Types of Mutual Fund

Wide variety of Mutual Fund Schemes exist to cater to the needs such as financial position, risk tolerance and return expectations etc. The table below gives an overview into the existing types of schemes in the Industry.

A.    Open ended                                   B.    Closed ended.

Most mutual funds are open-ended funds. This means you can subscribe to one at any time of the year. Open-ended funds are generally not listed on stock exchanges. A converse set of rules apply to closed-ended funds. Closed-ended funds have a fixed number of shares, are open for subscription during a specified period and operate for a fixed period of time. For example, five years - and so, the number of buyers and sellers are exact - someone would have to sell for you to be able to buy. Closed-ended funds are generally listed on stock exchanges.

Classification of Mutual Funds

Mutual funds can also be broadly classified into four distinguishable types :

1.    Equity Funds - Long Distance Runner

Equity funds (often described as growth funds) aim to provide capital growth by investing in the shares of individual companies. Depending on the fund’s objective, this could range from large blue-chip organisations to small and new businesses. Any dividends received by the fund can be reinvested by the fund manager to provide further growth or paid to investors. Both risk and returns are high but they could be a good investment if you have a long-term perspective and can stay invested for at least five years.

2.    Debt or Income Funds - Steady Income From Bonds

The aim of debt or income funds is to make regular payments to its investors, although dividends can be reinvested to buy more units of the fund. To provide you with a steady income, these funds generally invest in fixed income securities such as bonds, corporate debentures, government securities (gilts) and money market instruments. Opportunities for capital appreciation are limited and the downside is that as interest rates fluctuate, the net asset value or NAV of the fund could follow suit – if interest rates fall, the NAV is likely to increase and vice versa. There is also a risk that a company issuing a bond may default on its payment, if it is not financially healthy. However, if the fund invests in government securities there is little risk of the government defaulting on its payment.

3.    Balanced Funds - The Best of Both The Worlds

As the name suggests, these funds aim for balance, so they are made up of a mixture of equities and debt instruments. They match the goals of investors who seek to grow their capital and get regular income, while retaining relatively low risk. The debt or bond element of the fund provides a level of income and acts as the safety net during dynamic periods in the market, while equities provide the potential for capital appreciation. Balanced funds could be suitable for investors who are looking for moderate capital appreciation.

4.    Money Market Funds - Very Liquid

Money market or liquid funds are an appealing alternative to bank deposits because they aim to provide stability, liquidity, capital preservation and slightly higher interest rates than bank accounts. When you invest in a money market fund, the fund manager invests in ‘cash’ assets such as treasury bills, certificates of deposit and commercial paper. Returns on these funds fluctuate much less compared to other funds, but they are not guaranteed. They are appropriate for corporate and individual investors who wish to park their surplus money in a fund for a short period.