Mutual Funds

There are two key kinds of mutual funds on the basis of the constitution of the fund. This basically affects when investors can buy fund units and sell them.

• Close-Ended Schemes

  A closed-end fund is open for subscription only during the initial offer period and has a specified tenor and fixed maturity date (akin to a fixed term deposit). The units of Closed-end funds can be redeemed only on maturity. The units of a closed-end fund are compulsorily listed on a stock exchange. Investors seeking to exit the scheme before maturity may sell their units on the exchange.

• Open-Ended Schemes

  An open-ended fund is a mutual fund scheme that is available for subscription and redemption on every business day throughout the year. These schemes have no maturity date. Open ended schemes are akin to a savings bank account, wherein one may deposit and withdraw money every day.

• Growth Funds

  The aim of Growth Funds is to result in the appreciation of money invested by an investor over medium to long- term periods. Such schemes normally invest a major part of fund portfolio in equities and hence have comparatively high risk. Investors may choose to invest in these funds via Growth or Dividend options. Growth schemes are good for investors having a long-term outlook seeking appreciation over a period of time.

• Fixed Income Funds

  The aim of income funds is to provide regular and steady income to investors. Such schemes generally invest in fixed income securities such as bonds, corporate debentures, Government securities and money market instruments. Such funds are less risky compared to equity schemes as they are not affected by fluctuations in equity markets. However, opportunities of capital appreciation are also limited in such funds.

• Balanced Funds

  As the name suggests, balanced schemes try to strike a balance between risk and return. They do this by investing in both equities and debt. Therefore the risk is lower than equity or growth funds, but higher than debt or fixed-income funds and so are the returns.

• Equity Funds

  These are funds that invest predominantly in stocks. As a result, they are usually considered high risk, high return funds. Equity Funds provide capital appreciation over long term. Based on the scheme objective, investments could be in growth stocks, where earnings growth is expected to be high, or value stocks, where the view of the fund manager is that current valuations in the markets do not reflect the intrinsic value. The popular funds in the category are defined below:

  • Equity Diversified: All non-theme and non-sector funds can be classified as equity diversified funds. These funds invest in stocks across sectors and market cap.
  • Large, Mid & Small Cap Funds: Large Cap Funds invest a larger proportion of their corpus in stocks with high market cap and are well-established companies with strong market presence.

  Midcap Funds invests in mid-sized companies that lie between large cap and small cap stocks and are more risky than large cap as investment options.

  Small Cap Funds invest in stocks that lie at lower end of market capitalization. Small cap companies have smaller revenue and are usually in the early stage of development with significant growth potential. These funds have highest risk.

• Debt Funds

  These funds invest in debt instruments like bonds, government securities, debentures etc. Debt funds are relatively safer and therefore the returns on them are modest when compared to equity funds. They seek to provide regular income and growth and are suitable for investors with a moderate risk appetite with a medium to long term investment horizon. However, they are highly vulnerable to the changes in interest rates. Debt funds are further classified on the basis of the maturity period of the underlying assets: long-term and short-term.

  Some debt funds also invest in just a single type of debt instrument. Gilt funds which invest only in government securities are an example of such a fund. Gilt Funds invest in government securities of medium and long term maturities issued by central and state governments. These funds do not have the risk of default since the issuer of the instruments is the government.

  There are Corporate Bond funds that invest predominantly in corporate bonds and debentures of varying maturities that offer relatively higher interest, and are exposed to higher volatility and credit risk.

  Money Market Schemes or Liquid funds invest in short-term debt instruments issued by the government, corporates or banks namely CPs and CDs etc.

• Hybrid Funds

  Hybrid Funds invest in both equities as well as debt instruments. For this reason, they are less risky than equity funds, but more than debt funds. Similarly, they are likely to give higher returns than debt funds, but lower than equity funds. The schemes under the hybrid category are:

  • Balanced Schemes: Balanced Funds is a very popular category in Equity-oriented Hybrid funds. Balanced schemes invest in a mix of equity and debt. The debt investments ensure a basic interest income, which the fund manager hopes to top with a capital gain from the investment in equities. However loss in equities can eat into basic interest income and capital.
  • Monthly Income Plans: MIPs aim to provide consistency in returns by investing a major part of their portfolio in debt market instruments with a small exposure to equities. Thus, an MIP would be suitable for conservative investors who along with protection of capital seek some capital appreciation as MIPs have an exposure to equities. However the monthly income is not assured.
  • Hybrid Asset Allocation Funds: These schemes invest in a mix of Equity, Debt & Arbitrage. Asset Allocation Funds do not specify a minimum or maximum limit for each of the asset class. The fund manager allocates resources based on the expected performance of each asset class.
  • Capital Protected Schemes: Capital Protected Schemes are close-ended schemes, which are structured to ensure that investors get their principal back, irrespective of what happens to the market. This is ideally done by investing in Zero Coupon Government Securities whose maturity is aligned to the scheme’s maturity.
  • Arbitrage Funds: Arbitrage funds take opposite positions in different markets / securities, such that the risk is neutralized, but a return is earned. Most arbitrage funds take contrary positions between the equity market and the futures and options market.

Equity Linked Savings Scheme (ELSS) is an equity oriented Mutual Fund which helps investors address two critical aspects : tax saving and wealth creation. The lock-in period of 3 years provides the fund manager to take long term view in equities and generate optimal returns over long term.

Key benefits to an investor

• Investments up to Rs. 1.50 lakhs eligible for deduction from taxable income under Section 80C of Income Tax Act, 1961.
• 3 years lock-in period in ELSS is lowest as compared to traditional tax saving instruments
• Lock-in period provides fund manager the flexibility to make strategic, long-term investments in diversified portfolio of quality stocks.

^ Lock-in Period: PPF - 15 years (withdrawal allowed from 7th financial year onwards), Bank FD – 5 years, NSC – 5 years

Specialty funds invest primarily in a certain sector, industry, region, or security type. These investments do not offer the diversification that many other funds do. As a result, they are often seen as a riskier investment. The specialty fund is often used to describe a variety of funds, including sector funds, index funds and international funds.

Thematic funds invest in line with an investment theme. For example, an infrastructure thematic fund might invest in shares of companies that are into infrastructure construction, infrastructure toll-collection, cement, steel, telecom, power etc. The investment is thus more broad-based than a sector fund; but narrower than a diversified equity fund and still has the risk of concentration.