Mutual fund schemes are structured differently. Some schemes are open for purchase and repurchase on a perpetual basis. Once the scheme is launched, the scheme remains open for transactions, and hence the name of this category of schemes is open-ended funds. On the other hand, some schemes have a fixed maturity date. This means that these schemes are structured to operate for a fixed period till the maturity date and cease to exist thereafter. Since the closure of the scheme is pre-decided, such schemes are known as close-ended schemes. Apart from these two, there are a couple of other variants, which would be discussed further.
Open-ended funds allow the investors to enter or exit at any time, after the NFO Investors can buy additional units in the scheme any time after the scheme opens for ongoing transactions. Prospective investors can also buy units. At any time, the existing investors can redeem their investments, that is, they can sell the units back to the scheme to get their money back. Although some unit-holders may exit from the scheme, wholly or partly, the scheme continues operations with the remaining investors. The scheme does not have any kind of time frame in which it is to be closed. The ongoing entry and exit of investors imply that the unit capital in an open-ended fund would keep changing on a regular basis. When an investor invests money in the scheme, new units would be created and thus the unit balance would increase. On the other hand, when someone exits the scheme (fully or partly),the units sold back to the scheme would be canceled, due to which the unit balance of the scheme would go down.
Close-ended funds have a fixed maturity. Investors can buy units of a close-ended scheme, from the fund, only during its NFO. The investors cannot transact with the fund after the NFOis over. At the end of the maturity period, the scheme is wound up, units are canceled and the money is returned to the investors. The fund makes arrangements for providing liquidity,post-NFO through listing of the units on a stock exchange. Such listing is compulsory for close-ended schemes to provide liquidity to the investors. Therefore, after the NFO, investors who want to buy units will have to find a seller for those units in the stock exchange. Similarly, investors who want to sell units will have to find a buyer for those units in the stock exchange.Since post-NFO sale and purchase of units happen to or from counterparty in the stock exchange–and not to or from the scheme–the unit capital of the scheme remains stable or fixed. Every close ended scheme, other than an equity linked savings scheme, shall be listed on a recognised stock exchange within such time period and subject to such conditions as specified by SEBI.
Interval funds combine features of both open-ended and close-ended schemes. They are largely close-ended but become open-ended at pre-specified intervals. For instance, an interval scheme might become open-ended between January 1 to 15, and July 1 to 15, each year. The benefit for investors is that, unlike in a purely close-ended scheme, they are not completely dependent on the stock exchange to be able to buy or sell units of the interval fund. However, to provide liquidity to the investors between these intervals, the units must be compulsorily listed on stock exchanges to allow investors an exit route. The periods when an interval scheme becomes open-ended, are called ‘transaction periods’; the period between the close of a transaction period, and the opening of the next transaction period is called the ‘interval period’. Minimum duration of the transaction period is 2 days, and maximum duration of the interval period is 15 days. No redemption/repurchase of units is allowed except during the specified transaction period (during which both subscription and redemption may be made to and from the scheme). While the units of close-ended and interval funds are listed on the stock exchanges, the liquidity in these units may be poor. At the same time, even when the trade happens, the actual price may be at a discount to the NAV. This happens because of the demand-supply situation for the units of the schemes, as discussed earlier.
ETF Exchange Traded Funds (ETFs) are those mutual fund schemes that are traded on a stock exchange just like any other stock. These funds usually track an index or have a fixed portfolio strategy based on some index so they are passive in nature. In effect they are like a normal mutual fund but the only difference being that while an open-ended fund would have a single NAV at the end of the day at which all the transactions take place the situation is different for the ETF. Since the ETF is traded for the entire day, it gives multiple opportunities and prices at which the investor can either enter of exit the fund. This is similar to any other listed securities where there are multiple prices at which transactions take place and this is witnessed for an ETF too. ETFs provide additional liquidity for investors and enable them to take benefit of changes that take place in prices during the day. The downside to this is that the prices might fluctuate quite a bit and there might be a big gap with the NAV of the fund too. So, investors need to be careful about the price at which they are undertaking their transactions. There is ease of investing in an ETF because one can buy them just like a stock and the minimum investment here is also so small that any investor can participate by having these in their portfolio. Investors who already transact on the stock exchanges and have a demat account can use these for investing in ETFs. There is a huge variety in terms of the indices on which ETFs are based and hence this provides investors with a lot of choice in terms of their investments and the kind of exposure that they can take. Increasingly mutual funds are also coming out with different variants that employ varying strategies for their ETF offerings. Like Gold ETF recently Silver ETF has also been introduced by SEBI that can be defined as a mutual fund scheme that invests primarily in silver or silver related instruments which are specified by SEBI from time to time.
This type of classification looks at the investment universe where the scheme may invest money. There are equity funds, fixed income funds, money market funds, gold funds, international funds, etc. Here, the category names indicate where the money could be invested. This classification may get further specific depending on narrowing the investment universe. For example, within equity funds, we have large-cap funds, mid-cap funds, etc. Similarly, within debt funds, we have Government Securities funds and corporate debt funds.
Growth / Equity Oriented Scheme: The aim of growth funds is to provide capital appreciation over the medium to long- term. Such schemes normally invest a major part of their corpus in equities. Such funds have comparatively high risks. These schemes provide different options to the investors like dividend option, capital appreciation, etc. and the investors may choose an option depending on their preferences. The investors must indicate the option in the application form. The mutual funds also allow the investors to change the options at a later date. Growth schemes are good for investors having a long-term outlook seeking appreciation over a period of time.
Income / Debt Oriented Scheme: The aim of income funds is to provide regular and steady income to investors. Such schemes generally invest in fixed income securities such as bonds, corporate debentures, Government securities and money market instruments. Such funds are less risky compared to equity schemes. These funds are not affected because of fluctuations in equity markets. However, opportunities of capital appreciation are also limited in such funds. The NAVs of such funds are affected because of change in interest rates in the country. If the interest rates fall, NAVs of such funds are likely to increase in the short run and vice versa. However, long term investors may not bother about these fluctuations.
Balanced Fund: The aim of balanced funds is to provide both growth and regular income as such schemes invest both in equities and fixed income securities in the proportion indicated in their offer documents. These are appropriate for investors looking for moderate growth. They generally invest 40-60% in equity and debt instruments. These funds are also affected because of fluctuations in share prices in the stock markets. However, NAVs of such funds are likely to be less volatile compared to pure equity funds.
3. By management of portfolio: Actively managed funds are funds where the fund manager has the flexibility to choose the investment portfolio, within the broad parameters of the investment objective of the scheme.Since this increases the role of the fund manager, the expenses for running the fund turn out to be higher. Investors expect actively managed funds to perform better than the market. Passive funds invest on the basis of a specified index; whose performance it seeks to track. Thus, a passive fund tracking the S&P BSE Sensex would buy only the shares that are part of the composition of the S&P BSE Sensex. The proportion of each share in the scheme’s portfolio would also be the same as the weightage assigned to the share in the S&P BSE Sensex. Thus, the performance of these funds tends to mirror the concerned index. They are not designed to perform better than the market. Such schemes are also called index schemes.Since the portfolio is determined by the index itself, the fund manager has no role in deciding on investments. Therefore, these schemes have low running costs.