Types of Mutual Funds available can be classified based on parameters like fund structure, investment horizon, objectives etc., Classification of Mutual Funds according to their nature helps investors to choose better funds based on their risk and return. In India, various types of mutual funds are available with unique features to suit various investors based on their age, expected returns, risk tolerance, needs and how stable their finances are.
Types of mutual funds by structure:
Mutual funds can be classified into open ended, closed ended and interval schemes based on how they accept subscriptions from investors.
Open ended mutual funds: These are most common funds available. Fund houses buy and sell units of mutual funds directly from investors at prevailing Net Asset Value (NAV). These funds provide exit options for investors at NAV, which is actual worth of unit of mutual funds. Fund houses publish NAV daily.
Close ended Mutual Funds: After closing of New Fund Offer (NFO), investors can not buy or sell their units directly with fund house. Units of close ended mutual funds are listed and traded in stock exchanges like normal shares. They are not liquid as trading volumes are very less and most of the times, the traded price is less than fair price of the unit.
Interval Funds : Interval funds are funds with features of both open ended and close ended funds. They are close funds with an option to transact with funds directly for certain pre mentioned periods. When they are open for subscription / redemption during certain intervals (periods), they have open ended fund nature and rest of the time close ended fund nature.
Types of Mutual Fund by investment objective
Growth Schemes: Growth schemes have investment objective to generate wealth in long term for investors. These are most suitable for investors who are looking for accumulation of wealth for longer period of time. Usually these are suitable for investors who are looking for goal based investment like child education, own house and so on.
Income Schemes: Income schemes are for people who are looking for regular income from their accumulated wealth. These are suitable for people who are looking for regular income for their regular needs. For example, for retired people who wish to invest certain amount and have a regular income from them. Usually, incomes are paid by the way of dividends and pay out of dividends are not guaranteed as required by SEBI.
Balanced Fund Schemes: As the name indicates these funds try to balance the components of capital appreciation, safety of capital and incomes. To achieve this balance, these funds invest in a variety of assets to achieve the balance.
Money Market Schemes: Money market schemes are highly liquid funds for investments as low as a day. These are used by companies and organizations as a tool of treasury management to manage their liquid funds and earn income on them.
Other Types of Mutual Funds
Tax Savings Schemes: Tax Savings schemes are popularly known as Equity Linked Savings Schemes (ELSS). They are closed mutual funds which invest primarily in equity related instruments to benefit from available tax concession under Section 80C of income tax act. All ELSS investments with a 3 year lock in period are eligible for tax exemption up to 1,00,000 rupees per year.
Index Schemes: As the name indicates, these funds invest in index funds by following passive management. Advantages of index schemes are lesser fund management fees. They typically provide returns that of index they are bench marked. Usually returns are little less than index returns (Known as Tracking Error) due to fund fees, necessity to keep liquid cash which is not invested etc.,
Sector Schemes: Sector Schemes invest in a particular sector. Little variation of sector funds are theme funds which invest in a related theme rather than in a single sector. These are high risk funds as every sector has its life cycle with ups and downs. An example will be infrastructure funds which did not perform since 2008 market collapse.
Fund of Funds: These funds invest in selected mutual funds and have the advantage of further diversification of different investment styles of different fund managers. Although direct expenses with funds are less as they do not carry out transactions, research etc., they need to bear the expenses of other funds in the proportionate ratio of their investment.
This classification is based on amfiindia guidelines.
Also see another alternative types of mutual funds classification. (To be updated)