Classification of Mutual Funds: know these 15 types of schemes available to investors

Every major Mutual Fund Organization (MFO) in India has introduced at least a dozen schemes. These schemes are initiated and offered to the public, targeting different investor groups. You have a choice of selecting a suitable scheme.

Mutual Fund products can be classified based on their underlying portfolio composition such as the asset class the fund invests in, such as equity/debt/money market instruments or gold. The second level of categorization is based on strategies and styles used to create the portfolio, such as Income fund, Dynamic Bond Fund, Infrastructure fund, Large-cap/Mid-cap/Small-cap Equity fund, Value fund, etc. They provide an opportunity to invest in the capital market by small investors who do not have adequate knowledge experience or time to directly invest in the capital market. The small investors rely on the expertise of financial consultants or agents of the mutual funds.

Here are the major products of schemes under mutual funds:

Open-ended Mutual Funds: Open-ended mutual funds do not have a fixed maturity period. The investor can purchase the units at any point in time and can sell back (redeem) units to Asset Management Company (AMC) at any time.
Close-ended Mutual Funds: In close-end mutual funds the scheme ends after a fixed maturity period. Normally the investor is not eligible to sell them back to the Asset Management Company before the maturity period.
Growth/Equity Scheme: In the equity or Growth schemes of Mutual funds, the investors’ money is primarily invested in equities (Shares). Investment in equity schemes is subject to market risk. However, persons having ‘Risk-appetite’ may invest in equity schemes, anticipating good profit in the scheme.
The debt schemes: Funds are predominantly invested in Government Securities, bonds, insurance companies, deep-discounted bonds and commercials, Deposits, etc. Investments in Debt schemes are low risk, but low-yield investments.
Systematic Investment Plan (SIP): In SIP schemes of Mutual Funds, the investor would invest constantly certain amount at regular intervals either on a monthly or quarterly basis. Investment in SIP helps the investor to diversify their risk, over a predetermined time.
Systematic Withdrawal Plan (SWP): In SWP the investor withdraws money, at regular intervals. AS in the SIP, the investor diversifies the risk by withdrawing the money from the scheme at a different interval.
Systematic Transfer Plan (STP): STP allows the investors to transfer their investments from one scheme to another of Asset Management Company (AMC) of the same mutual fund or other mutual funds to maintain the mix of schemes. STP is also known as the Fund of Funds (FoF) scheme.
Balanced Fund: A scheme that provides both growth and regular income as such schemes invest in equities, as well as fixed-income securities in the proportion indicated in their offer documents. These are appropriate for investors looking for moderate growth. They generally invest 40-60% in equity and debt instruments. These funds are also affected because of fluctuations in share prices in the stock markets. However, NAVs of such funds are likely to be less volatile compared to pure equity funds.
Money Market or Liquid Fund: A scheme that provides easy liquidity, and preservation of capital at a modest income. Under the scheme, investment will be entirely in safer short-term instruments such as treasury bills, certificates of deposit, commercial paper and inter-bank call money, government securities, etc. The corporations and individuals who like to park their surplus funds for a short period prefer this scheme.
Gilt Fund: These funds invest exclusively in government securities. Government securities have no default risk. NAVs of these schemes also fluctuate due to changes in interest rates and other economic factors as is the case with income or debt-oriented schemes.
Index Fund: Index Funds Schemes’ function on NAV rises or falls according to the index, as these funds purchase all the stocks in the same proportion as in a particular index like Nifty 50, S&P BSE 50, etc. This means the scheme will perform in tandem with the index it is tracking, except for a small difference known as tracking error. Mutual funds such as the SBI Nifty Index Funds, ICICI Pru Index Funds, Franklin (I) Index Funds, and Reliance Index Funds-Nifty are some of the leading mutual funds dealing in index funds. An index mutual fund provides broad market exposure, low operating expenses, and low portfolio turnover. This is because index funds passively track the performance of a particular index instead of actively buying and selling stocks like other actively managed funds.
Arbitrage Fund
Arbitrage funds are mutual funds that seek to profit on price differentials in the derivatives and cash (or spot) markets by engaging in simultaneous buy and sell transactions in cash and futures markets. Minimum investment in equity & equity-related instruments – 65% of total assets.
Retirement Fund:
These funds offer a regular source of finance after one retires; a retiree receives an annuity on their investment until their demise. Pension funds are invested on the investor’s behalf, and the income generated from that investment is contributed as the interest provided on the pool of funds. Retirement Fund Scheme having a lock-in for at least 5 years or till retirement age whichever is earlier.
Children’s Fund:
Children’s Fund or Child Gifting Mutual Fund is an open-ended scheme designed primarily for child-specific needs like educational expenses, relocation, higher studies, healthcare, marriage, etc. These funds come with a 5 year mandatory lock-in period or until the child becomes an adult, whichever is earlier. Children’s Fund Scheme has a lock-in for at least 5 years or till the child attains the age of majority whichever is earlier.
ELSS Minimum investment in equity & equity-related instruments – 80% of total assets (by ELSS, 2005 notified by Ministry of Finance) An open-ended equity-linked saving scheme with a statutory lock-in of 3 years and tax benefit

There are many other schemes like ‘Sector-specific funds/schemes’ (investment will be purely on specific sectors like Software, FMCG, etc.), ‘Tax saving schemes’ (Income Tax benefit for investment in these schemes), and so on. These schemes are tailor-made offers to attract different kinds of investors into mutual fund investments.

Interpretations of words used in mutual funds:

Net Assets Value (NAV): Mutual Funds /AMC invests the investor’s money held by it on various types of financial instruments (assets) like shares, deposits, bonds, Government securities, etc. The Market value of assets (Securities) minus the liabilities if any (excluding investor’s liability), is divided by the number of units available in the scheme giving the Net Asset Value (NAV) of each unit.

Entry Load: The selling and distribution expenses of AMC will be charged to the investors at a certain percentage of Net Asset Value (NAV) generally between 1 to 3%. The above-mentioned charge is called Entry Load. In some schemes, the entry load is not charged.

Exit Load: The exit load is the amount charged by the AMC towards the investor’s money going out of the scheme. Generally, between 1 to 3% of NAV is charged as exit load. In some schemes, the exit load is not charged.

originally posted on July 26, 2014, updated on 24.11.2023

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