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  • Types of Mutual Funds

  • Types of Mutual Funds
    Types of Mutual Funds

    Mutual funds have been gaining a lot of popularity in the recent past as an effective investment channel. Choosing the right type of fund for your investment needs will depend on your investment goal.

    The most popular types of mutual funds in India are listed below:

    • Equity funds
    • Debt funds
    • Money market funds
    • Index funds
    • Balanced funds
    • Income funds
    • Fund of funds
    • Specialty funds

    There are several other types of funds offered by the asset management companies in the country. We have segregated the same based on structure, asset class, investment objective, specialty, and risk, in the sections below.

    Types of Mutual Funds based on structure

    • Open-Ended Funds: These are funds in which units are open for purchase or redemption through the year. All purchases/redemption of these fund units are done at prevailing NAVs. Basically these funds will allow investors to keep invest as long as they want. There are no limits on how much can be invested in the fund. They also tend to be actively managed which means that there is a fund manager who picks the places where investments will be made. These funds also charge a fee which can be higher than passively managed funds because of the active management. THey are an ideal investment for those who want investment along with liquidity because they are not bound to any specific maturity periods. Which means that investors can withdraw their funds at any time they want thus giving them the liquidity they need.
    • Close-Ended Funds: These are funds in which units can be purchased only during the initial offer period. Units can be redeemed at a specified maturity date. To provide for liquidity, these schemes are often listed for trade on a stock exchange. Unlike open ended mutual funds, once the units or stocks are bought, they cannot be sold back to the mutual fund, instead they need to be sold through the stock market at the prevailing price of the shares.
    • Interval Funds: These are funds that have the features of open-ended and close-ended funds in that they are opened for repurchase of shares at different intervals during the fund tenure. The fund management company offers to repurchase units from existing unitholders during these intervals. If unitholders wish to they can offload shares in favour of the fund.

    Types of Mutual Funds based on asset class

    • Equity Funds: These are funds that invest in equity stocks/shares of companies. These are considered high-risk funds but also tend to provide high returns. Equity funds can include specialty funds like infrastructure, fast moving consumer goods and banking to name a few. THey are linked to the markets and tend to
    • Debt Funds: These are funds that invest in debt instruments e.g. company debentures, government bonds and other fixed income assets. They are considered safe investments and provide fixed returns. These funds do not deduct tax at source so if the earning from the investment is more than Rs. 10,000 then the investor is liable to pay the tax on it himself.
    • Money Market Funds: These are funds that invest in liquid instruments e.g. T-Bills, CPs etc. They are considered safe investments for those looking to park surplus funds for immediate but moderate returns. Money markets are also referred to as cash markets and come with risks in terms of interest risk, reinvestment risk and credit risks.
    • Balanced or Hybrid Funds: These are funds that invest in a mix of asset classes. In some cases, the proportion of equity is higher than debt while in others it is the other way round. Risk and returns are balanced out this way. An example of a hybrid fund would be Franklin India Balanced Fund-DP (G) because in this fund, 65% to 80% of the investment is made in equities and the remaining 20% to 35% is invested in the debt market. This is so because the debt markets offer a lower risk than the equity market.

    Types of Mutual Funds based on investment objective

    • Growth funds: Under these schemes, money is invested primarily in equity stocks with the purpose of providing capital appreciation. They are considered to be risky funds ideal for investors with a long-term investment timeline. Since they are risky funds they are also ideal for those who are looking for higher returns on their investments.
    • Income funds: Under these schemes, money is invested primarily in fixed-income instruments e.g. bonds, debentures etc. with the purpose of providing capital protection and regular income to investors.
    • Liquid funds: Under these schemes, money is invested primarily in short-term or very short-term instruments e.g. T-Bills, CPs etc. with the purpose of providing liquidity. They are considered to be low on risk with moderate returns and are ideal for investors with short-term investment timelines.
    • Tax-Saving Funds (ELSS): These are funds that invest primarily in equity shares. Investments made in these funds qualify for deductions under the Income Tax Act. They are considered high on risk but also offer high returns if the fund performs well.
    • Capital Protection Funds: These are funds where funds are are split between investment in fixed income instruments and equity markets. This is done to ensure protection of the principal that has been invested.
    • Fixed Maturity Funds: Fixed maturity funds are those in which the assets are invested in debt and money market instruments where the maturity date is either the same as that of the fund or earlier than it.
    • Pension Funds: Pension funds are mutual funds that are invested in with a really long term goal in mind. They are primarily meant to provide regular returns around the time that the investor is ready to retire. The investments in such a fund may be split between equities and debt markets where equities act as the risky part of the investment providing higher return and debt markets balance the risk and provide lower but steady returns. The returns from these funds can be taken in lump sums, as a pension or a combination of the two.

    Types of Mutual Funds based on specialty

    • Sector Funds: These are funds that invest in a particular sector of the market e.g. Infrastructure funds invest only in those instruments or companies that relate to the infrastructure sector. Returns are tied to the performance of the chosen sector. The risk involved in these schemes depends on the nature of the sector.
    • Index Funds: These are funds that invest in instruments that represent a particular index on an exchange so as to mirror the movement and returns of the index e.g. buying shares representative of the BSE Sensex.
    • Fund of funds: These are funds that invest in other mutual funds and returns depend on the performance of the target fund. These funds can also be referred to as multi manager funds. These investments can be considered relatively safe because the funds that investors invest in actually hold other funds under them thereby adjusting for risk from any one fund.
    • Emerging market funds: These are funds where investments are made in developing countries that show good prospects for the future. They do come with higher risks as a result of the dynamic political and economic situations prevailing in the country.
    • International funds: These are also known as foreign funds and offer investments in companies located in other parts of the world. These companies could also be located in emerging economies. The only companies that won’t be invested in will be those located in the investor’s own country.
    • Global funds: These are funds where the investment made by the fund can be in a company in any part of the world. They are different from international/foreign funds because in global funds, investments can be made even the investor's own country.
    • Real estate funds: These are the funds that invest in companies that operate in the real estate sectors. These funds can invest in realtors, builders, property management companies and even in companies providing loans. The investment in the real estate can be made at any stage, including projects that are in the planning phase, partially completed and are actually completed.
    • Commodity focused stock funds: These funds don’t invest directly in the commodities. They invest in companies that are working in the commodities market, such as mining companies or producers of commodities. These funds can, at times, perform the same way the commodity is as a result of their association with their production.
    • Market neutral funds: The reason that these funds are called market neutral is that they don’t invest in the markets directly. They invest in treasury bills, ETFs and securities and try to target a fixed and steady growth.
    • Inverse/leveraged funds: These are funds that operate unlike traditional mutual funds. The earnings from these funds happen when the markets fall and when markets do well these funds tend to go into loss. These are generally meant only for those who are willing to incur massive losses but at the same time can provide huge returns as well, as a result of the higher risk they carry.
    • Asset allocation funds: The asset allocation fund comes in two variants, the target date fund and the target allocation funds. In these funds, the portfolio managers can adjust the allocated assets to achieve results. These funds split the invested amounts and invest it in various instruments like bonds and equity.
    • Gilt Funds: Gilt funds are mutual funds where the funds are invested in government securities for a long term. Since they are invested in government securities, they are virtually risk free and can be the ideal investment to those who don’t want to take risks.
    • Exchange traded funds: These are funds that are a mix of both open and close ended mutual funds and are traded on the stock markets. These funds are not actively managed, they are managed passively and can offer a lot of liquidity. As a result of their being managed passively, they tend to have lower service charges (entry/exit load) associated with them.

    Types of Mutual Funds based on risk

    • Low risk: These are the mutual funds where the investments made are by those who do not want to take a risk with their money. The investment in such cases are made in places like the debt market and tend to be long term investments. As a result of them being low risk, the returns on these investments is also low. One example of a low risk fund would be gilt funds where investments are made in government securities.
    • Medium risk: These are the investments that come with a medium amount of risk to the investor. They are ideal for those who are willing to take some risk with the investment and tends to offer higher returns. These funds can be used as an investment to build wealth over a longer period of time.
    • High risk: These are those mutual funds that are ideal for those who are willing to take higher risks with their money and are looking to build their wealth. One example of high risk funds would be inverse mutual funds. Even though the risks are high with these funds, they also offer higher returns.

    How to choose the right mutual fund

    With so many different types of mutual funds available in the market, picking one that suits specific investment needs the most is not an easy task. The simplest advice that can be given in that regard is to first understand your own needs. The next step would be to figure out what your goal is? Is it to build wealth quickly, at a moderate pace or at a slow pace. Once that is decided the last main thing to consider is the risk you are willing to take. The highest returns are general observed to come from the funds offering the highest risks. So if you want returns quickly and are willing to take risks than that is the fund to go for. If your objective is to build wealth slowly then going in for a medium or low risk mutual fund is ideal.

    Since mutual funds always come with a factor of risk associated with them, no matter how small, it is imperative that investors read their policy documents carefully before investing. It would also be a good idea to read the document to ensure that they, the investors, have understood exactly what they have invested in and all the facilities that are available to them with that investment.

    Facts About Tax Saving Mutual Funds

    Taxation on mutual funds

    • Some mutual fund types are exempt of taxes
    • No dividend distribution tax is applicable on Equity Funds
    • Mutual funds are not classified as wealth when calculating wealth tax
    • Long term gains are taxed at a lower rate than short term gains

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    News About Mutual Funds

    • Stocks of Eicher Motors, Selan Exploration, Shree Renuka Sugars, Sunteck Realty in the news

      Selan Exploration sold 1,04,250 shares at Rs.244.03 to Dolly Khanna while 9,50,000 shares of Sunteck Realty were bought by the DSP BlackRock Tax Saver Fund at Rs.415.50 per share. Shree Renuka Sugars in its first quarter, recorded a net loss at Rs.179 crore and its net revenue was down by 39.9%. The board of the company recently approved the addition of 2 distilleries. The deal between Tata Steel and Bhushan Power & Steel receives approval from CCI. Adani Green Energy gets a nod from shareholders to raise Rs.5,000 crore. Pidilite plans to invest $5,00,00 in its subsidiary based in the US. Also, Corporation Bank approved the issue of Rs.2,555 crore worth of equity shares to the Government of India on a preferential basis.

      9 August 2018

    • HSBC Mutual Fund seeks approval from SEBI for launching equity hybrid fund

      Asset management firm HSBC Mutual Fund has submitted a draft offer document to the Securities and Exchange Board of India (SEBI) to launch a new scheme. The scheme will be known as HSBC Equity Hybrid Fund and it is an open-ended hybrid scheme that will invest predominantly in equity and its related securities. The scheme will allocate a minor portion of its investments on money market and debt securities including cash and cash equivalents. Around 10% of the investments will be made in units issued by infrastructure investment trusts (InvITs) and real estate investment trusts (REITs).

      The HSBC Equity Hybrid Fund is available in both direct and regular plans. Investors will have an option to choose between growth and dividend. The growth option will entitle investors to receive capital gains at the end of the investment period while the dividend option will let them enjoy regular income. Mr. Sanjay Shah and Mr. Neelotpal Sahai will be the fund managers of the scheme whose benchmark is S&P BSE 200 and CRISIL Composite Bond Fund Index.

      3 August 2018

    • DIIs have put in Rs.66,666 crore in equities in the current year

      Domestic institutional investors (DIIs) have pumped in more than $10 billion, i.e., Rs.66,666 crore in equities in the ongoing calendar year. This has resulted in benchmark indices reaching new highs regularly.

      The DII investment data from BSE since 2008 shows that the current calendar year, i.e., the period between January-July, had the highest quantum of investment by domestic institutional investors. The previous high figures were registered in the initial 7 months of 2008. In 2017, the DII investment reached Rs.26,127.05 crore in the first 7 months as well.

      The current rally is attributed to the strong flows from DIIs, as foreign portfolio investors (FPIs) have been net sellers at Rs.4,583 crore this year.

      31 July 2018

    • AUM of Kotak Standard Multicap Fund increased by 6 times in last 3 years

      After mutual funds recategorised their schemes to comply with the guidelines of the Securities and Exchange Board of India (SEBI), Kotak Mahindra Mutual Fund renamed its Kotak Select Focus Fund to Kotak Standard Multicap Fund. Since its inception in September 2009, the scheme has been ranked at the second position for the past 2 quarters in the multi-cap category by CRISIL Mutual Fund Ranking (CMFR). The scheme has an objective of generating capital growth for the investor over a long term through investment in equity and its related securities.

      The Kotak Standard Multicap Fund is managed by Mr. Harsha Upadhyaya since August 2012 and the Assets Under Management (AUM) has gone up by 6 times over the last 3 years to reach Rs.19,817 crore in the period ended June. Over the last 1,3,5, and 7 year period, the fund has been outperforming its benchmark index (Nifty 200 TRI) and the highest contribution to the scheme’s performance has been made by HDFC Bank.

      30 July 2018

    • Performance of Axis Long Term Equity Fund consistent from the start

      The Axis Long Term Equity Fund offered by Axis Mutual Fund has been consistently performing since its launch in December 2009 with a 7-year return of 19.22%. The scheme has been beating the performance of its benchmark index by 12.07% and the category average of 13.66%. Even annually, the fund has outperformed across durations but did see a decrease in the return profile over the last 2 years. The Axis Long Term Equity Fund is an equity-linked savings scheme (ELSS) and has an Average Assets Under Management (AUMM) of Rs.17,299.43 crore. It is one of the top performing mutual funds and offers both growth and dividend investment option. The fund is managed by Mr. Jinesh Gopani and invests a major chunk in equities of firms with large market capitalisation. Automobile, chemicals, financials, technology, and services are the top 5 segments in the portfolio.

      23 July 2018

    • Mutual funds may soon be allowed to invest in commodity derivatives

      The Securities and Exchange Board of India (SEBI) in its recent statement said that it will soon be coming out with the final guidelines on permitting mutual funds to make investments in the commodity derivatives segment. SEBI also revealed that it will also be framing the norms for warehousing for non-agriculture commodities and will also examine if ‘indices’ should be allowed in the stock exchange. According to the head of the Commodity Derivatives Market Regulation Department (CDMRD) of SEBI, the commodity derivatives market still faces a lot of challenges in spite of the rising trading volumes at Rs.100 lakh crore. Hence, the SEBI is contemplating on allowing mutual funds to participate in the commodities market and will also consider the ‘indices’ once more products are allowed in the market.

      The MCX has already included the ‘option’ trading in the commodity derivatives market and will soon be launching it in 5 commodities. After gauging the success rate, SEBI will consider allowing more commodities. The equity and commodity derivatives will be integrated into the stock exchanges by 1 October 2018 in order to enhance hedging, participation, and improved price realisation.

      20 July 2018

    • AMFI declares a list of stocks ranked on the basis of market capitalisation

      Following the diktat issued by the Securities and Exchange Board of India (SEBI) to consolidate mutual fund schemes in specific categories, the Association of Mutual Funds in India (AMFI) has released a list of stocks ranked by market capitalisation. This categorisation will offer convenience to mutual funds and AMFI has grouped the top 100 firms by complete market capitalisation as large cap stocks. Firms that rank between 101 to 250 has been categorised under mid cap stocks while the rest will come under small cap stocks. In total, the AMFI has ranked around 5,077 stocks.

      The AMFI was asked by SEBI last year to order the stocks on the basis of market capitalisation so as to make it easy for mutual fund houses to invest in stocks that fit under a particular category. This would mean that a large cap scheme can invest only in large cap stocks, mid cap schemes in mid cap stocks, and so on. The definition of large, mid, and small cap by SEBI will ensure uniformity across the mutual fund universe.

      11 July 2018

    • Mutual Funds to Hit Rural Markets Thanks to Reliance and Payworld

      Reliance Mutual Fund has collaborated with Payworld – a company that offers financial services for rural and semi-urban consumers, so that those who live in rural areas and fall under the low-income category can also get access to mutual funds. The collaboration is expected to empower people in rural areas as it will allow them to make investments in a product that has long been available only to high- and middle-income groups. Under the venture, investments will be facilitated By Payworld while Reliance Mutual Fund will be in charge of the management of investments brought in by Payworld.

      26 June 2018

    • Indian stock market sees an increase in foreign outflows

      The Sensex and Nifty recently saw a sharp outflow of foreign outflows recording a net outflow of Rs.30,351 crore in 2018. This outflow was from foreign portfolio investors (FPIs) and when compared to the outflow in 2008, which was Rs.17,025 crore, the numbers have significantly increased. According to a data released by the Bombay Stock Exchange (BSE), due to strong inflows of domestic funds, the Sensex is down by 3% to 35,463 points.

      The huge foreign outflows in the Indian market (both in equity and debt markets) indicate that it is maturing and as it develops, market volatility which in turn will reduce the market risks. Some of the credit in this increase also goes to demonetisation effect.

      8 June 2018

    • SEBI directs mutual funds to reveal total expenses to investors on a day-to-day basis

      The Securities and Exchange Board of India (SEBI) has issued a directive to mutual fund houses to declare the total expenses charged by them to the investors on a day-to-day basis. These expenses should be put up on their official websites as well as on the AMFI website, under a separate heading. The fund houses should follow the prescribed format bearing the scheme name, base and total expense ratio (TER), Good the Services Tax (GST), and additional expenses for both regular and direct plans.

      Investors should also be notified of any alterations in the base TER, GST, and advisory fees through SMS or via an email. SEBI has also directed mutual fund houses to disclose the Net Asset Value (NAV) of all the schemes. These steps are being taken by the market regulator to bring about cost effectiveness for investors and will also act as a green initiative measure.

      7 June 2018

    GST rate of 18% applicable for all financial services effective July 1, 2017.

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