Schemes according to Maturity Period :
A mutual fund scheme can be classified into open-ended scheme or close-ended
scheme depending on its period.
An open-ended fund or scheme is one that is available for subscription and
repurchase on a continuous basis. These schemes do not have a fixed maturity
period. Investors can conveniently buy and sell units at Net Asset Value (NAV)
related prices, which are declared on a daily basis. The key feature of
open-ended schemes is liquidity.
A close-ended fund or scheme has a stipulated maturity period e.g. 5-7 years.
The fund is open for subscription only during a specified period at the time of
launch of the scheme. Investors can invest in the scheme at the time of the
initial public issue and thereafter they can buy or sell the units of the scheme
on the stock exchanges where the units are listed. In order to provide an exit
route to the investors, some close-ended funds give an option of buying back the
units to the mutual fund at NAV related price. Regulations stipulate that at
least one of the two exit routes is provided to the investor i.e. either
repurchase facility or through listing on stock exchanges. These mutual funds
schemes disclose NAV generally on weekly basis.
Schemes according to Investment Objective :
A scheme can also be classified as growth scheme, income scheme or balanced
scheme considering its investment objective. Such schemes may be open-ended or
close-ended schemes as described earlier. Such schemes may be classified mainly
The aim of growth funds is to provide capital appreciation over the medium to
long term. Such schemes normally invest a major part of their corpus in
equities. Such funds have comparatively high risks. These schemes provide
different options to the investors like dividend option, capital appreciation,
etc. and the investors may choose an option depending on their preferences. The
investors must indicate the option in the application form. The mutual funds
also allow the investors to change the options at a later date. Growth schemes
are good for investors having a long-term outlook seeking appreciation over a
period of time.
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. These funds are not affected
because of fluctuations in equity markets. However, opportunities of capital
appreciation are also limited in such funds. The NAVs of such funds are affected
because of change in interest rates in the Country. If interest rates fall, NAVs
of such funds are likely to increase in the short run and vice versa. However,
long term investors may not bother about these fluctuations.
The aim of balanced funds is to provide both growth and regular income as such
schemes invest both in equities and fixed income securities in the proportion
indicated in their offer documents. These are appropriate for investors looking
for moderate growth. They generally invest 40-60% in equity and debt
instruments. These funds are also affected because of fluctuations in share
prices in the stock markets. However NAVs of such funds are likely to be less
volatile compared to pure equity funds.
These funds are also income funds and their aim is to provide easy liquidity,
preservation of capital and moderate income. These schemes invest exclusively in
safer short-term instruments such as treasury bills, certificates of deposit,
commercial paper and inter-bank call money, government securities, etc. Returns
on these schemes fluctuate much less compared to other funds. These funds are
appropriate for corporate and individual investors, as a means to park their
surplus funds for short periods.
These funds invest exclusively in government securities. Government securities
have no default risk. NAVs of these schemes also fluctuate due to change in
interest rates and other economic factors as is the case with income or debt
Index Funds replicate the portfolio of a particular index such as the BSE
Sensitive index, S&P NSE 50 index (Nifty), etc. These schemes invest in the
securities in the same weightage comprising of an index. NAVs of such schemes
would rise or fall in accordance with the rise or fall in the index, though not
exactly by the same percentage due to some factors known as "tracking error" in
technical terms. Necessary disclosures in this regard are made in the offer
document of the mutual fund scheme.
There are also exchange traded index funds launched by the mutual funds which
are traded on the stock exchanges.