In the investment market, one can find a variety of investors with different needs, objectives and risk taking capacities. For instance, a young businessman would like to get more capital appreciation for his funds and he would be prepared to take greater risk than a person who is just on the verge of his retiring age. So, it is very difficult to offer one fund to satisfy all the requirements of investors. Just as one shoe is not suitable for all legs, one fund is not suitable to meet the vast requirements of all investors. Therefore, many types of funds are available to the investor. It is completely left to the discretion of the investor to choose any one of them depending upon his requirement and his risk taking capacity.
Mutual fund schemes can broadly be classified into many types as given below:
1. On the basis of execution and operation
(A) Close-ended Funds
Under this scheme, the corpus of the fund and its duration are prefixed. In other words, the corpus of the fund and the number of units are determined in advance. Once the subscription reaches the pre-determined level, the entry of investors is closed. After the expiry of the fixed period, the entire corpus is disinvested and the proceeds are distributed to the various unit holders in proportion to their holding. Thus, the fund ceases to be a fund, after the final distribution.
Features : The main features of the close-ended funds are:
(i) The period and/or the target amount of the fund is definite and fixed beforehand.
(ii) Once the period is over and/or the target is reached, the door is closed for the investors. They cannot purchase any more units.
(iii) These units are publicly traded through stock exchange and generally, there is no repurchase facility by the fund.
(iv) The main objective of this fund is capital appreciation.
(v) The whole fund is available for the entire duration of the scheme and there will not be any redemption demands before its maturity. Hence, the fund manager can manage the investments efficiently and profitably without the necessity of maintaining and liquidity.
(vi) At the time of redemption, the entire investment pertaining to a closed-end scheme is liquidated and the proceeds are distributed among the unit holders.
(vii) From the investor’s point of view, it may attract more tax since the entire capital appreciation is realized in toto at one stage itself.
(viii) If the market condition is not favourable, it may also affect the investor since he may not get the full benefit of capital appreciation in the value of the investment.
(ix) Generally, the prices of closed-end scheme units are quoted at a discount of upto 40 percent below their Net Asset Value (NAV).
(B) Open-ended Funds
It is just the opposite of close-ended funds. Under this scheme, the size of the fund and/or the period of the fund is not pre-determined. The investors are free to buy and sell any number of units at any point of time. For instance, the Unit Scheme (1964) of the Unit Trust of India is an open ended one, both in terms of period and target amount. Anybody can buy this unit at any time and sell it also at any time at his discretion.
The main features of the Open-Ended Funds are :
(i) The investor is assured of regular income at periodic intervals, say half-yearly or yearly and so on.
(ii) The main objective of this type of Fund is to declare regular dividends and not capital appreciation.
(iii) The pattern of investment is oriented towards high and fixed income yielding securities like debentures, bonds etc.
(iv) This is best suited to the old are retired people who may not have any regular income.
(v) It concerns itself with short run gains only.
(C) Pure Growth Funds (Growth Oriented Funds)
Unlike the Income Funds, Growth Funds concentrate mainly on long run gains i.e., capital appreciation. They do not offer regular income and they aim at capital appreciation in the long run. Hence, they have been described as “Nest Eggs” investments.
The main features of the Growth Funds are :
(i) The growth oriented fund aims at meeting the investors’ need for capital appreciation.
(ii) The investment strategy therefore, conforms to the fund objective by investing the funds predominantly on equities with high growth potential.
(iii) The fund tries to get capital appreciation by taking much risks and investing on risk bearing equities and high growth equity shares.
(iv) The fund may declare dividend, but its principal objective is only capital appreciation.
(v) This is best suited to salaried and business people who have high risk bearing capacity and ability to defer liquidity. They can accumulate wealth for future needs.
(D) Balanced Funds
This is otherwise called income-cum-growth fund. It is nothing but a combination of both income and growth funds. It aims at distributing regular income as well as capital appreciation. This is achieved by balancing the investments between the high growth equity shares and also the fixed income earning securities.
(E) Specialized Funds
Besides the above, large number of specialized funds are in existence abroad. They offer special schemes so as to meet the specific needs of specific categories of people like pensioners, widows etc. There are also funds for investments in securities of specified areas. For instance, Japan Fund, South Korea Fund etc. In fact, these funds open the door for foreign investors to invest on the domestic securities of these countries.
Again certain funds may be confined to one particular sector or industry like fertilizer, automobiles, petroleum etc. These funds carry heavy risk since the entire investment is in one industry. But, there are high risk taking investors who prefer this type of fund. Of course, in such cases, the rewards may be commensurate with the risk taken. At times, it may be erratic. The best example of this type is the Petroleum Industry Funds in the U.S.A.
(F) Money-Market Mutual Funds (MMMFs)
These funds are basically open ended mutual funds and as such they have all the features of the open ended fund. But, they invest in highly liquid and safe securities like commercial paper, banker’s acceptances, certificates of deposits, treasury bills etc. These instruments are called money market instruments. They take the place of shares, debentures and bonds in a capital market. They pay money market rates of interest. These funds are called ‘money funds’ in the U.S.A. and they have been functioning since 1972. Investors generally use it as a “parking place” or “stop gap arrangement” for their cash resources till they finally decide about the proper avenue for their investment i.e., long term financial assets like bonds and stocks.
Since MMMFs are a new concept in India, the RBI has laid down certain stringent regulations. For instance, the entry to MMMFs is restricted only to scheduled commercial banks and their subsidiaries. MMMFs can invest only in specified short term money market instruments like certificate of deposits, commercial papers and 182 days treasury bills. They can also lend to call market. These funds go for safe and liquid investment. Frequent realization of interest and redemption of fund at short notice are the special features of the fund. These funds will not be subject to reserve requirements. The re-purchase could be subject to a minimum lock in period of 3 months.
(G) Taxation Funds
A taxation fund is basically a growth oriented fund. But, it offers tax rebates to the investors either in the domestic or foreign capital market. It is suitable to salaried people who want to enjoy tax rebates particularly during the month of February and March. In India, at present the law relating to tax rebates is covered under section 88 of the Income Tax Act, 1961. An investor is entitled to get 20% rebate in Income Tax for investments made under this fund subject to a maximum investment of Rs.10,000/- per annum. The Tax Saving Magnum of SBI Capital Market Limited is the best example for the domestic type. UTI’s US $60 million India Fund, based in the USA, is an example for the foreign type.
OTHER CLASSIFICATION
(H) Leveraged Funds
These funds are also called borrowed funds since they are used primarily to increase the size of the value of portfolio of a mutual fund. When the value increases, the earning capacity of the fund also increases. The gains are distributed to the unit holders. This is resorted to only when the gains from the borrowed funds are more than the cost of borrowed funds.
(I) Dual Funds
This is a special kind of closed end fund. It provides a single investment opportunity for two different types of investors. For this purpose, it sells two types of investment stocks viz., income shares and capital shares. Those investors who seek current investment income can purchase income shares. They receive all the interest and dividends earned from the entire investment portfolio. However, they are guaranteed a minimum annual dividend payment. The holders of capital shares receive all the capital gains earned on those shares and they are not entitled to receive any dividend of any type. In this respect, the dual fund is different from a balanced fund.
(J) Index Funds
Index funds refer to those funds where the portfolios are designed in such a way that they reflect the composition of some broad based market index. This is done by holding securities in the same proportion as the index itself. The value of these index linked funds will automatically go up whenever the market index goes up and vice-versa. Since the construction of portfolio is entirely based upon maintaining proper proportions of the index being followed, it involves less administrative expenses, lower transaction costs, less number of portfolio managers etc. It is so because only fewer purchases and sales of securities would take place.
(K) Bond Funds
These funds have portfolios consisting mainly of fixed income securities like bonds. the main thrust of these funds is mostly on income rather than capital gains. They differ from income funds in the sense income funds offer an average returns higher than that from bank deposits and also capital gains lesser than that in equity shares.
(L) Aggressive Growth Funds
These funds are just the opposite of bond funds. These funds are capital gains oriented and thus the thrust area of these funds is capital gains. Hence, these funds are generally invested in speculative stocks. They may also use specialized investment techniques like short term trading, option writing etc. Naturally, these funds tend to be volatile in nature.
(M) Off-Shore Mutual Funds
Off-shore mutual funds are those funds which are meant for non-residential investors. In other words, the sources of investments for these funds are from abroad. So, they are regulated by the provisions of the foreign countries where those funds are registered. These funds facilitate flow of funds across different countries, with free and efficient movement of capital for investment and repatriation. Off-shore funds are preferred to direct foreign investment, since, it does not allow foreign domination over host country’s corporate sector. However, these funds involve much currency and country risk and hence they generally yield higher return.
In India, these funds are subject to the approval of the Department of Economic Affairs, Ministry of Finance and the RBI monitors such funds by issuing directions then and there. In India, a number of off-shore funds exist. ‘India Fund’ and ‘India Growth Fund’ were floated by the UTI in U.K. and U.S.A. respectively. The State Bank of India floated the India Magnum Fund in Netherlands. ‘The Indo-Suez Himalayan Fund N.V.’ was launched by Canbank Mutual Fund in collaboration with Indo-Suez Asia Investment Services Ltd. It also floated ‘Commonwealth Equity Fund’.
Mutual fund schemes can broadly be classified into many types as given below:
1. On the basis of execution and operation
(A) Close-ended Funds
Under this scheme, the corpus of the fund and its duration are prefixed. In other words, the corpus of the fund and the number of units are determined in advance. Once the subscription reaches the pre-determined level, the entry of investors is closed. After the expiry of the fixed period, the entire corpus is disinvested and the proceeds are distributed to the various unit holders in proportion to their holding. Thus, the fund ceases to be a fund, after the final distribution.
Features : The main features of the close-ended funds are:
(i) The period and/or the target amount of the fund is definite and fixed beforehand.
(ii) Once the period is over and/or the target is reached, the door is closed for the investors. They cannot purchase any more units.
(iii) These units are publicly traded through stock exchange and generally, there is no repurchase facility by the fund.
(iv) The main objective of this fund is capital appreciation.
(v) The whole fund is available for the entire duration of the scheme and there will not be any redemption demands before its maturity. Hence, the fund manager can manage the investments efficiently and profitably without the necessity of maintaining and liquidity.
(vi) At the time of redemption, the entire investment pertaining to a closed-end scheme is liquidated and the proceeds are distributed among the unit holders.
(vii) From the investor’s point of view, it may attract more tax since the entire capital appreciation is realized in toto at one stage itself.
(viii) If the market condition is not favourable, it may also affect the investor since he may not get the full benefit of capital appreciation in the value of the investment.
(ix) Generally, the prices of closed-end scheme units are quoted at a discount of upto 40 percent below their Net Asset Value (NAV).
(B) Open-ended Funds
It is just the opposite of close-ended funds. Under this scheme, the size of the fund and/or the period of the fund is not pre-determined. The investors are free to buy and sell any number of units at any point of time. For instance, the Unit Scheme (1964) of the Unit Trust of India is an open ended one, both in terms of period and target amount. Anybody can buy this unit at any time and sell it also at any time at his discretion.
The main features of the Open-Ended Funds are :
(i) The investor is assured of regular income at periodic intervals, say half-yearly or yearly and so on.
(ii) The main objective of this type of Fund is to declare regular dividends and not capital appreciation.
(iii) The pattern of investment is oriented towards high and fixed income yielding securities like debentures, bonds etc.
(iv) This is best suited to the old are retired people who may not have any regular income.
(v) It concerns itself with short run gains only.
(C) Pure Growth Funds (Growth Oriented Funds)
Unlike the Income Funds, Growth Funds concentrate mainly on long run gains i.e., capital appreciation. They do not offer regular income and they aim at capital appreciation in the long run. Hence, they have been described as “Nest Eggs” investments.
The main features of the Growth Funds are :
(i) The growth oriented fund aims at meeting the investors’ need for capital appreciation.
(ii) The investment strategy therefore, conforms to the fund objective by investing the funds predominantly on equities with high growth potential.
(iii) The fund tries to get capital appreciation by taking much risks and investing on risk bearing equities and high growth equity shares.
(iv) The fund may declare dividend, but its principal objective is only capital appreciation.
(v) This is best suited to salaried and business people who have high risk bearing capacity and ability to defer liquidity. They can accumulate wealth for future needs.
(D) Balanced Funds
This is otherwise called income-cum-growth fund. It is nothing but a combination of both income and growth funds. It aims at distributing regular income as well as capital appreciation. This is achieved by balancing the investments between the high growth equity shares and also the fixed income earning securities.
(E) Specialized Funds
Besides the above, large number of specialized funds are in existence abroad. They offer special schemes so as to meet the specific needs of specific categories of people like pensioners, widows etc. There are also funds for investments in securities of specified areas. For instance, Japan Fund, South Korea Fund etc. In fact, these funds open the door for foreign investors to invest on the domestic securities of these countries.
Again certain funds may be confined to one particular sector or industry like fertilizer, automobiles, petroleum etc. These funds carry heavy risk since the entire investment is in one industry. But, there are high risk taking investors who prefer this type of fund. Of course, in such cases, the rewards may be commensurate with the risk taken. At times, it may be erratic. The best example of this type is the Petroleum Industry Funds in the U.S.A.
(F) Money-Market Mutual Funds (MMMFs)
These funds are basically open ended mutual funds and as such they have all the features of the open ended fund. But, they invest in highly liquid and safe securities like commercial paper, banker’s acceptances, certificates of deposits, treasury bills etc. These instruments are called money market instruments. They take the place of shares, debentures and bonds in a capital market. They pay money market rates of interest. These funds are called ‘money funds’ in the U.S.A. and they have been functioning since 1972. Investors generally use it as a “parking place” or “stop gap arrangement” for their cash resources till they finally decide about the proper avenue for their investment i.e., long term financial assets like bonds and stocks.
Since MMMFs are a new concept in India, the RBI has laid down certain stringent regulations. For instance, the entry to MMMFs is restricted only to scheduled commercial banks and their subsidiaries. MMMFs can invest only in specified short term money market instruments like certificate of deposits, commercial papers and 182 days treasury bills. They can also lend to call market. These funds go for safe and liquid investment. Frequent realization of interest and redemption of fund at short notice are the special features of the fund. These funds will not be subject to reserve requirements. The re-purchase could be subject to a minimum lock in period of 3 months.
(G) Taxation Funds
A taxation fund is basically a growth oriented fund. But, it offers tax rebates to the investors either in the domestic or foreign capital market. It is suitable to salaried people who want to enjoy tax rebates particularly during the month of February and March. In India, at present the law relating to tax rebates is covered under section 88 of the Income Tax Act, 1961. An investor is entitled to get 20% rebate in Income Tax for investments made under this fund subject to a maximum investment of Rs.10,000/- per annum. The Tax Saving Magnum of SBI Capital Market Limited is the best example for the domestic type. UTI’s US $60 million India Fund, based in the USA, is an example for the foreign type.
OTHER CLASSIFICATION
(H) Leveraged Funds
These funds are also called borrowed funds since they are used primarily to increase the size of the value of portfolio of a mutual fund. When the value increases, the earning capacity of the fund also increases. The gains are distributed to the unit holders. This is resorted to only when the gains from the borrowed funds are more than the cost of borrowed funds.
(I) Dual Funds
This is a special kind of closed end fund. It provides a single investment opportunity for two different types of investors. For this purpose, it sells two types of investment stocks viz., income shares and capital shares. Those investors who seek current investment income can purchase income shares. They receive all the interest and dividends earned from the entire investment portfolio. However, they are guaranteed a minimum annual dividend payment. The holders of capital shares receive all the capital gains earned on those shares and they are not entitled to receive any dividend of any type. In this respect, the dual fund is different from a balanced fund.
(J) Index Funds
Index funds refer to those funds where the portfolios are designed in such a way that they reflect the composition of some broad based market index. This is done by holding securities in the same proportion as the index itself. The value of these index linked funds will automatically go up whenever the market index goes up and vice-versa. Since the construction of portfolio is entirely based upon maintaining proper proportions of the index being followed, it involves less administrative expenses, lower transaction costs, less number of portfolio managers etc. It is so because only fewer purchases and sales of securities would take place.
(K) Bond Funds
These funds have portfolios consisting mainly of fixed income securities like bonds. the main thrust of these funds is mostly on income rather than capital gains. They differ from income funds in the sense income funds offer an average returns higher than that from bank deposits and also capital gains lesser than that in equity shares.
(L) Aggressive Growth Funds
These funds are just the opposite of bond funds. These funds are capital gains oriented and thus the thrust area of these funds is capital gains. Hence, these funds are generally invested in speculative stocks. They may also use specialized investment techniques like short term trading, option writing etc. Naturally, these funds tend to be volatile in nature.
(M) Off-Shore Mutual Funds
Off-shore mutual funds are those funds which are meant for non-residential investors. In other words, the sources of investments for these funds are from abroad. So, they are regulated by the provisions of the foreign countries where those funds are registered. These funds facilitate flow of funds across different countries, with free and efficient movement of capital for investment and repatriation. Off-shore funds are preferred to direct foreign investment, since, it does not allow foreign domination over host country’s corporate sector. However, these funds involve much currency and country risk and hence they generally yield higher return.
In India, these funds are subject to the approval of the Department of Economic Affairs, Ministry of Finance and the RBI monitors such funds by issuing directions then and there. In India, a number of off-shore funds exist. ‘India Fund’ and ‘India Growth Fund’ were floated by the UTI in U.K. and U.S.A. respectively. The State Bank of India floated the India Magnum Fund in Netherlands. ‘The Indo-Suez Himalayan Fund N.V.’ was launched by Canbank Mutual Fund in collaboration with Indo-Suez Asia Investment Services Ltd. It also floated ‘Commonwealth Equity Fund’.
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