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Types of Mutual Funds



Investment Objective

Schemes can be classified by way of their stated investment objective such as Growth Fund, Balanced Fund, and Income Fund etc.

Equity Oriented Schemes

These schemes, also commonly called Growth Schemes, seek to invest a majority of their funds in equities and a small portion in money market instruments. Such schemes have the potential to deliver superior returns over the long term. Though, because they invest in equities, these schemes are exposed to fluctuations in value especially in the short term.

Equity schemes are hence not suitable for investors seeking regular income or needing to use their investments in the short-term. They are ideal for investors who have a long-term investment horizon. The NAV prices of equity fund fluctuates with market value of the underlying stock which are influenced by external factors such as social, political as well as economic. HDFC Growth Fund, HDFC Tax Plan 2000 and HDFC Index Fund are examples of equity schemes

General Purpose

The investment objectives of general-purpose equity schemes do not restrict them to invest in specific industries or sectors. They thus have a diversified portfolio of companies across a large spectrum of industries. While they are exposed to equity price risks, diversified general-purpose equity funds seek to reduce the sector or stock specific risks through diversification. They mainly have market risk exposure. HDFC Growth Fund is a general-purpose equity scheme.

Sector Specific

These schemes restrict their investing to one or more pre-defined sectors, e.g. technology sector. Since they depend upon the performance of select sectors only, these schemes are inherently more risky than general-purpose schemes. They are suited for informed investors who wish to take a view and risk on the concerned sector.

Special Schemes
Index schemes

The primary purpose of an Index is to serve as a measure of the performance of the market as a whole, or a specific sector of the market. An Index also serves as a relevant benchmark to evaluate the performance of mutual funds. Some investors are interested in investing in the market in general rather than investing in any specific fund. Such investors are happy to receive the returns posted by the markets. As it is not practical to invest in each and every stock in the market in proportion to its size, these investors are comfortable investing in a fund that they believe is a good representative of the entire market. Index Funds are launched and managed for such investors. An example to such a fund is the HDFC Index Fund.

Tax saving schemes

These schemes offer tax rebates to the investors under specific provisions of the Indian Income Tax laws as the Government offers tax incentives for investment in specified avenues. Investments made in Equity Linked Savings Schemes (ELSS) and Pension Schemes are allowed as deduction u/s 88 of the Income Tax Act, 1961.

The Scheme is subject to Securities & Exchange Board of India (Mutual Funds) Regulations, 1996 and the notifications issued by the Ministry of Finance (Department of Economic Affairs), Government of India regarding ELSS subject to such conditions and limitations, as prescribed under Section 88 of the Income-tax Act, 1961, subscriptions to the Units not exceeding Rs.10, 000 would be eligible to a deduction, from income tax, of an amount equal to 20% of the amount subscribed. HDFC Tax Plan 2000 is such a fund.

Real Estate Funds

Specialized real estate funds would invest in real estate directly, or may fund real estate developers or lend to them directly or buy shares of housing finance companies or may even buy their securitized assets.

These schemes, also usually called Income Schemes, invest in debt securities such as corporate bonds, debentures and government securities. The prices of these schemes tend to be more stable compared with equity schemes and most of the returns to the investors are generated through dividends or steady capital appreciation. These schemes are ideal for conservative investors or those not in a position to take higher equity risks, such as retired individuals. Though, as compared to the money market schemes they do have a higher price fluctuation risk and compared to a Gilt fund they have a higher credit risk.

Income Schemes

These schemes invest in money markets, bonds and debentures of corporate with medium and long-term maturities. These schemes mainly target current income instead of capital appreciation. They therefore distribute a substantial part of their distributable surplus to the investor by way of dividend distribution. Such schemes usually declare quarterly dividends and are suitable for conservative investors who have medium to long term investment horizon and are looking for regular income through dividend or steady capital appreciation. HDFC Income Fund, HDFC Short Term Plan and HDFC Fixed Investment Plans are examples of bond schemes.

Liquid Income Schemes

Similar to the Income scheme but with a shorter maturity than Income schemes. An example of this scheme is the HDFC Liquid Fund.

Money Market Schemes
Gilt Funds

This scheme mainly invests in Government Debt. Hence the investor usually does not have to worry about credit risk since Government Debt is usually credit risk free. HDFC Gilt Fund is an example of such a scheme.

Hybrid Schemes

These schemes are commonly known as balanced schemes. These schemes invest in both equities as well as debt. By investing in a mix of this nature, balanced schemes seek to attain the objective of income and moderate capital appreciation and are ideal for investors with a conservative, long-term orientation. HDFC Balanced Fund and HDFC Children’s Gift Fund are examples of hybrid schemes.

Constitution

Schemes can be classified as Closed-ended or Open-ended depending upon whether they give the investor the option to redeem at any time (open-ended) or whether the investor has to wait till maturity of the scheme.

Open ended Schemes

The units offered by these schemes are available for sale and repurchase on any business day at NAV based prices. Hence, the unit capital of the schemes keeps changing each day. Such schemes thus offer very high liquidity to investors and are becoming increasingly popular in India. Please note that an open-ended fund is NOT obliged to keep selling/issuing new units at all times, and may stop issuing further subscription to new investors. On the other hand, an open-ended fund rarely denies to its investor the facility to redeem existing units.

Closed ended Schemes

The unit capital of a close-ended product is fixed as it makes a one-time sale of fixed number of units. These schemes are launched with an initial public offer (IPO) with a stated maturity period after which the units are fully redeemed at NAV linked prices. In the interim, investors can buy or sell units on the stock exchanges where they are listed. Unlike open-ended schemes, the unit capital in closed-ended schemes usually remains unchanged. After an initial closed period, the scheme may offer direct repurchase facility to the investors. Closed-ended schemes are usually more illiquid as compared to open-ended schemes and hence trade at a discount to the NAV. This discount tends towards the NAV closer to the maturity date of the scheme.

Interval Schemes

These schemes combine the features of open-ended and closed-ended schemes. They may be traded on the stock exchange or may be open for sale or redemption during pre-determined intervals at NAV based prices.

Money Market Funds

The aim of money market funds is to provide easy liquidity, preservation of capital and moderate income. Returns on these schemes may fluctuate depending upon the interest rates prevailing in the market. These are ideal for Corporate and individual investors as a means to park their surplus funds for short periods. These schemes invest in short term instruments such as commercial paper (“CP”), certificates of deposit (“CD”), treasury bills (“T-Bill”) and overnight money (“Call”). The schemes are the least volatile of all the types of schemes because of their investments in money market instrument with short-term maturities. These schemes have become popular with institutional investors and high networth individuals having short-term surplus funds.

Commercial Paper
A Commercial Paper is a short term unsecured promissory note issued by the raiser of debt to the investor. In India, Corporates, Primary Dealers (PD), Satellite Dealers (SD) and Financial Institutions (FIs) can issue these notes.

It is usually companies with very good ratings which are active in the CP market, though RBI permits a minimum credit rating of Crisil-P2. The tenure of CPs can be anything between 15 days to one year, though the most popular duration is 90 days. Companies use CPs to save interest costs

Certificates of Deposit
These are issued by banks in denominations of Rs 5 Lakhs and have maturity ranging from 30 days to 3 years. Banks are allowed to issue CDs with a maturity of less than one year while financial institutions are allowed to issue CDs with a maturity of at least one year.

Treasury Bills
Treasury Bills are instruments issued by RBI at a discount to the face value and form an integral part of the money market. In India Treasury Bills are issued in four different maturities - 14 days, 90 days, 182 days and 364 days.

Apart from the above money market instruments, certain other short-term instruments are also in vogue with investors. These include short-term corporate debentures, bills of exchange and promissory notes.

Government Securities (G-securities or Gilts)
Like T-bills, gilts are issued by RBI on behalf of the Government. These instruments form a part of the borrowing program approved by Parliament in the Finance Bill each year (Union Budget). Usually, they have a maturity ranging from 1 year to 20 years.

Like T-Bills, Gilts are issued through the auction route but RBI can sell/buy securities in its Open Market Operations (OMO). OMOs include conducting repos as well and are used by RBI to manipulate short-term liquidity and thereby the interest rates to desired levels

The other types of Government Securities are :
i. Inflation linked bonds
ii. Zero coupon bonds
iii. State Government Securities (State Loans)

Load Funds

A Load Fund is one that charges a commission for entry or exit. That is, each time you buy or sell units in the fund, a commission will be payable. Usually entry and exit loads range from 1% to 2%. It could be worth paying the load, if the fund has a good performance history.

No-Load Funds

A No-Load Fund is one that does not charge a commission for entry or exit. That is, no commission is payable on purchase or sale of units in the fund. The advantage of a no load fund is that the entire corpus is put to work.

Mutual Funds
Mutual Funds