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Mutual funds and Types of mutual funds

On the basis of Structure: Open ended Schemes, Closed ended Schemes.

MUTUAL FUND

 

ü A Mutual Fund is a trust that pools the savings of a number of investors who share a common financial goal.

 

 

 The money thus collected is then invested in capital market instruments such as shares, debentures and other securities.

 

 The income earned through these investments and the capital appreciation realised are shared by its unit holders in proportion to the number of units owned by them.

 Mutual Fund Operation Flow Chart


 

Advantages of Mutual Funds


 

 

Disadvantages of mutual fund

 

    No control over costs: The investor pays investment management fees as long as he remains with the fund, even while the value of his investments are declining. He also pays for funds distribution charges which he would not incur in direct investments.

 

    No tailor-made portfolios: The very high net-worth individuals or large corporate investors may find this to be a constraint as they will not be able to build their own portfolio of shares, bonds and other securities.

 

    Managing a portfolio of funds: Availability of a large number of funds can actually mean too much choice for the investor. So, he may again need advice on how to select a fund to achieve his objectives.

 

    Delay in redemption: It takes 3-6 days for redemption of the units and the money to flow back into the investor‘s account.

 


1 TYPES OF MUTUAL FUNDS

 

On the basis of Structure

 

Open ended Schemes

 

Closed ended Schemes.

 

OPEN ENDED SCHEMES

 

    Open ended Schemes are schemes which offers unit for sale without specifying any duration for redemption.

 

    They sell and repurchase schemes on a continuous basis.

 

    The main feature of such kind of scheme is liquidity

 

CLOSED ENDED SCHEMES

    These are the schemes in which redemption period is specified.

 

    Once the units are sold by mutual funds, then any transaction takes place in secondary market only i.e stock exchange.

 

    Price is determined by forces of market.

 

On the basis of growth objective

 

GROWTH FUND

The aim of growth funds is to provide capital appreciation over the medium to long- term. Such schemes normally invest a major part of their corpus in equities. Such funds havecomparatively high risks

INCOME FUNDS

 

Funds that invest in medium to long-term debt instruments issued by private companies, banks, financial institutions, governments and other entities belonging to various sectors (like infrastructure companies etc.) are known as Debt / Income Funds

 

BALANCED FUND

 

These funds provide both growth and regular income as these schemes invest in debt and equity.The NAV of these schemes is less volatile as compared pure equity funds.

 

MONEY MARKET FUNDS

 

Money market / liquid funds invest in short-term (maturing within one year) interest bearing debt instruments. These securities are highly liquid and provide safety of investment, thus making money market / liquid funds the safest investment option when compared with other mutual fund types.

 

On the basis of Special Schemes

 

INDUSTRY SPECIFIC SCHEMES

 

Industry Specific Schemes invest only in the industries specified in the offer document. The investment of these funds is limited to specific industries like Infotech, FMCG, Pharmaceuticals etc

 

INDEX SCHEMES

 

In this schemes, the funds collected by mutual funds are invested in shares forming the Stock Exchange Index.

 

Example- Nifty Index Scheme of UTI Mutual Fund and Sensex Index Scheme of Tata Mutual Fund.

 

SECTORAL SCHEMES

 

Sectoral funds are those mutual funds which invest in a particular sector of the market, e.g. banking, information technology etc. Sector funds are riskier than equity diversified funds since they invest in shares belonging to a particular sector which gives them fewer diversification opportunities

 

OTHER SCHEMES

   Gilt Security Schemes

 

   Funds of Funds

 

   Domestic Funds

 

 

   Tax Saving Schemes.

 

   Insurance business

 

 

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