Mutual Funds are an ideal way to fulfill the needs of investors as per their financial goal. Therefore, it is recommended to study carefully each and every scheme before initiating any investment. As every asset class covered under mutual funds are exposed to a certain degree of risk. This would clearly be able to give a fair idea to investors for choosing their schemes, depending on their risk taking aptitude.
Various types of mutual funds categories are designed to permit investors for selecting a scheme based on their risk taking capacity, the investible amount, their goals and the investment duration etc.
Let's take a look at some important mutual fund schemes under the following three classifications subject to the maturity period of investment:
Open-Ended : This scheme permits investors to engage in buying or selling the units at any point of time at the prevalent Net Asset Value(NAV). These funds do not restrict on the amount of shares issued by the fund. They offer units for sale without prescribing any duration for redemption. If there is high demand, the fund will continue to issue shares, irrespective of the number of investors involved. One of the prime benefits of the open-ended scheme is the liquidity that these funds provide to investors.
Debt/Income: In a debt/income plan, a major portion of the investible corpus becomes directed towards investing in debentures, government securities, and other debt instruments. No matter, capital appreciation is low, this is comparatively low-risk return investment option which is suited for investors seeking a regular income.
Money Market/Liquid : Money market schemes invest in short-term debt instruments and aim to provide reasonable returns to investors. This is suitable for those investors who wish to utilize their surplus funds in short-term instruments rather than waiting for some better options.
Equity/Growth : Equities are a popular investment choice amongst retail investors. Although it possesses a high-risk in the short-term but investors can aim for capital growth in the long-run. If you are at your initial earning stage and focussing on long-term benefits, growth schemes could be your ideal investment avenue.
The following schemes are classified under Equity/Growth plans :
Index Scheme : Index scheme is a widely preferable concept in the west. These follow a passive investment strategy where your investments track closely proportionate to the movements of benchmark indices such as Nifty, Sensex etc.
Sectoral Scheme: These funds invest in particular sectors such as infrastructure, IT, pharmaceuticals, etc. or segments of the capital market like large caps, mid caps, etc. This scheme offers comparatively high-risk return avenue within the equity framework.
Tax-Saving : This scheme offers tax benefits to its investors. These funds are entitled to income tax deductions under Section-80 C of the Income Tax Act, 1961 with a 3-year lock-in period. Tax savings are done under Equity Linked Savings Scheme(ELSS) which offer long-term growth opportunities.
Balanced/Hybrid: This scheme permits the investors to enjoy growth and income at periodic intervals. Funds are invested in a combination of both equities and fixed-income securities; the proportion is ascertained in advance and divulged in the scheme related offer document. These are suitable for the cautiously aggressive investors.
Closed-Ended: Closed-ended schemes have a fixed maturity period and investors can invest only during the initial launch period referred to as the NFO(New Fund Offer) period. On the contrary to open-ended funds, new shares/units are not created by managers to fulfill the demand from investors but the shares can only be bought (and sold) in the secondary market.
Capital Protection: The primary objective of this scheme is to seek protection of the principal amount while striving to deliver equitable returns. These invest in high-quality fixed income securities with a minimal exposure to equities with a stipulated maturity period.
Fixed Maturity Plans (FMPs): These are the mutual fund schemes with a pre-defined maturity period. These schemes normally consist of debt instruments which have a maturity period relative to the maturity of the scheme, as a result, earning through the interest portion(known as coupons) of the securities in the portfolio. FMPs are usually passively managed i.e. no involvement of active trading of debt instruments in the portfolio. The expenses which are levied on the scheme, are hence, comparatively lower than actively managed schemes.
Interval: Interval schemes operate as a combination of open and closed-ended schemes wherein it permits the investors for trading the units at pre-defined intervals.