MUTUAL FUNDS and Its Types

Posted by sandeep on November 1st, 2019

Concept of Mutual Funds

When an asset management company collects money from the different type of investors with common risk taking capacity, invest that amount in a single pool (fund) and manage that fund is called Mutual funds. In other words, Mutual fund is a medium of earning profit by which small investor can also get good return in long term.

Types of Mutual Funds

There are different types of mutual fund are as follows:

1. Open-ended Fund:

In open-ended funds, any investor can invest or withdraw their money from the fund whenever they want. There is no fixed maturity date is defined.

2. Close-ended Fund:

In close ended funds there is an fixed maturity date is defined. These type of funds cannot be purchase at any time. Investors can invest in close ended fund only during its New fund offer.

3. Interval fund:

Interval funds include both the features of open ended and close ended funds. On can invest in these kind of fund whenever fund is open for investment for a fixed time interval, otherwise investment in these kind of fund is closed.

4. Actively managed Fund:

This type of funds is managed in a flexible way by the fund manager. These constituents of these funds are bought and sold in a very frequently, so these funds are managed actively. For example: KPIT technologies has provide better results so fund manager purchased the KPIT technologies shares. After 10 days, Hindalco company's result came and it’s result are way better than KPIT , so fund manager sold out  KPIT and purchased hindalco stock.

In the above example, the way in which fund is managed that’s why it is called actively managed funds. Index funds are example of actively managed fund.

5. Passive Fund:

In Passive funds, investors invested on those funds whose performance seeks to track the higher return on the market. The investors purchase the funds and hold it until they get good return from it.

6. Equity Fund:

Those types of scheme whose motive/objective is to invest in equity shares or equity related investments like convertible debentures. These type of funds seeks capital appreciation through the investments of the investors.

Sub-Types of Equity funds:

• Diversified equity fund: This is a category of those of funds which is invested in mix securities of different of type of sectors.
• Sector fund: Those funds which invested in a specific sector.

For example: The funds of banking sector will invest only in banking companies. Gold sector funds will invest only in gold related companies or securities.

• Thematic Funds: Those funds which invest on a theme are known as thematic funds.

For example: Infrastructure sector will invest in the shares of the companies comes under infrastructure construction like cement, telecom, etc.

• Equity linked saving scheme (ELSS): This scheme offers the benefit of tax relief to the investors. This investment done in ELSS is locked for the period of 3 years.
• Rajiv Gandhi equity saving scheme (RGESS): This scheme offers the tax benefit to the new investors. This investment lock in for the period of 1 year in fix and 2 years in flexible.
• Equity income/dividend yield scheme: This type of scheme invest on those securities whose shares fluctuates less and the dividend represents the larger proportion of the return on those shares.
• Arbitrage fund: Those funds takes opposite position in different securities/markets. In this fund the risk is about neutralized and provide the good return. Arbitrage funds always hedge their position

7. Debt fund:

Those funds which are limited to invest in debt securities like treasury bills, government securities, bonds or debentures, commercial papers are called Debt funds.

Sub-Types of Debt fund:

• Gilt Fund: These funds invest only in government securities and treasury bills which does not have the credit risk.
• Diversified Debt Fund: Those funds which does a mix investment in both government and non-government securities like corporate bonds, debentures and commercial papers.
• Junk bond scheme: Those funds which invest in the bonds of all the private companies except government companies. The companies whose credit quality is poor. Risk is higher in junk bond schemes.
• Fixed maturity plans: Those funds or scheme whose maturity date is fixed. Those funds where the investment portfolio aligns to the maturity of the scheme.
• Liquid scheme: This scheme is also called money market scheme. This scheme is the variants of debt scheme which invest in the short term debt securities. This scheme invest on those debt securities which is going to mature in 91 days or less than 1 year.

8. Hybrid Fund:

Those funds which provide the investment charter to invest in both equity and debt funds. Hybrid fund include the features of both the fund equity and debt. Some of the investors invest in gold with either equity or debt or both.

Sub-Types of Hybrid Funds:

• Monthly income plan: Those fund in which by the investment we get income every month in the form of dividend. Investor those who require monthly income invest in these funds.
• Balanced Fund: This is also a popular category of hybrid funds. This scheme is historically launched for the purpose of giving the exposure of equity and debt both in one portfolio to the investors.
• Capital protected scheme: This type of scheme are structured to ensure that investors get their principal back. Those funds by investing in which the capital would be protected like government securities, zero coupon bonds etc., but the return of this scheme is also very low. Those investors invest in this scheme whose risk taking capacity is about negligible.

9. Gold Fund:

Those funds which invested in gold or gold related securities are called Gold fund.

Gold funds is divided into 2 category:

• Gold Exchange Traded Fund: Those funds which invest only in gold, gold related securities or a gold deposit scheme of a bank. The NAV of these funds get change with the gold price in the market.
• Gold Sector Fund: The fund will invest in that shares of the company which is engaged with gold mines or in processing.

10. Real estate funds/ Real estate investment fund:

Those funds which invest in real estate related stocks are known as real estate funds. There are some funds which make things possible to the small investors to take exposure of fund of real estate like an asset class.