An investor has an option to invest in multiple schemes of mutual fund available in the market basis one’s investment objective, risk appetite & investment horizon. It is pertinent to assess one’s investment goals and accordingly allocate funds to each type of mutual fund.
Broadly Mutual Fund can be classified into:
- Based on their Structure
- Open -Ended 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.
- Closed Ended 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.
- Interval Schemes: These funds are a hybrid of open and close ended funds. While they operate mainly as close ended funds, these funds may trade on stock exchanges and are open for sale or redemption at predetermined intervals at the prevailing NAV. They are not required to be listed on the stock exchanges, as they have an in-built redemption window. They can make fresh issue of units during the specified interval period, at the prevailing NAV based prices. Maturity period of the scheme is not defined unlike Closed ended schemes.
- Exchange Traded Funds: Equity Exchange Traded Funds (ETFs) are simple investment products that combine the flexibility of stock investment and the simplicity of equity mutual funds. An ETF is a basket of stocks that reflects the composition of an Index, like S&P CNX Nifty or BSE Sensex. The ETFs trading value is based on the net asset value of the underlying stocks that it represents. Think of it as a Mutual Fund that you can buy and sell in real-time at a price that change throughout the day. An investor can get exposure to indices on stock markets in India and in some cases in other countries as well. The key attribute of ETF is real time price & lower cost.
- Fund of Funds: A ‘Fund Of Funds’ (FOF) is an investment strategy of holding a portfolio of other investment funds rather than investing directly in stocks, bonds or other securities. An FOF Scheme primarily invests in the units of another Mutual Fund scheme. This type of investing is often referred to as multi-manager investment. A FOF aims at diversifying the risk of a single fund by investing in several types of funds. The underlying investments for a FoF are the units of other mutual fund schemes either from the same mutual fund or other mutual fund houses. Under current Income Tax regime in India, a FOF is treated as a non-Equity fund and consequently taxed accordingly.
- Based on their Objective
- Equity Oriented Funds: The investment objective of equity oriented mutual fund is to generate growth & capital appreciation by investing at least 65% of the assets in equities and equity related instruments. As such, the portfolio of equity-oriented funds will be skewed in favor of equity investments. The investment into these funds are based on their investment philosophy of the scheme and the strategy managed and structured by the investment team of mutual fund houses. These funds are suitable to investors having moderate to higher risk appetite and have a long term investment horizon in order to ride the short term volatility of equity markets.
- Debt Oriented Funds: The investment objective of debt oriented mutual fund is to generate regular income & capital preservation by investing at least 65% of the assets in debt and other money market instruments. As such, the portfolio of debt-oriented funds will be skewed in favor of fixed income investments. The investment into these funds are based on their investment philosophy of the scheme and the strategy managed and structured by the investment team of mutual fund houses. These funds are suitable to investors having lower to moderate risk appetite and have a very short to long term investment horizon basis the interest rate scenario and credit outlook.
- Hybrid Funds: The aim of Hybrid 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. The fund also has an impact basis the credit outlook and interest rate scenario prevailing in the economy.
- Solution Oriented Funds: Solution Oriented Funds are the mutual funds which design their portfolio to achieve a specific goal like retirement planning and child's education planning. It is a newly introduced category of mutual funds which has unique features, objectives, and strategies.
The funds in this category have a lock in period and facilitate investment for preservation of corpus or capital appreciation to fund specific expenses in the future, such as retirement, marriage or education of children, etc.
In 2017, SEBI came out with a circular on re-categorization and rationalization of mutual fund schemes with an objective to bring uniformity and standardizing the attributes of Mutual fund schemes across categories. SEBI has specified 36 categories of mutual fund schemes in total.