Mutual funds are an investment instrument that pools money from investors and parks it in multiple assets, such as equity stocks, bonds, and even money market securities. Mutual funds are managed by professional fund managers who make investment decisions on behalf of investors. The returns on mutual fund investments are distributed to an investor according to their investment proportion. However, the level of the same may vary among the type of mutual fund scheme and their degree of market exposure.
That said, let’s check the classification of mutual funds and their types in detail.
Classification of Mutual Fund Scheme
Mutual funds are essentially a diverse range of investment instruments with varying investment objectives and risk profiles. Typically, mutual funds can be broadly categorized on the basis of –
| Parameter | Examples |
| Organization Structure | Open-ended, Interval, and Close-ended |
| Management of Portfolio | Actively or passively managed |
| Underlying Portfolio | Multi-asset, Equity, Money market instruments, Debt, or Hybrid |
| Investment Objective | Income, Growth, or Liquidity |
| Thematic | Retirement benefit, Tax saving, Arbitrage, Endowment, or Child welfare |
| Overseas funds | – |
| Exchange Traded Funds | – |
Fund of funds | – |
Mutual Fund Classification Based on Organization Structure
Open-ended funds are always available to investors for buying and selling, and they do not necessarily come with a maturity date. Investors can buy or redeem their fund units any day at the prevailing net asset value or NAV.
Closed-ended funds come with a fixed lifespan, and individuals can only purchase their units during the initial public offering (IPO). Post-IPO, investors are allowed to redeem their mutual fund units on the maturity date. However, closed-ended funds are listed on Indian stock exchanges, enabling investors to sell their units to others before maturity.
These schemes allow individuals to buy and sell mutual fund units only during specific periods, called intervals. These intervals have to be at least 2 days long, and there has to be a minimum of 15 days between two intervals. Notably, all interval schemes are listed on Indian stock exchanges.
Mutual Fund Scheme Classification Based on Portfolio Management
Active funds are proactively managed by a fund manager who is responsible for selecting and managing the underlying securities in the mutual fund. They constantly buy, sell, and adjust their investment portfolio in the hope of outperforming the market. Active funds utilize multiple strategies, such as quantitative modeling, fundamental analysis, and technical analysis, to select stocks for portfolios to achieve the investor’s financial goal. They are known to generate better returns than benchmark index. Notably, the risk and reward quotient of the fund typically depends on the adopted strategy.
Passive Funds
Passive funds put money into securities that mirror specific market indexes. This means fund managers do not pick stocks, but track the current performance of certain indexes. These funds are often less expensive than actively managed funds, as they don’t need as much research and active trading.
Mutual Fund Classification Based on Investment Objectives
Mutual funds offer schemes that cater investors’ different investment objectives such as capital appreciation or Growth, capital preservation, liquidity, regular income, and tax-saving. The funds also offer plans such as growth and dividend fund options, to help individuals tailor their investment as per their requirements.
Growth funds
Growth funds are designed to help individuals grow their investments over time, primarily by parking money in growth-oriented assets like company stocks. These funds are suitable for those with a medium- to long-term investment horizon because stock prices are subject to market movements and can turn volatile in the short term. However, historically, company stocks have outperformed the rest of the asset classes in the long term.
Income funds
Income funds are designed to help individuals generate a reliable stream of income. These funds invest money in fixed-income securities, such as debentures, corporate bonds, and government securities, which help earn capital gains and interest income. Income funds distribute earnings to individuals in case the investment portfolio generates substantial returns, but there’s no guarantee of it. Notably, the returns on investment vary depending on the maturity and securities held.
Liquid, overnight, or money market funds
Overnight funds, liquid schemes, and money market mutual funds are popular investment options offering liquidity, capital protection, and commensurate returns. These fund schemes invest in money market instruments with a maturity period of a maximum of 91 days. Money market instruments typically include commercial bills and commercial papers, government securities, treasury bills, certificate of deposit, and usance bills. Money market instruments may also include other instruments specified by RBI. Their returns on investment depend on the current short-term interest rates. These mutual funds are deemed ideal for individuals who want to park their surplus for short tenure.
Mutual Fund Classification Based on Investment Portfolio
Mutual funds can be grouped based on the assets they invest in, such as stocks, gold, bonds, or money market instruments, and how they build their investment portfolios, such as focusing on dynamic bonds, income, infrastructure, value stock, or large, mid, or small-cap stocks, or value stocks. The mix of asset classes in a mutual fund is determined by investment goals.
Since different mutual fund options come with different degree of risks, it is advisable to pick one only after one knows the risk they bring along. To determine it accurately, investors must identify their risk taking capacity and their willingness to expose their investment portfolio to market risks. Based on this they can pick a mutual fund and diversify their portfolio. Individuals should also factor in their investment and financial goals to understand which mutual fund scheme will be most suited for them. Typically, an investor can use specific mutual fund calculators to ascertain estimated returns on investment and whether the same would be effective in helping them meet their long or short-term goals. Based on these information individuals can plan their investments and generate substantial returns that will help them build a corpus or mobilize savings.
In addition, individuals are encouraged to study the market movements, track fund performance, and other external factors before investing in any mutual fund.
