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Sunday 23 March 2014

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The Indian Mutual Fund industry has a plethora of options to choose from, with a wide variety of mutual funds catering to the needs of all categories of investors. Mutual Funds cater to different risk profiles, return expectations and financial position of the investors. Let’s look at the important categories of Mutual Funds present in the market today:

Maturity Period:

Open-Ended Schemes: These schemes are available for subscription throughout the year and do not have a pre-defined maturity period. The biggest advantage of open-ended funds is liquidity as they can be easily bought and sold at the prevailing NAV.

Close-Ended Schemes: These schemes have a fixed maturity period. Investments are made at the time of initial issue. The structure of the scheme determines the exit option available to the investor, either by transacting on the exchange where the units are listed or through a repurchase by the Mutual Fund.

Nature of Investments:

Equity Fund: These funds invest most of their corpus (typically over 65%, though there is no fixed rule on this) in equity-related instruments. Equity funds rank high on the risk-return spectrum and are generally meant for long term.

Debt Funds: Debt funds invest in fixed income instruments issued by the Government, banks, financial institutions and private companies. As opposed to equity funds, debt funds rank low on the risk-return spectrum. There are different classifications of debt funds based on investment category and time horizon. This includes gilt funds, income funds, liquid funds and short term plans.

Balanced Funds: These funds invest both in fixed income and equity instruments, giving the twin benefit of low risk and high returns. However, contrary to belief, balanced funds do not invest 50:50 in debt and equity. The investment philosophy of each scheme is different.

Investment Objective:

Growth schemes: Growth schemes re-invest their profit back into the scheme and do not distribute these to the unit holders.

Dividend schemes: If you invest in a dividend scheme, you are entitled to get regular dividends, which is the profit made by the fund. However, both the frequency and amount of dividend is not guaranteed.

Dividend re-investment schemes: These schemes declare a dividend, but do not distribute them to unit holders. Rather, it is invested back into the fund, like a growth scheme. Dealing with income from this type of mutual fund is difficult from a tax perspective.

Size of investments: Some equity funds invest in companies only of a particular size. In this case, funds are categorized based on the size of the company in which investments are made. The funds are categorized back on the market capitalization of the companies in which they are invested.

Large Cap Funds: Generally above USD 10 billion, these investments are more stable than mid and small cap funds.

Mid Cap Funds: Between USD 2 billion and 10 billion, these are typically turn-around stories, which are on the verge of becoming a large cap company due to the growth prospects. Hence both risk and return from such funds are high.

Small Cap Funds: There invest in less than USD 2 billion market-cap companies, which are highly risky.

 

(Please note that we have observed variation in the definition of the Large, Mid & S

Sectoral Funds: Equity Mutual Funds are also categorized based on the sector in which investments are made. Some equity mutual funds invest in companies belonging to a single sector or a bunch of sectors related to each other. This is because of the high growth prospects associated with a particular sector. While the return potential may be high, these types of funds are also very risky due to the concentration of investments in a single sector e.g: Software, Banking, Oil&Gas etc. The returns of these funds are benchmarked with the respective Sectoral indices.

Tax Saving Funds: These funds are Equity Linked Savings Schemes, which are diversified equity schemes, investments into which qualify for tax deductions. ELSS funds have a lock-in period of 3 years from the date of investment.

Index Funds: Index Funds typically aim to replicate the performance of a particular index like the BSE Sensex of the Nifty 50. Returns from these schemes will be more or less similar to returns of the index as both the stocks as well as the percentage of holding of each stock will be similar to the index.

Exchange Traded Funds: ETFs are a combination of stocks and mutual funds. They invest in a specified set of instruments, like a mutual fund e.g. Gold. They are also traded on the stock exchange like a stock.  They can thus be conveniently traded on the stock exchange, based on the closing NAV price.

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