Objectives & Types of Mutual Funds with Different Types of Mutual Fund Schemes

What is mutual fund?

A mutual fund is a type of investment vehicle that pools money from many investors and invests it in a diversified portfolio of stocks, bonds, or other securities. The fund is managed by professional portfolio managers, who make investment decisions on behalf of the investors. The goal of a mutual fund is to provide investors with a diversified and professionally managed investment option.

Features of Investing in Mutual Funds

1. Liquidity:
   • Easily redeem units in case of financial emergencies.
   • Redemption amount credited within 3-4 business days.
   • Exit load may be charged for early redemption.
2. Professional Management:
   • Managed by professional fund managers.
   • Fund managers make investment decisions based on the fund's objective.
   • Investors are relieved from individual stock picking.
3. Portfolio Diversification:
   • Offers a diversified portfolio with exposure to various financial instruments.
   • Risk is spread across different asset classes.
   • Helps balance the investment portfolio in different market conditions.
4. Income Tax Benefits:
   • Both equity and debt funds offer unique tax benefits.
   • Debt funds benefit from indexation on long-term capital gains.
   • Equity funds offer an exemption on returns up to Rs 100,000 in a financial year.
   • ELSS funds allow a deduction up to Rs 1,50,000 from taxable income.
5. Investment Flexibility:
   • Allows both lump-sum and systematic investment plan (SIP) options.
   • SIPs enable regular investment with amounts as low as Rs 500 per month.
6. Low Cost:
   • Charges a small expense ratio to cover operating expenses.
   • Expense ratio includes management, administration, and other charges.
7. Properly Regulated:
   • Regulated by the Securities and Exchange Board of India (SEBI).
   • Strict compliance with SEBI (Mutual Funds) Regulations, 1996 ensures transparency and investor protection.
8. Ease of Purchasing:
   • Offers easy online buying and selling options.
   • No need to visit mutual fund offices; transactions can be done on the official website of the asset management company.
   • Fast, convenient, and user-friendly process for investors.

MUTUAL FUND SCHEME CLASSIFICATION / TYPES OF MUTUAL FUND SCHEME

Mutual funds are classified into different schemes based on their investment objectives, asset allocation, and underlying securities. The classification helps investors choose funds that align with their financial goals and risk tolerance. Here are some common mutual fund scheme classifications

• Bases On Underlying Portfolio – Equity, Debt, Hybrid, Money market instruments, Multi-Asset
• Bases On Solution oriented – Tax saving, Retirement benefit, Child welfare, Arbitrage
• Bases On Investment Objective – Growth, Income, Liquidity
• Bases On Organisation Structure – Open ended, Close ended, Interval
• Bases On Management of Portfolio – Actively or Passively
• Bases On Risk appetite- High Risk, Moderate Risk, Very-low-risk and low-risk funds
• Bases On Taxation – Tax Saving Mutual Fund, Non Tax Saving Mutual Fund
• Bases On Market Capitalization – Largecap, Midcap, Small Cap, etc.
• Exchange Traded Funds
• Overseas funds
• Fund of funds

UNDERSTAND THE DIFFERENT TYPE OF MUTUAL FUND

1. 1. 1. 1. 1. SCHEME CLASSIFICATION BY ORGANIZATION STRUCTURE
               • Open-ended schemes are perpetual, and open for subscription and repurchase on a continuous basis on all business days at the current NAV.
               • Close-ended schemes have a fixed maturity date. The units are issued at the time of the initial offer and redeemed only on maturity. The units of close-ended schemes are mandatorily listed to provide an exit route before maturity and can be sold/traded on the stock exchanges.
               • Interval schemes allow purchase and redemption during specified transaction periods (intervals). The transaction period has to be for a minimum of 2 days and there should be at least a 15-day gap between two transaction periods. The units of interval schemes are also mandatorily listed on the stock exchanges.
            2. SCHEME CLASSIFICATION BY PORTFOLIO MANAGEMENT
               

               Active Funds

               In an Active Fund, the Fund Manager is ‘Active’ in deciding whether to Buy, Hold, or Sell the underlying securities and in stock selection. Active funds adopt different strategies and styles to create and manage the portfolio.

               The investment strategy and style are described upfront in the Scheme Information document (offer document) Active funds expect to generate better returns (alpha) than the benchmark index.

               The risk and return in the fund will depend upon the strategy adopted. Active funds implement strategies to ‘select’ the stocks for the portfolio.

               Passive Funds

               Passive mutual funds are funds which replicate a market index like the Nifty or Sensex. These funds invest in the constituents of the selected market index in the same proportion as they are present in the index.

               Fund managers of passive funds do not conduct any research to pick up stocks that can be a part of their portfolios. They imitate the index composition. For example, a passively managed fund tracking Sensex will invest in the stocks of 30 companies that make up the index in the same proportion.

            3. - CLASSIFICATION BY INVESTMENT OBJECTIVES
               • Income Funds:
                 1. Objective: Provide regular income and long-term capital growth.
                 2. Investment: Primarily in fixed income instruments like bonds and debentures.
                 3. Risk/Reward: Moderate risk, suitable for investors seeking income along with some capital growth.
               • Growth Funds:
                 1. Objective: Achieve capital growth or appreciation.
                 2. Investment: In schemes with a high potential for principal amount growth.
                 3. Risk/Reward: Higher risk due to the focus on capital appreciation, but potential for good returns.
               • Liquid Funds:
                 1. Objective: Provide liquidity to investors.
                 2. Investment: In short-term instruments like treasury bills or government bonds.
                 3. Risk/Reward: Lower risk compared to growth funds, with moderate returns; suitable for short-term needs.
                 4. Global/International Funds:
                 5. Objective: Invest in assets located outside the home country.
                 6. Risk/Reward: Offers portfolio diversification but is subject to political and economic risks in foreign markets.
            4. Index Funds
               Index funds are a type of mutual fund that invests in a market index like Nifty or the Sensex. These funds purchase all the stocks in the same proportion as in a particular index. It seeks to replicate the performance of an index. This means the scheme will perform in tandem with the index it is tracking, save for a small difference known as tracking error.
            5. Mutual funds also offer investment plans, such as Growth and Dividend options, to help tailor the investment to the investors’ needs.
               1. GROWTH FUNDS
                  Growth Funds are schemes that are designed to provide capital appreciation. Primarily invest in growth oriented assets, such as equity investment in growth-oriented funds requires a medium to long-term investment horizon.
               2. INCOME FUNDS
                  The objective of Income Funds is to provide regular and steady income to investors. Income funds invest in fixed income securities such as Corporate Bonds, Debentures and Government securities.The fund’s return is from the interest income earned on these investments as well as capital gains from any change in the value of the securities. The fund will distribute the income provided the portfolio generates the required returns. There is no guarantee of income. The returns will depend upon the tenor and credit quality of the securities held.
               3. LIQUID / OVERNIGHT /MONEY MARKET MUTUAL FUNDS
                  Liquid Schemes, Overnight Funds and Money market mutual funds are investment options for investors seeking liquidity and principal protection, with commensurate returns.
            6. F- Sector Mutual Funds
               Many investors seek different ways to diversify their investment portfolio. One way of diversifying is investing in different asset classes like equity, debt, real estate, gold, etc. Another popular way of diversifying investments is by investing in different sectors of the economy. There are various mutual funds which allow people to invest in a specific sector(s) of the economy as Infrastructure, Banking, Real Estate, energy, Healthcare, FMCG, Capital goods, Information Technology etc.

Analyzing Mutual Fund Performance

Analyzing mutual fund performance is crucial for investors to make informed decisions. Key parameters include:

• Performance vs Benchmark:
  1. Compare fund returns to a benchmark over various time frames.
  2. Assess consistent outperformance or underperformance.
• Expense Ratio:
  1. Consider annual fees and expenses.
  2. Compare with similar funds in the category.
  3. Account for fund size, investment strategy, and historical performance.
• Fund History:
  1. Evaluate performance during different market conditions.
  2. Check for managerial changes and assess their tenure.
  3. Ensure alignment of fund objectives and historical performance.
• Portfolio Strength:
  1. Assess asset allocation, sector exposure, and quality of holdings.
  2. Verify diversification and alignment with investment goals.
• Portfolio Turnover Ratio (PTR):
  1. Evaluate the frequency of buying and selling securities.
  2. Compare with peers and consider the impact on costs and taxes.
     • Maturity Period:
       1. Consider the average time to maturity of bond holdings.
       2. Assess sensitivity to interest rate changes.
       3. Align with investment horizon, risk tolerance, and economic outlook.
     • Risk-Adjusted Returns:
       1. Consider standard deviation for volatility.
       2. Evaluate beta for market sensitivity.
       3. Assess Sharpe ratio for risk-adjusted performance.

Money Market Instruments

Money Market Instruments includes commercial papers, commercial bills, treasury bills, Government securities having an unexpired maturity up to one year, call or notice money, certificate of deposit, usance bills, and any other like instruments as specified by the Reserve Bank of India from time to time.
Mutual funds offer several advantages, including professional management, diversification, liquidity, and accessibility for individual investors. There are various types of mutual funds, each with its own investment objectives, risk profiles, and fee structures. Investors can choose mutual funds based on their financial goals, risk tolerance, and investment preferences.

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