04 April 2015

Types of mutual fund schemes

There are a wide variety of Mutual Fund schemes that cater to your needs, whatever your age, financial position, risk tolerance and return expectations. Whether as the foundation of your investment programme or as a supplement, Mutual Fund schemes can help you meet your financial goals.

(A) By Structure

Open-Ended Schemes
These do not have a fixed maturity. You deal directly with the Mutual Fund for your investments and redemptions. The key feature is liquidity. You can conveniently buy and sell your units at net asset value ("NAV") related prices.

Close-Ended Schemes
Schemes that have a stipulated maturity period (ranging from 2 to 15 years) are called close-ended schemes. You can invest directly in the scheme at the time of the initial issue and thereafter you can buy or sell the units of the scheme on the stock exchanges where they are listed. The market price at the stock exchange could vary from the scheme's NAV on account of demand and supply situation, unit holders' expectations and other market factors. One of the characteristics of the close-ended schemes is that they are generally traded at a discount to NAV; but closer to maturity, the discount narrows.

Some close-ended schemes give you an additional option of selling your units directly to the Mutual Fund through periodic repurchase at NAV related prices. SEBI Regulations ensure that at least one of the two exit routes are provided to the investor.

Interval Schemes
These combine the features of open-ended and close- ended schemes. They may be traded on the stock exchange or may be open for sale or redemption during pre-determined intervals at NAV related prices.

(B) By Investment Objective

Growth Schemes
Aim to provide capital appreciation over the medium to long term. These schemes normally invest a majority of their funds in equities and are willing to bear short- term decline in value for possible future appreciation.
These schemes are not for investors seeking regular income or needing their money back in the short-term.
Ideal for:
* Investors in their prime earning years.
* Investors seeking growth over the long-term

Income Schemes
Aim to provide regular and steady income to investors. These schemes generally invest in fixed income securities such as bonds and corporate debentures. Capital appreciation in such schemes may be limited.
Ideal for:
* Retired people and others with a need for capital stability and regular income.
* Investors who need some income to supplement their earnings.

Balanced Schemes
Aim to provide both growth and income by periodically distributing a part of the income and capital gains they earn. They invest in both shares and fixed income securities in the proportion indicated in their offer documents. In a rising stock market, the NAV of these schemes may not normally keep pace, or fall equally when the market falls.
Ideal for:
* Investors looking for a combination of income and moderate growth.

Money Market Schemes
Aim to provide easy liquidity, preservation of capital and moderate income. These schemes generally invest in safer, short-term instruments, such as treasury bills, certificates of deposit, commercial paper and inter- bank call money.
Returns on these schemes may fluctuate, depending upon the interest rates prevailing in the market.
Ideal for:
* Corporates and individual investors as a means to park their surplus funds for short periods or awaiting a more favourable investment alternative.

Other Schemes
Tax Saving Schemes
These schemes offer tax rebates to the investors under tax laws as prescribed from time to time. This is made possible because the Government offers tax incentives for investment in specified avenues. For example, Equity Linked Savings Schemes (ELSS) and Pension Schemes.

Recent amendments to the Income Tax Act provide further opportunities to investors to save capital gains by investing in Mutual Funds. The details of such tax savings are provided in the relevant offer documents.
Ideal for:
* Investors seeking tax rebates.

Sector Funds
Sector funds are those with the objective to invest only in the equity of those companies existing in a specific sector, as laid down in the fund’s offer document. For example, an FMCG sector fund shall invest in companies like HLL, Cadbury, Nestle etc., while a technology fund will invest in software companies like Infosys Technologies, Satyam Computers etc. There are also funds that invest in basic sectors/industries such as Cement, steel and petrochemicals.

Index Funds
Index Funds try to mirror the performance of a particular index such as the BSE Sensex or the NSE 50. Index funds will invest in only those scrips that constitute a particular index. Investment in these scrips is also made in proportion to each stocks weight in the index.

Exchanged Traded Funds
ETFs are a phenomenon which impart a lot of liquidity to an existing market. They are passively Managed Funds tracking and investing in the stocks of a particular benchmark index. ETFs offer the best features of an open and close end funds. They represent units of beneficial interest in Unit Investment Trusts that hold the component stocks of the representative index. As the name suggests they are listed and traded on an exchange like a common stock - the biggest advantage. Today ETFs with different names are traded in the world in different countries. The total assets in ETFs globally are over $ 70 Billion USD.

Advantages of ETFs:

Investors get instantaneous exposure to a diversified portfolio that is a replica of the index.
As they are traded on the stock exchange investors can enter or exit the fund anytime during the day at the traded price , during the trading hours. A very big advantage over other index funds that allows  entry or exit only at the end of the days NAV.
Investors can also leverage / hedge their positions in the market by going long or short on the ETFs.
A very good arbitrage opportunity between the ETFs and the Futures market-thus increasing the liquidity.

A passive fund with very low cost of management and hence the NAV nearly replicates the INDEX  value.