CLASSIFICATION OF MUTUAL FUNDS

There are three different types of classification of mutual funds. (1) Functional (2) Portfolio and (3) Ownership. Each classification is mutually exclusive.

Functional Classification

Funds are divided into:

(1) Open ended funds

(2) Close ended funds

In an open ended scheme, the investor can make entry and exit at any time. Also, the capital of the fund is unlimited and the redemption period is indefinite. On the contrary, in a close ended scheme, the investor can buy into the scheme during Initial Public offering or from the stock market after the units have been listed. The scheme has a limited life at the end of which the corpus is liquidated. The investor can make his exit from the scheme by selling in the stock market, or at the expiry of the scheme or during repurchase period at his option. Interval schemes are a cross between an open ended and a close ended structure. These schemes are open for both purchase and redemption during pre-specified intervals (viz. monthly, quarterly, annually etc.)

at prevailing NAV based prices. Interval funds are very similar to close-ended funds, but differ on the following points: 

• They are not required to be listed on the stock exchanges, as they have an in-built redemption window. 
•  They can make fresh issue of units during the specified interval period, at the prevailing NAV based prices. 
•  Maturity period is not defined. 
• Portfolio Classification 

Funds are classified into Equity Funds, Debt Funds and Special Funds. 

Equity funds invest primarily in stocks. A share of stock represents a unit of ownership in a company. If a company is successful, shareholders can profit in two ways: 

•  the stock may increase in value, or 

• vthe company can pass its profits to shareholders in the form of dividends. 

If a company fails, a shareholder can lose the entire value of his or her shares; however, a shareholder is not liable for the debts of the company. 

Equity Funds are of the following types viz. 

(a) Growth Funds: They seek to provide long term capital appreciation to the investor and are best to long term investors. 

(b) Aggressive Funds: They look for super normal returns for which investment is made in start- ups, IPOs and speculative shares. They are best to investors willing to take risks. 

(c) Income Funds: They seek to maximize present income of investors by investing in safe stocks paying high cash dividends and in high yield money market instruments. They are best to investors seeking current income. 

(d) Balanced Funds: They are a mix of growth and income funds. They buy shares for growth and bonds for income and best for investors seeking to strike golden mean. 

Debt Funds are of two types viz. 

(a) Bond Funds: They invest in fixed income securities e.g. government bonds, corporate debentures, convertible debentures, money market. Investors seeking tax free income go in for government bonds while those looking for safe, steady income buy government bonds or high grade corporate bonds. Although there have been past exceptions, bond funds tend to be less volatile than stock funds and often produce regular income. For these reasons, investors often use bond funds to diversify, provide a stream of income, or invest for intermediate-term goals. Like stock funds, bond funds have risks and can make or lose

money.

(a) Gilt Funds: They are mainly invested in Government securities.

Special Funds are of four types viz.

(a) Index Funds: Every stock market has a stock index which measures the upward and downward sentiment of the stock market. Index Funds are low cost funds and influence the stock market. The investor will receive whatever the market delivers.

(b) International Funds: A mutual fund located in India to raise money in India for investing globally.

(c) Offshore Funds: A mutual fund located in India to raise money globally for investing in India.

(d) Sector Funds: They invest their entire fund in a particular industry e.g. utility fund for utility industry like power, gas, public works.

(e) Money Market Funds: These are predominantly debt-oriented schemes, whose main objective is preservation of capital, easy liquidity and moderate income. To achieve this objective, liquid funds invest predominantly in safer short-term instruments like Commercial Papers, Certificate of Deposits, Treasury Bills, G-Secs etc.

These schemes are used mainly by institutions and individuals to park their surplus funds for short periods of time. These funds are more or less insulated from changes in the interest rate in the economy and capture the current yields prevailing in the market.

(f) Fund of Funds: Fund of Funds (FoF) as the name suggests are schemes which invest in other mutual fund schemes. The concept is popular in markets where there are number of mutual fund offerings and choosing a suitable scheme according to one’s objective is tough. Just as a mutual fund scheme invests in a portfolio of securities such as equity, debt etc, the underlying investments for a FoF is the units of other mutual fund schemes, either from the same fund family or from other fund houses.

Capital Protection Oriented Fund: The term ‘capital protection oriented scheme’ means a mutual fund scheme which is designated as such and which endeavours to protect the capital invested therein through suitable orientation of its portfolio structure. The orientation towards protection of capital originates from the portfolio structure of the scheme and not from any bank guarantee, insurance cover etc. SEBI stipulations require these types of schemes to be close-ended in nature, listed on the stock exchange and the intended portfolio structure would have to be mandatory rated by a credit rating agency. A typical portfolio structure could be to set aside major portion of the assets for capital safety and could be invested in highly rated debt instruments. The remaining portion would be invested in equity or equity related instruments to provide capital appreciation. Capital Protection Oriented schemes are a recent entrant in the Indian capital markets and should not be confused with ‘capital guaranteed’

schemes. 

(a) Gold Funds: The objective of these funds is to track the performance of Gold. The units represent the value of gold or gold related instruments held in the scheme. Gold Funds which are generally in the form of an Exchange Traded Fund (ETF) are listed on the stock exchange and offers investors an opportunity to participate in the bullion market without having to take physical delivery of gold.

Ownership Classification

Funds are classified into Public Sector Mutual Funds, Private Sector Mutual Funds and Foreign Mutual Funds. Public Sector Mutual Funds are sponsored by a company of the public sector. Private Sector Mutual Fund are sponsored by a company of the private sector. Foreign Mutual Funds are sponsored by companies for raising funds in India, operate from India and invest in India.