Investment in mutual fund: Types of different mutual fund schemes

Mutual fund investments are always associated with certain degree of risks so it is always beneficial to have thorough knowledge of the same before investment. Knowledge of different types of mutual fund schemes is the first step towards going in the depth of mutual funds. In this article, I am giving you the complete insight of classification of mutual fund schemes on the basis of various factors.

There are different types of mutual fund schemes in the market which are classified either on the basis of the maturity plan or objective of the investment. Each mutual fund scheme has its own merits and demerits. Investor should know his objective of the investment before making any investment in mutual funds.

Investment in mutual funds: definition in simple language for a lay man

In simple words, mutual fund is a professionally organised investment scheme which pools money from many investors. Investors are issued units for their investment with objectives of the investment disclosed in the document. Investors of mutual funds are known as unit holders.
In India, it is mandatory to register the mutual fund with Securities and Exchange Board of India (SEBI) established in 1993. Profit or loss in the mutual fund is shared with the investors in proportion of their investments in the scheme.
Major giants of the mutual fund investment in India include UTI mutual fund, SBI mutual fund, HDFC mutual fund and Reliance mutual fund. All these major mutual fund trusts come with different mutual fund schemes along with different objectives time to time.

Types of mutual fund: On the basis of maturity period

On the basis of maturity period mutual fund schemes can be classified either as open-ended scheme or close-ended scheme.

1. Open-ended mutual fund scheme

Liquidity is the key feature of all open-end mutual fund schemes. These schemes are available or open for subscription and repurchase on a continuous basis. These are called open end schemes as they don't have fixed maturity plan. In such schemes investors are free to buy and sell units on the basis of Net Asset value (NAV) which is declared daily.

2. Close-ended mutual fund scheme

As the name suggesting close-ended mutual fund schemes have a fixed maturity plan usually ranging from 5 to 7 years. NAV of these fund schemes is disclosed on the weekly basis. Close-ended mutual fund schemes are open for subscription for a specified duration at the time of launching of scheme. An investor can buy the scheme at the time of launching or thereafter on the stock exchanges where the units are listed.
According to the SEBI regulations- It is mandatory to provide either of the two exit routes to the investors in the close-ended mutual fund; either through repurchase facility or through listing on stock exchanges.

Types of mutual fund: on the basis of investment objective

A mutual fund scheme can also be classified on the basis of objective of the investment. On this basis, a scheme can be either growth scheme, income scheme or balanced scheme. As discussed above, these schemes can be either open-ended or close-ended.

1. Growth or equity oriented scheme

These schemes are created with an objective of providing capital appreciation for a medium to long duration. As compared to other schemes, these schemes are associated with comparatively higher risk. Growth schemes provide their investors different options such as capital appreciation, dividend option etc. and the best thing is that an investor can choose any of the option according to his will by indicating the same in the application form. Also, investor can change his preference during the later stages.
Growth schemes or equity oriented schemes are best option for those who seek capital appreciation over a long period of time.

2. Income or Debt oriented schemes

As the name suggesting, main objective of such schemes is to provide a regular and steady income to the investor for a period of time. As compared to growth schemes, these are less risky and so from the general rule of investment provide less capital appreciation. Debt schemes generally invest in fixed income securities which include-
a) Bonds
b) Government securities
c) Corporate debentures
d) Money market instrument

Net Asset value of income oriented schemes fluctuates due to the change in the interest rates in the country. General rule says that for a short term investor, NAV and interest rates are inversely proportional; if interest rate falls NAV will rise and vice versa. However, for a long term investor there is no need to worry about the interest rate.

3. Balanced fund

These types of schemes are hybrid of above two stated schemes. Balance fund provide the growth of equity schemes and fixed income of debt schemes. This scheme is best for the investors who are interested in moderate growth and willing to take small amount of risk.
NAV of these funds is less volatile as compared to the equity funds but still affected by the fluctuation in the share prices in the stock market.

Types of mutual funds- Other mutual fund schemes

1. Money market or liquid fund

Liquid fund are very similar to the income funds with a main objective of providing the benefits of capital preservation, moderate income and easy liquidity. Returns on such schemes fluctuate less as compare to other mutual fund schemes. Liquid fund schemes mainly invest in short term instruments like-
a) Government securities
b) Certificate of deposits
c) Commercial paper and inter-bank call money
d) Treasury bills
Liquid funds are best to invest for corporate and individual investors for making a short term investment in the funds.

2. Glit fund

Glit funds are meant exclusively to invest in the government securities. There is always less risk involves in the government securities. Like debt or income funds, NAVs of Glit fund also fluctuates due to the fluctuation in the interest rates and other certain economic factors.

3. Index funds

Index funds are launched to follow the portfolio of a certain index such as Nifty, BSE, Sensitive index etc. All the necessary disclosures regarding the index funds are made on the scheme documents. In index funds, investment in the securities is made in the same weightage as in the index. NAVs of Index funds fluctuates just like of that in index, although not exactly due to some factors which are known as tracking errors in technical terms.
There are certain mutual funds which are traded in the stock exchanges and more precisely known as exchange traded index funds.

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