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Mutual Fund Schemes- Broad Classification

We have gone through the Basics and Advantages of Mutual Funds. Now let us examine what are the different types and categories of Mutual Funds available in the market.

What are the two major types of Mutual Funds?

Mutual Funds can be broadly classified under two types; Closed-End Funds and Open-End Funds.

A Closed-End Fund raises the investible amount from the investors during a specified period through an Initial Public Offering (IPO) and operates for a particular period, normally ranging between 3 to 15 years. The initial subscription to the fund can be made only during a specified period. The initial quantum will be divided into fixed number of units and the number of units will remain unchanged through the life of the fund. Closed end funds are normally listed on stock exchanges to enable the subscribers to sell their units and new investors to purchase units. The value of the units will be changing depending on the underlying securities in which the scheme has invested. Apart from listing in stock exchanges, redemption dates are also specified to enable the investors to redeem their investments, if required.

Contrary to the Closed-End Fund, an Open-End Fund is available through out the year for subscription and units can be purchased at the prevailing Net Asset Value (NAV). These Funds are not listed in stock exchanges. Investors can buy or sell units at any time and the value of such sale or purchase will be linked to the prevailing Net Asset Value (NAV) on the day. The scheme does not have a specific maturity date.

What are the major categories of Mutual Fund Schemes?

Mutual Fund Schemes can be broadly classified into three categories. This categorization is based on the type of securities in which the fund is investing. The type of scheme is an indirect indication of the risk and reward associated with the fund.

• Equity Mutual Fund Schemes
• Debt Mutual Fund Schemes and
• Hybrid Mutual Fund Schemes

Equity Mutual Fund Schemes invest mainly in equities or shares of companies. Equity investments normally carry high risk and high returns. Hence the basic characteristics of Equity Mutual Funds are high risk and high reward. Equity investments go through volatile cycles and hence this type of investment is suitable for medium to long term and also for who are young in age. The return is mainly from capital appreciation.

In a Debt Mutual Fund Scheme, major portion of investment is made in government securities, debentures and other debt instruments. Capital appreciation in this scheme is low, but it ensures a steady stream of income. It is meant for investors looking for low risk and steady income. The investment in this scheme can be for short periods too as the volatility is only nominal.

Hybrid Mutual Fund Schemes combine the advantages of both schemes by investing a portion of the fund in the Equity Mutual Fund Schemes and the remaining portion in the Debt Mutual Fund scheme. It balances the risk and return. The minimum and maximum proportion of investments in each scheme is pre-determined and announced through the offer document. These are ideal for cautious investors who aim better return than in Debt Mutual Fund Scheme but are not ready to face the full risk associated with stock markets.

There are sub-classification based on the objectives of the fund. More about the same in the next article.

Please go through the tutorial video (Courtesy: Birla Sunlife Mutual Fund) to have a better understanding of the concepts.

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Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

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