Types of Mutual Fund Schemes in India
Tuesday, Mar 5, 2024
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Mutual funds have transformed the investment world by providing ease and flexibility to invest in the financial market. When there are a number of schemes available in the market, it is important for an investor to know and understand each type to select the best mutual fund schemes.
Therefore, to make your work easy and to help you understand different types of mutual fund schemes, we have listed here the types with examples to know better. Let us explore each of them and remove the complexities of investing with mutual funds.
Types of Mutual Fund Schemes
Each of the schemes is classified based on different categories, let us have a look at them in detail.
Based on Organization Structure:
Open-ended Funds:
Open-ended mutual fund products don't have a fixed maturity date and, thus investors can purchase and sell units whenever they like. Investors can invest, sell, and repurchase funds at any time based on the present NAV prices without any problems.
They are perfect for investors who want quick access to their holdings since they provide flexibility and liquidity. Of all the different types of mutual fund schemes available in the market, the majority of them are open-ended funds.
For example, consider the following:
HDFC Equity Fund: The high-performing, open-ended equity fund well-known for its steady returns.
SBI Bluechip Fund: Renowned open-ended large-cap equity fund having a history of producing strong returns.
Close-ended Funds:
In closed-ended mutual fund schemes, only a fixed amount of units are issued through IPO and have a fixed maturity time frame. On stock exchanges, investors can only purchase or sell units during specified times.
In relation to their Net Asset Value (NAV), these funds can be traded at a premium or discount. Investors who are happy with extended investment horizons, desire significant financial appreciation, and are ready to accept lower liquidity tend to opt for closed-ended funds.
An example of this fund can be -:
The close-ended HDFC Capital Builder Value Fund - An equity fund that prioritizes value investing strategies.
ICICI Prudential Value Fund - Series 19 - The closed-end fund using value investing for long-term capital growth.
Interval Funds:
These types of funds are for the ones who want to leverage the benefits of both open-ended and close-ended funds. The transactions for these funds can only be done on some specified time period.
A minimum of two days is required within the transaction time, and there must be a minimum of fifteen days between each transaction period. These funds offer both portfolio stability as well as liquidity and are hence used by the neutral kind of investors.
For example,
Tata Interval Fund - Quarterly Interval Fund and
Sundaram Interval Fund - Quarterly Interval Plan A - Including diversified portfolio with periodical liquidity.
Based on Portfolio Management:
Active Funds:
In these types of funds, fund managers proactively manage the buying and selling activities of securities with the goal of outperforming the market or a designated benchmark. Although these funds have higher management costs, they have the potential to yield better returns.
Investors seeking higher returns through professional management of funds always look out for these funds. Multiple strategies are employed by active funds to build and monitor the portfolio. The strategies used are clearly mentioned in the Scheme Information document (offer document).
HDFC Large and Mid Cap Funds and Aditya Birla Sun Life Frontline Equity Fund are perfect examples of active funds.
Passive Funds:
These funds are named passive funds because they replicate market indexes for both security selection and its proportion. And thus it does not require active fund management efforts.
These funds will have minimal fees for fund management. Therefore, investors willing to invest with lower costs and have faith in the market indexes stocks will prefer passive funds.
Here are some examples of passive funds -:
Nippon India Index Fund Sensex Plan - Passively managed fund that tracks the performance of the BSE Sensex.
UTI Nifty Index Fund - Passively managed fund following the performance of the Nifty 50 index.
Based on Portfolio:
Equity Funds:
Stocks are the main asset class of equity mutual fund schemes, which have a higher volatility but also the potential for large gains. Again, in equity schemes, there are three sub-categories large cap, mid cap, and small cap.
Large-cap stocks have companies with big market capitalizations; mid-cap stocks have midsize businesses with medium market capitalizations; and smaller enterprises with comparatively low market capitalizations are the ones with small-cap stocks.
These schemes are appropriate for those who can afford to take on more risk and have a longer investing horizon. Some of the top-performing equity fund schemes are Motilal Oswal Mid-cap Fund and SBI Contra Fund.
Debt Funds:
Debt funds are those mutual funds that invest in fixed-income generating securities such as debentures and bonds. These funds offer stable returns and simultaneously they have lower risks. Therefore, it should be opted for by the risk-averse investors.
There are further different categories of debt funds such as liquid funds, short-duration funds, credit risk funds, etc. And total there are 16 sub-categories listed by SEBI. To name some best-performing debt funds, the SBI CRISIL IBX Gilt Index - June 2036 Fund produces a 10.23% annual return and the Nippon India Nifty G-Sec Jun 2036 Maturity Index Fund offers a 10.3% annual return.
Hybrid Funds:
Investments that are distributed among both debt and equity securities are called Hybrid Mutual Fund Schemes, providing an appropriate balance to risk and return. They are appropriate for investors looking for stability along with growth as they leverage the benefits of both equity and debt funds.
Again these funds are categorised as conservative hybrid funds and aggressive hybrid funds. Aggressive hybrid funds seek growth by investing primarily in equities and a smaller percentage in debt, whereas conservative hybrid funds mostly deal in debt with a lower allocation to stocks for stable returns.
Example:- HDFC Hybrid Equity Fund - aggressive hybrid fund and ICICI Prudential Equity & Debt Fund - conservative hybrid fund.
Money Market Funds:
Money market mutual funds provide stability and liquidity by investing in highly liquid, short-term securities like Treasury bonds, certificates of deposits, commercial paper, etc. They are appropriate for investors who want quick access to money and capital preservation.
Furthermore, money market mutual funds may serve as a short-term holding facility for cash as investors wait for the market to settle up or for greater investment opportunities. To name a few, Invesco India Money Market Fund, ICICI Money Market Fund, Axis Money Market Fund, etc.
Based on Investment Objective:
Growth Funds:
As the name suggests, these funds invest in the securities of a company that results in the growth of your capital over a longer period of time. Hence, they invest in such companies having a higher probability of huge profits.
If you are an investor bearing high risks and wish to invest for a longer time duration then growth funds are best suited for you. The best example of this kind of growth fund is the Canara Robeco Small Cap Fund.
Income Funds:
Income-oriented mutual funds invest in fixed-income instruments like bonds and debentures to consistently provide investors with income. For cautious investors looking for steady returns and consistent income streams, these funds are appropriate.
Here are the examples,
ICICI Prudential Regular Savings Fund: A balanced fund focusing on generating income through investments in debt and equity securities.
HDFC Corporate Bond Fund: A debt-oriented fund aiming for regular income by investing in high-quality corporate bonds.
Liquidity Funds:
The main focus of liquid funds is to invest in instruments that are highly liquid and where the capital invested remains safe. These kinds of funds are suitable for the ones who want revenues in a short duration and do not wish to park funds for a longer time period.
Usually, liquid funds have a lower expense ratio, regular interest payment, and a lower amount of investments required. The examples of liquid funds are as follows -
Kotak Liquid Fund: a low-risk fund that makes investments in short-term money market products to provide high liquidity.
IDFC Cash Fund: focusing on capital preservation and higher liquidity by investing in short-term debt securities.
There are many other mutual fund schemes such as Exchange Traded Funds (ETFs), Overseas Funds, Funds of Funds, etc.
Conclusion
In summary, investors may find it difficult to navigate the vast ocean of mutual funds, frequently feeling overwhelmed by the sheer number of options available. It becomes way confusing to select the best mutual fund scheme from the number of options available especially when life is so busy.
At Green Portfolio, we understand the difficulties investors have in choosing the finest mutual fund options that satisfy their values and financial objectives. To make the investing process easier for investors, Green Portfolio is soon launching a product - MUTUAL FUND SMALLCASE.
MUTUAL FUND SMALLCASE provides you with a basket of mutual funds based on one particular theme or sector, similar to the basket of stocks. As a result, the time-consuming process of evaluating several mutual fund schemes—such as debt, hybrid, equity, and index funds—can be eliminated by this investment option.
This investment option provides investors with a chance to combine varied funds into one portfolio. Hence, say goodbye to confusion and take the first step towards investing in such mutual fund schemes.
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