types of Mutual Funds

The simplest way to understand the types of mutual funds is on the basis of maturity period. The first question that any potential investor would ask is the time frame within which they can expect their returns. So let’s try and understand mutual funds on the basis of their maturity period.

Open-ended funds

In an Open-ended Fund, units are purchased and sold perpetually, all through the year. This scheme offers high liquidity and tremendous operational flexibility to the investors since they can buy and sell units as per their requirements. Thus, these funds have no maturity period. Within open-ended fund schemes, there are four major types of MFs namely, Debt, Money market/Liquid, Equity and Balanced.

  1. In a Debt/Income scheme, a major part of investable funds are channelized towards bonds, debentures, government securities (gilts) and money market instruments which provide a regular and fixed return. These schemes are ideal for retired investors looking for a steady income since bonds are liquid and safe investments.
  2. Money market/Liquid schemes are suitable for those investors who have surplus funds, and are interested in utilizing them to get short-term returns. But only the most cautious investors must opt for this scheme since the primary aim of such a scheme is capital preservation. Since it is short term, the risks are considerably higher.
  3. Equity/Growth schemes invest in equity shares. These funds may invest in a wide range of industries or focus on specific sectors. But these schemes are suitable only for investors with a higher risk appetite which results in higher returns. Since the returns are not fixed, they can fluctuate. Within Equity schemes are Index schemes, Tax saving schemes and Sector-specific schemes. Index schemes replicate the performance of a particular index like Nifty, Sensex etc. this portfolio consists of only those stocks that form the index and the returns are similar to that generated by the index. Tax-saving schemes offer tax rebates to investors under specific provisions of the Income Tax Act, 1961. These are primarily growth-oriented schemes where they invest in equities. Just like an Equity fund, the investor interested in such schemes should have a high risk bearing capacity.Sector-specific funds invest in the securities of the sectors that have been mentioned in the schemes. Since these are sector-oriented, the returns on investment are dependent on the performance of that particular sector for example, IT, Pharma, Auto, FMCG, etc. This means that the level of diversification is quite low due to which the risk bearing capacity of the investor must be relatively high.
  1. Balanced Fund schemes, as the name suggests invests in both equities and fixed income instruments having a specified objective. This scheme provides the best of both categories, that is, stabilized returns and capital appreciation to investors. Thus, this is a good combination of regular income and moderate growth. The general ratio of equity to debt is 60:40.

Close-ended funds

  1. Capital Protection scheme’s primary objective is to safeguard the principal amount while trying to deliver reasonable returns. These are funds with an objective to seek capital protection by investing in fixed income securities maturing in line with the tenure of the scheme and seeking capital appreciation by investing in equity & equity-related instruments will form part of this category.
  2. Fixed Maturity Plans (FMPs) have a defined maturity period ranging from one month to five years which comprise of debt instruments that mature at the same time as the scheme. The primary objective is to provide steady returns and protect the investor from market fluctuations. As the securities are held till maturity, FMPs are not affected by interest rate volatilities.

Interval funds

These funds combine the features of both open-ended and close-ended funds where it allows investors to trade units at predefined intervals. Thus, it offers the benefits of a close-ended scheme with the advantage of redemption features in specified intervals of time.

There is no one-point solution for investors to select a scheme that suits their needs. Every investor is different; therefore, the solution to their problems will be unique. In order to decide the scheme that best suits you, approach a Consultant or Advisor. An ideal scheme would be one with the right combination of growth, stability and income keeping the risk appetite in mind.

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