What is Mutual Fund?
A financial intermediary known as a mutual fund collects individual money for group investments in a variety of securities. A fund is referred to as “mutual” if its investors share 100% of the fund’s profits after deducting its costs.
The Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 defines a mutual fund as “a fund established in the form of a trust to raise money through the sale of units to the public or a section of the public under one or more schemes for investing in securities, including money market instruments or gold or gold related instruments or real estate assets.”
There are total 4 types of Mutual Fund Schemes
Let’s have a look at them with details:
Functional Classification of MF
a. Open-Ended Schemes
In the case of open-ended schemes, the mutual fund continuously offers to sell and repurchase its units at NAV or NAV-related prices. Unlike close-ended schemes, open-ended ones do not have to be listed on the stock exchange and can also offer repurchases soon after allotment.
Investors can enter and exit the scheme at any time during the life of the fund.
Open-ended schemes do not have a fixed corpus.
The corpus of funds increases or decreases, depending on the purchase or redemption of units by investors. There is no fixed redemption period in open-ended schemes, which can be terminated whenever the need arises. The fund offers a redemption price at which the holder can sell units to the fund and exit.
b. Close-ended Schemes
Close-ended schemes have a fixed corpus and a stipulated maturity period ranging between two to five years. Investors can invest in the scheme when it is launched. The scheme remains open for a period not exceeding 45 days.
Investors in close-ended schemes can buy units only from the market, once initial subscriptions are over and thereafter the units are listed on the stock exchanges where they can be bought and sold.
The fund has no interaction with investors till redemption except for paying dividends/bonuses. In order to provide an alternate exit route to the investors, some close-ended funds give an option of selling back the units to the mutual fund through periodic repurchases at NAV-related prices.
c. Interval Scheme
The interval scheme combines the features of open-ended and close-ended schemes. They are open for sale or redemption during predetermined intervals at NAV-related prices.
Investment Classification of MF
a. Equity Fund
If funds of a particular scheme are invested in equity shares, then it is an equity fund. Equity funds are riskier compared to debt funds and they can be further classified on the basis of their investment strategy as diversified, aggressive, growth, value, and sector funds.
b. Debt Fund
If funds of a particular scheme are invested in debt instruments, then it is a debt fund. Debt funds are characterized as low-risk and high-liquidity investments. Debt funds invest in government securities, money market instruments, corporate debt instruments including floating rate bonds and non-convertible debentures, PSU bonds, securitized debt including asset-backed securities, mortgage-backed securities, and bank fixed deposits.
c. Hybrid fund
In order to provide the benefits of both equity and debt investment to the investors, some funds invest in both the asset classes and they are known as hybrid funds. Hybrid funds may be further categorized into equity-oriented funds and debt-oriented funds.
Portfolio Classification of MF
a. Income Funds
The aim of income funds is to provide safety of investments and regular income to investors. Such schemes invest predominantly in income-bearing instruments like bonds, debentures, government securities, and commercial paper.
The return, as well as the risk, are lower in income funds as compared to growth funds.
b. Growth Funds
The main objective of growth funds is capital appreciation over the medium to long term. They invest most of the corpus in equity shares with significant growth potential and they offer higher returns to investors in the long-term. They assume the risks associated with equity investments. There is no guarantee or assurance of returns. These schemes are usually close-ended and listed on stock exchanges.
c. Balanced Funds
The aim of a balanced scheme is to provide both capital appreciation and regular income. They divide their investment between equity shares and fixed interest-bearing instruments in such a proportion that the portfolio is balanced. The portfolio of such funds usually comprises companies with good profit and dividend track records. Their exposure to risk is moderate and they offer a reasonable rate of return.
Geographical Classification of MF
a. Domestic Funds
Funds that mobilize resources from a particular geographical locality like a country or region are domestic funds. The market is limited and confined to the boundaries of the nation in which the fund operates. They can invest only in the securities which are issued and traded in the domestic financial markets.
b. Offshore Funds
Offshore funds attract foreign capital for investment in the country of the issuing company. They facilitate cross-border fund flow which leads to an increase in foreign currency and foreign exchange reserves. Such mutual funds can invest in the securities of foreign companies. They open the domestic capital market to international investors.
Many mutual funds in India have launched a number of offshore funds, either independently or jointly with foreign investment management companies.
The first offshore fund, The India Fund, was launched by Unit Trust of India in July 1986 in collaboration with the US fund manager, Merril Lynch.