After having basic knowledge of what are mutual funds, it is important to know about the different types of Mutual funds. There are multiple types of Mutual funds available in the market and when normal investor wants to invest, there would be various questions arising in his mind after reading the mysterious names of the funds.
It is prerequisite from investor’s point of view to have some basic knowledge about the types of funds before investing or choosing the fund to invest in. Different funds have many different features. Each of the type has some advantages and some disadvantages.
Classification of the Mutual funds types can be done in various ways. Following are the ways in which Mutual funds can be classified.
1. ON THE BASIS OF INVESTMENT TYPE
When any Mutual fund scheme is launched, the fund declares the description of the financial instruments in which it will make the investment of collected funds. According to the investment type adopted by the fund, Mutual funds can be divided into the following categories.
i. Equity funds
· Equity funds primarily invest in stocks. They are also known as stock funds. Stock funds are sometimes actively managed and sometimes passively managed.
· There are many aspects like company size, market capitalization, investment pattern and holding -patterns considered to categorize them broadly.
· The investment can be made in local market or global market.
ii. Income funds
· Income funds are also widely known as debt funds. These are the funds which make investment in the fixed securities on bonds.
· For, Investors who don’t want to invest in a highly volatile equity market, Debt funds provide good option. Debt funds provide steady income but income is relatively less compared to the Equity funds.
iii. Balanced funds
· As the name suggests, Balance fund is type of fund that combines investment in stock market, bonds and, sometimes, a money market, in a single portfolio.
· Due to this, this type of fund is also called as the Diversified fund.
· These funds are for those investors who want all safety, income and modest capital increase.
· Balanced fund portfolios usually don’t materially change their asset mix.
iv. Gilt funds
· Gilt funds make investment in the long term government securities in addition to premium top quality corporate debts.
· Gilts differ from the bonds as in bond funds invest in corporate bonds and money market. Gilt funds make investment in high-quality & low-risk debt, mainly government securities.
v. Money Market funds
· Money market funds make investments in short-term securities but they promise high quality.
· Some of the Money market funds give tax advantages which could be one of the prime reasons for choosing these types of funds.
· It provides a way for highly liquid, low risk and low return type of investment option.
Vi. Sector specific funds
· As the name suggests, sector specific funds make investment solely in instruments that operate in a specific industry or sector.
· The profits or losses of the retail investors depend directly on the performance of the business or instrument in which capital is invested.
· Lack of diversification is big negative for sector specific funds.
Vii. Index funds
· Index fund’s market portfolio is constructed and designed to match the movement of the share market index.
· Index fund represent passive form of fund management, that has been greatly successful in recent times performing better than many other funds.
· It provides a broad market exposure. This fund has low operating cost and low portfolio turnover.
2. ON THE BASIS OF TIME OF CLOSURE
When the new mutual fund is launched, it is declared whether the scheme is open ended or the close ended. Open ended scheme has no definite date on which it will close down and in case of close ended scheme the closure of the scheme has been decided.
According to the closure type, there are two types in which mutual funds can be divided.
i. Open ended funds
· Open ended scheme has no definite date for issuing and redeeming the units.
· There is no limit to the number of units that will be issued. If demand continues, the fund continues to issue the mutual fund units. Though there are some exceptional cases when the fund manager stops the issuing of new mutual fund unit.
· The funds also buy backs the unit when any retail or small investor wants to sell his own part of holding.
· Most of the funds are open ended as it provides great flexibility to both, the fund proposer and small investor.
ii. Close ended funds
· Unlike open ended funds, in this closes ended funds the number of units to be issued to the normal investors is usually predetermined.
· The proposer intends to raise capital through such funds and when predetermined capital is raised, the issuing of new mutual fund unit for new investors is usually closed down.
· The initial period when the units are issued to the general public is called as Initial Public Offering (IPO). In close end funds, there is a predefined date when the funds will close down and the returns will be given back to the investor.
· The price of the fund fluctuates like normal stocks with regard to the changes in supply and demand and also with the changing values of the instruments in which capital is invested by the fund.
3. ACCORDING TO TAX INCENTIVES
Many investors invest in the Mutual funds to get different kind of tax benefits. It is important to have prior knowledge about the taxation policy to be applicable to the investment anyone intends to make. Each and every Mutual fund is different considering the taxation policy.
We can classify funds in following two categories on the basis of Taxation strategy.
i. Tax saving schemes
· As the name suggests, Tax saving schemes provide taxation benefits to the small investor.
· Usually these types of funds make capital investment in the equities and money market instruments.
· These types of funds generally have initial lock-in period of three years when you can’t liquidate your investment.
· Tax saving fund usually has long maturity duration. Also there is a certain limit for the capital that can be invested by a single person for such schemes.
ii. Non tax saving schemes
· Investor is supposed to pay the due tax on the investment profit.
· These schemes have no lock-in period so the funds can be liquidated whenever needed.
4. ON THE BASIS OF PAYOUT PLAN
Payout plan of any fund is very important for any investor to know. It is very important to take a look at the payout strategy offered by the fund you are investing in. Following are the types on payout timing bases.
i. Dividend paying
· In this type of funds, the investor gets the returns in form of dividend on the investment amount.
· For many investors, the dividend returns means a lot. It is important to accept the bitter fact that the dividend returns are not as simple as they are in stock investments.
· Funds usually give the expected dividend figures, but very high numbers of funds fail to pay the expected dividend and also they fail to maintain the frequency period at which it should be paid.
· The dividend returns depend on the performance of the instrument in which investment is made by fund managers so according to the performance of those instruments, the timing and the amount of dividend fluctuates in funds.
ii. Reinvestment plan
· In these types of funds, the periodic gains are also reinvested. Usually, the investors get returns at the completion of fund duration or when the holdings are liquidated.
· The returns are comparatively higher, as the periodic gains are also summed up to the capital invested by the investor and the returns paid as per the total amount.
These are the different types of mutual funds available in the market and above shown are the ways in which Mutual funds can be classified. I hope this information will help you in the investment you plan to make. Thank you and Happy investing.