Classification of Mutual Funds
Mutual funds can be classified with a range of investment objectives. It can be classified based on Tenor, Asset class & Position Philosophy.
Open-End Mutual Fund (Tenor based)
An Open-ended Mutual funds are those funds in which the company can issue always more outstanding shares. It can help to add on the net assets of the company. These types of funds do not have a fixed maturity period. Investors can buy and sell units of these funds at Net Asset Value (NAV) related prices which are published on a daily basis. Open-end schemes are more liquid in nature.
Close-End Mutual Fund ( Tenor based)
Close Ended mutual fund or generally termed as traded mutual fund is the one that can be brought and sold like a normal share. In it, the number of shares always stays fixed. These funds also have commission which brokers get since the shares of these funds are traded over the counter, like the shares are traded. Close-ended funds has a stipulated maturity period like 5-7 years. It is open for subscription only during the time of launch. Investors can invest in the close ended mutual funds at the time of the initial public issue and thereafter can be brought or sold units of the scheme on the exchanges where the units are listed. Close-ended funds give an option for the investor of selling back the units to the mutual fund through periodic repurchase at NAV related prices. But the commissions will incur for this selling and buying.
Aggressive Growth Funds (Asset class based)
These are stock funds that primarily have one objective of maximum capital gains. Capital gains are the increase in the value of investment. This type of mutual fund invest in many different kind of shares which includes risk industry stocks, small company stocks and uses certain investment techniques like short selling of stocks, futures & options. These type of mutual funds are most volatile also.
Growth Funds (Asset class based)
These type funds are those which invest in the stocks of well-established, blue chip companies. Dividends and steady income are not only goal of these types of funds. But, they are focussed on increasing in capital gains.
Growth and Income funds (Asset class based)
These type of mutual funds are focussed on increased capital gains and steady income. Less volatile than Aggressive Growth funds.
Equity Funds (Asset class based)
These funds allow an investor to own a portion of the company that they have invested in, its like having shares of a certain company. Stocks that have proven historically to bethe best investment. Also which have already outperformed all other types of investments in long term, but the risk is high. These funds produce a greater level of current income by investing in equity securities of companies with solid reputation and have a good record of paying dividends.
Balanced Funds (Asset class based)
Balanced mutual funds have a portfolio mix of bonds, preferred stocks and common stocks. Balanced mutual funds aim to conserve investors’ initial investment, to pay an income and to aid in the long-term growth of both the principle and the income.
Fixed-Income Funds (Asset class based)
Fixed-income mutual funds are safer than equity funds, but as always, do not yield as high returns as the latter do. These types of mutual funds are geared towards the investor who is approaching old age and doesn’t have many earning years left. Many investors hope to draw a steady income from these types of mutual funds. Bond funds fall into the category of fixed-income funds.
Money-Market Funds (Asset class based)
These are generally the safest and most secure of mutual fund investments. They invest in the largest, most stable securities, including Treasury bills. The chances of your capital being eroded are very minimal. Money-market funds are risk-free. If you invest a thousand rupees, you will get that money back. It is simply a matter of when you get it back. When investing in a money-market fund, you should pay attention to the interest rate that is being offered, along with the rules regarding check-writing. Money-markets have allowed investors to reap high yields on their deposits, and have made the entire investment process more accessible to people.
The interest rates on money-market funds are changing nearly day to day. In times of inflation, these funds have had high yields.
Index Funds (Position philosophy based)
They invest in the portfolio of a index such as BSE Sensitive index (SENSEX) , S&P NSE 50 index (Nifty), etc. The investment is done in the securities in the same weightage comprising of an index. You can see that the NAVs of such schemes would rise or fall in accordance with the rise or fall in the index. It may not be exactly by the same percentage due to “tracking errors”.