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Mutual Fund schemes can be classified into different categories and subcategories
based on their investment objectives or their maturity periods.
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Mutual Fund schemes can be classified into three categories based on their maturity
periods.
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These are mutual fund schemes which offer units for purchase and redemption subscription
on a continuous basis. In other words, the units of these schemes can be purchased
or redeemed at any point of time at Net Asset Value (NAV) based prices. Also, these
schemes do not have a fixed maturity period and an investor can redeem his units
anytime.
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These are mutual fund schemes which have a defined maturity period e.g. 1 year /
5 years etc. The units of close ended scheme can be bought only during a specified
period at the time of initial launch. SEBI stipulates that all close-ended schemes
should provide for a liquidity window to its investors. These schemes are either
required to be listed on a recognized stock exchange or provide periodic repurchase
facility to investors.
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These 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 the prevailing NAV based prices. Interval
funds are very similar to close-ended funds, but differ on the following points.
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- 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.
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Apart from the above classification, mutual fund schemes can also be classified
based on their investment objectives:
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Apart from the above classification, mutual fund schemes can also be classified
based on their investment objectives:
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Growth/ Equity oriented schemes are those schemes which predominantly invest in
equity and equity related instruments. The objective of such schemes is to provide
capital appreciation over the medium to long term. These types of schemes are generally
meant for investors with a long-term outlook and with a higher risk appetite.
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The main objective of debt-oriented funds is to provide regular and steady income
to investors. These schemes mainly invest in fixed income securities such as Bonds,
Money Market Instruments, Corporate Debentures, Government Securities (Gilts) etc.
Debt-oriented schemes are suitable for investors whose main objective is safety
of capital along with modest growth. These funds are not affected because of fluctuations
in equity markets. However, the NAV of such funds is affected because of change
in the interest rate in the country.
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Balanced Funds provide the best of both worlds i.e. equity and debt. The aim of
the balanced funds is to provide both capital appreciation and stability of income
in the long run. The proportion of investment made into equities and fixed income
securities is pre-defined and mentioned in the offer document of the scheme. This
type of scheme is a good alternative for pure equity-oriented products and provides
an effective asset allocation tool. These schemes are suitable for investors looking
for moderate growth. NAVs of such funds are generally less volatile in nature compared
to pure equity funds.
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These Funds invest exclusively in the dated securities issued by the government.
These funds carry a very minimal risk because they are free of any default or credit
risk. However, they do carry an interest rate risk as is the case with other debt
products.
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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..
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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.
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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.
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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
type 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.
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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.
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A quantitative fund is an investment fund that selects securities based on quantitative
analysis. The managers of such funds build computer based models to determine whether
or not an investment is attractive. In a pure "quant shop" the final decision to
buy or sell is made by the model. However, there is a middle ground where the fund
manager will use human judgment in addition to a quantitative model. The first Quant
based Mutual Fund Scheme in India, Lotus Agile Fund opened for subscription on October
25, 2007.
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With the opening up of the Indian economy, Mutual Funds have been permitted to invest
in foreign securities/ American Depository Receipts (ADRs) / Global Depository Receipts
(GDRs). Some of such schemes are dedicated funds for investment abroad while others
invest partly in foreign securities and partly in domestic securities. While most
such schemes invest in securities across the world there are also schemes which
are country specific in their investment approach.
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Real Estate Mutual Funds or realty funds as they are popularly known are the latest
addition to the mutual fund offerings in India. SEBI recently paved way for the
launch of such products, by making amendments to its existing Regulations. However,
real estate mutual funds are yet to be introduced in India by any asset management
company. These schemes invest in real estate properties and earn income in the form
of rentals, capital appreciation from developed properties. Also some part of the
fund corpus is invested in equity shares or debentures of companies engaged in real
estate assets or developing real estate development projects. REMFs are required
to be close-ended in nature and listed on a stock exchange.
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In addition to the above broad classification, mutual fund schemes can be further
classified into sub-categories. Each of the sub-categories has a stated objective
and caters to specific requirements of investors.
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Under growth option, dividends are not paid out to the unit holders. Income attributable
to the Unit holders continues to remain invested in the Scheme and is reflected
in the NAV of units under this option. Investors can realize capital appreciation
by way of an increase in NAV of their units by redeeming them.
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Dividends are paid out to the unit holders under this option. However, the NAV of
the units falls to the extent of the dividend paid out and applicable statutory
levies.
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The dividend that accrues on units under option is re-invested back into the scheme
at ex-dividend NAV. Hence investors receive additional units on their investments
in lieu of dividends.
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