Answer Posted / rakesh panchal
Types of Mutual Fund
Schemes according to Maturity Period:
A mutual fund scheme can be classified into open-ended
scheme or close-ended scheme depending on its maturity
period.
Open-ended Fund
An open-ended Mutual fund is one that is available for
subscription and repurchase on a continuous basis. These
Funds 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.
Close-ended Fund
A close-ended Mutual fund 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.
Fund according to Investment Objective:
A scheme can also be classified as growth fund, income
fund, or balanced fund considering its investment
objective. Such schemes may be open-ended
or close-ended schemes as described earlier. Such schemes
may be classified mainly as follows:
Growth / Equity Oriented Scheme
The aim of growth funds is to provide capital appreciation
over the medium to long- term. Such schemes normally invest
a major part of their corpus in equities.
Such funds have comparatively high risks. These schemes
provide different options to the investors like dividend
option, capital appreciation, etc. and
the investors may choose an option depending on their
preferences. The investors must indicate the option in the
application form. The mutual funds
also allow the investors to change the options at a later
date. Growth schemes are good for investors having a long-
term outlook
seeking appreciation over a period of time.
Income / Debt Oriented Scheme
The aim of income funds is to provide regular and steady
income to investors. Such schemes generally invest in fixed
income securities such as bonds,
corporate debentures, Government securities and money
market instruments. Such funds are less risky compared to
equity schemes. These funds are
not affected because of fluctuations in equity markets.
However, opportunities of capital appreciation are also
limited in such funds. The NAVs of
such funds are affected because of change in interest rates
in the country. If the interest rates fall, NAVs of such
funds are likely to increase in the short run
and vice versa. However, long term investors may not bother
about these fluctuations.
Balanced Fund
The aim of balanced 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.
Money Market or Liquid Fund
These funds are also income funds and their aim is to
provide easy liquidity, preservation of capital and
moderate income. These schemes invest
exclusively in safer short-term instruments such as
treasury bills, certificates of deposit, commercial paper
and inter-bank call money, government
securities, etc. Returns on these schemes fluctuate much
less compared to other funds. These funds are appropriate
for corporate and individual
investors as a means to park their surplus funds for short
periods.
Gilt Fund
These funds invest exclusively in government securities.
Government securities have no default risk. NAVs of these
schemes also fluctuate due to
change in interest rates and other economic factors as is
the case with income or debt oriented schemes.
Index Funds
Index Funds replicate the portfolio of a particular index
such as the BSE Sensitive index, S&P NSE 50 index (Nifty),
etc These schemes invest in the securities
in the same weightage comprising of an index. NAVs of such
schemes would rise or fall in accordance with the rise or
fall in the index, though not exactly
by the same percentage due to some factors known
as "tracking error" in technical terms. Necessary
disclosures in this regard are made in the offer document
of the mutual fund scheme. There are also exchange traded
index funds launched by the mutual funds which are traded
on the stock exchanges.
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