Types of Mutual Funds
In our earlier aticle- What is Mutual Fund?, we have seen the meaning, process and objectives of mutual fund. Every investor has a different requirement for his investments. No matter what your requirement is, there is always a type of mutual fund that fits your objective. In this article we are going to discuss these types of Mutual funds.
Classification of Mutual Funds
Mutual funds can be subdivided in different types depending upon various criteria’s they are based on. Below are the types of mutual funds:
a. based on funds schemes
i. Open Ended Funds: The most popular type. These are funds in which you can enter or exit anytime. They are not time bound.
ii. Close Ended Funds: After the closure of an initial offer, new investors cannot enter, nor can existing investors exit till the term of the scheme ends. These funds are listed on stock exchange and you can sell fund units on it, but liquidity is very low.
iii. Interval Funds: Very few such funds are present in Indian market. These funds combine the characteristics of both closed-end and open-ended funds. These do not permit regular buying and selling as these remain closed for most of the time but open for a time interval predefined by the fund, wherein units can be redeemed, or new units can be bought. Like Close ended funds, these too can be traded on the stock exchange.
b. based on management of funds
i. Actively Managed Funds: These are the funds, in which fund managers actively pick securities based on their own research and analysis. These funds are compared to benchmarks which are mostly popular indices. There are many top-rated fund managers who consistently deliver exceptional results. In India, most of the Mutual Fund investments are done in Actively Managed funds as fund managers consistently beat the benchmark and create an Alpha (returns over and above the predicted ones).
ii. Passively Managed Funds: These are funds in which fund managers replicate an index with the same stocks and in the same proportion. They are also called as Index Funds or ETFs. Here the fund manager tries to replicate the index performance with little tracking error as the fund is subject to inflows and outflows. These funds have lower expense ratio and are gaining popularity but still lag their actively managed counterparts by quite a bit.
c. based on assets invested in
i. Debt Funds: These types of Mutual Funds invest their assets only in Debt (Fixed Income) Instruments such as Corporate Bonds, Debentures, Govt. Securities, etc. Their overall risk profile is low. For additional information refer our separate article on Debt Funds
ii. Equity Funds: Equity Funds invest their assets in Stock market. These are also known as Stock Funds. These are the highest risk Mutual Funds.
iii. Liquid Category Funds: These funds invest their assets in low maturity Money market instruments such as Treasury Bills, Certificate of Deposits, etc. which have maturities of 1 to 180 days. They are the least risky Mutual Fund type.
iv. Hybrid Funds: These funds invest their money in both Equity and Debt instruments. Ratio varies from fund to fund. These funds are medium risk type and give you the best of both equity and debt funds. For additional information refer our separate article on Hybrid Funds
d. based on investment objectives of fund
i. Growth Funds: These are equity-based funds that invest primarily in Stock Markets. While picking stocks, these funds look for potential to grow faster than the others. The fund managers mostly invest in stocks that have low dividend yields and high growth potential.
ii. Value Funds: These are also Equity based funds that invest in undervalued stocks with a potential for appreciation. But such stocks are usually ignored by the investing community. It is a more conservative approach of investing. They invest typically in stocks with high dividend yield and low P/E ratio. For additional information refer our separate article on Value Funds
iii. Income Funds: These funds invest primarily in Debt instruments and will give you regular dividends/interest. These are mainly for capital protection.
e. special funds
i. Index Funds: Index funds closely follow the stock indices they track. For instance, a scheme that tracks the Sensex will invest in the 30 stocks that comprise the benchmark index of the BSE. Type of Passively Managed Funds. For additional information refer our separate article on Index Funds
ii. ETFs: They are essentially Index Funds that are listed and traded on exchanges just like stocks. Another type of Passively Managed Funds.
iii. Sectoral/Thematic Funds: These are a type of Equity Funds, which invest their assets only in one focused sector/theme. Some popular sector funds are in Banking, Technology, Pharma and Infrastructure sector.
iv. Tax Saving Funds: Also, known as ELSS, they are a type of Equity funds, which have 3 years lock in and your investments get tax benefit under Section 80C. For additional information refer our separate article on ELSS
v. International Funds: These mutual funds invest in companies outside India. They help you to invest and get an exposure to Global companies. For additional information refer our separate article on International Funds
vi. Retirement/Children Funds: These are solution oriented Mutual Funds in new SEBI categorization and have a 5-year lock in.