DIFFERENT KINDS OF MUTUAL FUND

WHAT ARE DIFFERENT TYPES OF MUTUAL FUNDS YOU SHOULD KNOW ABOUT?

There are different types of mutual funds in India depending on their structure, nature of investment, tax benefits, category of the scheme and investor goals etc. Based on these factors there can be two types of mutual fund schemes:-

  • Open ended Funds: These funds can be bought and sold any time after the launch of the new fund offer (NFO). Some open ended funds e.g. Equity Linked Savings Schemes (ELSS) which comes with a lock-in period of 3 years, after which units of these schemes can be redeemed at any point in time, subject to the applicable exit load if any
  • Close ended Funds: Close ended funds can be bought only during the new fund offer (NFO). Once the NFO period is over, investors cannot invest in these funds. Close ended Funds come with fixed investment period or maturity periods during which the investors cannot redeem units. Post maturity the closing unit value is automatically redeemed and transferred to unit holder’s bank account. Based on the underlying investments in open and closed ended funds, types of mutual funds are broadly classified in 5 different groups – a) Equity Schemes b) Debt Schemes c) Hybrid Schemes d) Solution Oriented Schemes e) Other Schemes
  • Equity mutual Funds: Equity mutual funds align underlying investments in equity and equity related securities. Equity funds can further be categorized into large cap funds, mid cap fund, small cap funds, multi-cap funds, focused funds etc. In order to ensure uniformity in respect of the investment universe for equity schemes, the following are defined as large, mid and small cap stocks in which the equity mutual fund schemes can invest depending upon the scheme mandate or category/ type – Large cap – 1st – 100th company in terms of full market capitalization, Mid cap - 101st – 250th company in terms of full market capitalization and Small Cap 251st company onward in terms of full market capitalization. Large cap funds align most of their investments in large cap companies while midcap and small cap funds align their investments respectively in mid cap companies and small cap companies. Multi-cap funds and ELSS Funds, which are popular equity fund categories, can invest across large cap, midcap and small cap stocks. Some equity mutual funds align their investments in particular sectors e.g. banking, FMCG, pharma, technology, infrastructure, automobile or entertainment and so on. Such types of mutual funds are known as sectoral/ thematic funds.
  • Debt Funds: Debt funds have money market and / or debt market securities as their underlying investments. Money market securities include commercial papers, certificates of deposits (CDs), treasury bills etc. Debt market securities include government bonds, PSU bonds, non-convertible debentures etc. Debt funds can be further categorized into sub-categories depending on the nature of the investment and their respective maturity period. For example - Liquid funds invest in money market securities which have a maturity period of upto 60 days. Ultra-short duration funds invest in money market securities which has a maturity range of 90 days to 180 days. Short term debt funds invest in debt and money market securities which has a maximum duration of 1 to 3 years.
  • Hybrid mutual funds: These schemes invest in both, equities as well as debt instruments. The percentage allocation to equity and debt varies depending on whether they are equity oriented hybrid funds also known as Aggressive Hybrid Funds or debt oriented hybrid funds also known as Conservative Hybrid Funds. Equity oriented funds have at least 65% exposure to equities and balance to debt securities; whereas debt oriented hybrid funds have at least 75% exposure to debt instruments.
  • Solution oriented funds: These funds have two categories of schemes – Retirement fund and Children’s Fund. These are open ended schemes with minimum lock-in period of 5 years or till retirement age whichever is earlier (in case of Retirement Funds) and / or till the child attains age of majority whichever is earlier (in case of Children’s Fund)
  • Other schemes: These funds have two categories of schemes – Index funds/ETFs which invest 95% in securities of a particular index and Fund-of-Funds (FoFs) which invest minimum 95% of total assets in underlying funds. There are two types of FoFs – domestic and Overseas.

We have seen what the types of mutual funds, however, are from a tax perspective there are only two types of mutual funds in India – equity funds and non-equity funds. Equity funds should have at least 65% exposure to equity or equity related securities

 

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