In the investment market, one can find different types of investors with different requirements, objectives and risk-taking abilities. For example, a young businessman would prefer to get more capital for his wealth and would be willing to take more risk than a person who is just in his retirement age. Therefore, it is very difficult to offer a fund to meet all the requirements of the investors. Just as a shoe is not suitable for all feet, a fund is not suitable to meet the huge needs of all investors. Therefore, there are several types of funds available to the investor. It is left entirely to the discretion of the investor and to choose one of them based on his / her risk-taking ability. It is also important for an investor to know how to choose a mutual fund while investing.
Mutual fund schemes can be broadly classified into several types as given below.
Depending on the operation: closed-end and open-end
Depending on investment options: Income Fund, Development Fund, Balance, Money Market, Taxation Fund
- Close-ended fund: Under this scheme, the fund of the fund and its duration are prefixed. In other words, the fund’s fund and the number of units are determined in advance. Once the membership reaches a pre-determined level, the entry of investors ceases. After the top of the fixed period, the whole corpus is disinvested and also the proceeds are distributed to the varied unit holders in proportion to their holdings. Thus, the fund ceases to be the fund after the last distribution.
Some of the features of a closed-ended fund are
- The primary objective of this fund is capital appreciation
- The entire fund is available for the entire duration of the scheme and there will be no redemption demand before its maturity. Therefore, the fund manager can manage the investment efficiently and profitably without the need for maintenance and liquidity.
- From the investor’s point of view, it can attract higher tax since the entire capital is appreciated in a single-phase Toto.
- If the market situation is not favorable, it can also affect the investor as he may not get the full benefit of capital appreciation in the value of the investment.
- Open-ended funds: This is the opposite of closed-ended funds. Under the scheme, the size of the fund and/or the duration of the fund are not pre-determined. Investors are free to buy and sell any number of units at any time. For example, the Unit Scheme of Unit Trust of India (1964) is an open-ended one, in terms of both duration and target amount. Anyone can buy this unit at any time and sell it at any time at their discretion.
Some features of open-ended funds:
- There is complete flexibility with one’s investment or disinvestment. In other words, there is free entry and exit of investors in open-ended funds. There is no time limit. The investor can join it and come out of the fund as per his wish.
- The investor is offered immediate liquidity in the sense that the units can be sold in the fund on any working day. The fund operates just like a bank account, with cash over the counter for any number of units sold.
- The main objective of this fund is income generation. Investors get dividends, rights or bonuses as rewards for their investment.
In short, open funds have a permanent existence and their funds sometimes change depending on the entry and exit of the members.
Based on investment options:
- Income Fund: As the name suggests, the purpose of this fund is to create and distribute regular income to members periodically. It focuses more on the distribution of regular income and also observes that the average return is higher than the income from bank deposits. It is best suited for older and retired people who may not have any regular income.
The main purpose of this type of fund is to declare regular dividends, not capital appreciation.
- Growth Funds: Unlike income funds, growth funds are primarily focused on long-run gains. They do not offer regular income and they appreciate capital in the long run. Therefore, they are described as “Nest Eggs” investments. It is best suited for salaried and business people who have the high-risk capacity and ability to defer liquidity. They can store money for future needs.
The fund can declare dividends, but its main purpose is only capital appreciation.
- Balanced Fund: This is otherwise called an “income-cum-development” fund. This is nothing but a combination of both income and development funds. It aims to distribute regular income as well as capital appreciation. This is achieved by balancing the investment between high growth equity shares and fixed income earning securities.
- Money-market funds: These funds are open-ended and as such, they have all the characteristics of open-ended funds. However, they invest in highly liquid and secured securities such as commercial papers, certificates of deposit, treasury bills, etc. These instruments are called money market instruments. They replace shares, debentures, and bonds in the capital market.
- Taxation Fund: A taxation fund is essentially a growth-oriented fund. However, it provides tax exemption to investors in domestic or foreign capital markets. It is suitable for salaried people who want to enjoy tax exemption, especially in February and March.
There are also other Types of Funds which are mentioned below:
Index funds: Index funds refer to those funds where portfolios are designed in such a way that they reflect the structure of some broad-based market indexes. This is done by holding securities in the same way as the index. Whenever the market index goes to the contrary, the value of the funds associated with these indices will automatically increase. Since the creation of a portfolio is based solely on maintaining a reasonable proportion of the index, this includes lower administrative expenses, lower transaction costs, lower number of portfolio managers, etc. This is because only fewer purchases and sales of securities will take place.
Aggressive Growth Funds: These funds are the exact opposite of bond funds. These funds are capital gains oriented and thus the thrust area of these funds is ‘capital gains’. Therefore, these funds are usually invested in speculative stocks. They can also use special investment techniques such as short-term trading. Naturally, these funds are volatile