Mutual funds have slowly, but surely, become the common Indian investor’s choice of investment. Equity bull run, ease of investing as well as relatively better returns than fixed deposits, etc have led to mutual funds becoming popular among investors.
Based on various factors, mutual funds can be classified into different categories.
Based on the scheme structures, mutual funds are of two types:
- Close-ended schemes
A close-ended fund is open for investment, or subscription, only during the initial offer period. It has a specified tenure and fixed maturity date (similar to a fixed term deposit). Units of close-ended funds can be redeemed only on maturity. As the units of a close-ended fund are listed on a stock exchange, investors looking to exit the scheme before maturity may sell their units on the exchange.
- Open-ended schemes
A fund that can be subscribed to and sold on every business day throughout the year is an open-ended fund. These schemes have no maturity date and they are like savings bank accounts, wherein one may deposit and withdraw money every day.
Based on the investment objective, mutual funds can be classified as:
- Growth funds
One of the most common type of mutual fund, the growth fund aims to help an investor’s money grow by investing it for longer durations. Usually, these schemes invest a major part of their fund portfolio in equities and hence, have comparatively high risk. Depending on their expectation from the investment, investors may choose to invest their money in growth funds by opting between growth and dividend options. It has been observed that those investors who have stayed invested in growth funds for longer durations have seen significant appreciation in their capital.
- Fixed income funds
Fixed income funds are the funds that aim to provide investors with regular and steady income. These schemes generally invest in fixed income securities such as bonds, corporate debentures, government securities and money-market instruments. These funds are relatively less risky, as compared with equity schemes, as they are not exposed to the equity market or its fluctuations. However, these funds follow the adage: No risk, no gain. Thus, these fixed income funds do not generate returns in line with the equity market.
Specialty funds: Specialty funds invest majority assets in certain sectors, industries, regions, or security types. These investments are the very opposite of diversification, and are hence, deemed riskier investments. Specialty funds are often used to describe a variety of funds, including sector funds, index funds and international funds.
Thematic funds: Thematic funds are the mutual funds that invest in stocks that will be benefited from a particular investment theme. For example, an infrastructure thematic fund might invest in shares of companies that are into toll collection, infrastructure construction, cement, steel, telecom, power etc.
Thematic funds are way more broad based than sector fund, but they are narrower than diversified equity funds and they carry with themselves the inherent risk associated with that particular sector.
Given the variety of options available to investors and the significantly varied performance of the various funds, investors should carefully consider which mutual fund they want to invest in.