Types of Mutual Funds

There are two broad categories of Mutual Funds

  1. Open-Ended - These schemes allow investors to buy or sell units at any point in time in the open market. They do not have a lock in period and the amount can be withdrawn any time, providing easy liquidity.
  2. Closed-Ended - These schemes in India are known as NFO's (New Fund Offer) and the units are offeered at par Rs 10 each. These funds have a lock in period of generally 3 years or more and the investors can invest only during the initial launch period, and no fresh investments can be made in the scheme. The money can be withdrawn only at the end of the lock in period. These funds are generally illiquid in nature and the investor cannot cannot take the advantage of capital appreciation in the short term.

Various categories of Mutual Funds are designed to allow investors to choose a scheme based on the risk they are willing to take, the investable amount, their goals, the investment period, etc.

Debt/ Income Funds: In a debt/income scheme, a major part of the investments are channelized towards debentures, government securities, and other debt instruments. Although capital appreciation is low (compared to the equity mutual funds), this is a relatively low risk-low return investment avenue which is ideal for investors seeing a steady income and secure returns.

Money Market/ Liquid Funds: These funds ideal for investors looking to utilize their surplus funds in short term instruments while awaiting better options. These schemes invest in short-term debt instruments and seek to provide reasonable returns for the investors.

Equity/ Growth: Equity funds are a popular mutual fund category amongst retail investors. Although it could be a high-risk investment in the short term, investors can expect capital appreciation in the long run. If at the prime earning stage an ivestor is looking for long-term benefits, growth schemes could be an ideal investment.

Index Scheme: Index schemes are more popular developed markets of the western countries. These follow a passive investment strategy where the investments replicate the movements of benchmark indices like Nifty, Sensex, etc.

Sectoral Scheme: Sectoral funds invest in a specific sector like infrastructure, IT, pharmaceuticals, etc. or segments of the capital market like large caps, mid caps, etc. These schemes provide high risk-high return opportunities within the equity space.

Tax Saving (ELSS Schemes): As the name suggests, these scheme offers tax benefits to its investors. The funds are invested in equities thereby offering long-term growth opportunities. Tax saving mutual funds (called Equity Linked Savings Schemes) have a 3-year lock-in period as per the guidelines laid down by the Income Tax Act, 1961.

Balanced Funds: These funds allow the investors to enjoy growth and income at regular intervals. Funds are invested in both equities and fixed income securities; the proportion is pre-determined and disclosed in the scheme related offer document. These are ideal for the cautiously aggressive investors.

Capital Protection Funds: The primary objective of this scheme is to safeguard the principal amount while trying to deliver reasonable returns to the investor. These schemes invest in high-quality fixed income securities with marginal exposure to equities and generally the maturity period of the scheme is the same as that of the fixed income securities, generally 3 years or 1,097 days or more.

Fixed Maturity Plans (FMPs): FMPs, as the name suggests, are mutual fund schemes with a defined maturity period. These schemes normally comprise of debt instruments which mature in line with the maturity of the scheme, thereby earning through the interest component (also called coupons) of the securities in the portfolio. FMPs are normally passively managed, i.e. there is no active trading of debt instruments in the portfolio. These FMP's are also for a period of 1,097 days or 3 years.