Types of Mutual Fund

Types of Mutual Fund

There are various tools for investing money such as bank deposits, metals, real estates, and stock market instruments. The scale of risk and return is based on the type of investments. Investors should tradeoff between risk and return. If they invest in bank deposits, the risk is very lower and at the same time the return is also very lower than that of any other means of investment. The metals and real estate assets are not sold easily.

The expectation of investors is higher return with lower risk or Lower risk with optimum return within short period of time. It is possible only in stock market investments. But it is not possible to the common investor because he is not technically competent to understand the stock market operations. A common man can invest his money safely in stock market through the rescuer, Mutual funds.

Mutual funds are dynamic financial institutions which play a crucial role in an economy by mobilizing savings and investing them in the capital market. Savings pooled from small investors are invested through a fund manager to purchase a diversified portfolio of stocks or bonds. An investor can invest in mutual fund at lower cost with the advantage of diversification. Diversification means “spreading out money across many different types of investments”. When one investment involves high risk, another might be lower. Diversification of investment holdings reduces the risk tremendously.

On the basis of their structure and objective, mutual funds can be classified into various types. Generally, there are two major types of Mutual Funds:-

Open-end Mutual Funds

Closed-end Mutual Funds

Open End Mutual Funds

An open-ended fund or scheme is one that is available for subscription and repurchase on a continuous basis. These schemes do not have a fixed maturity period. Investors can conveniently buy and sell units at Net Asset Value (NAV) related prices, which are notified a daily. The key feature of open-end schemes is their liquidity.

Closed End Mutual Funds

A close-ended fund or scheme has a stipulated maturity period say for e.g. 5-7 years. The fund is open for subscription only during a specified period at the time of launching of the scheme. Investors can invest in the scheme at the time of the initial public issue and thereafter they can buy or sell the units of the scheme through the stock exchanges, where the units are listed. In order to provide an exit route to the investors, some close-ended funds give an option of selling back the units to the mutual fund through periodic repurchase at NAV related prices. Stock Exchange Board of India (SEBI) Regulations stipulate that at least one of the two exit routes is provided to the investor i.e. either repurchase facility or through listing on stock exchanges. These mutual funds schemes disclose NAV generally on weekly basis. They are traded more like the general stocks.

The reasons to invest in this category are:

Prices are determined by market demands and thus, closed end funds trade at lower than the offer price more often.

The open end funds provide wide options for investors to choose from (a) stock funds and balanced funds which give full asset allocation benefit and (b) bond funds.

After the closure of the offer, buying and redemption of units by the investors directly from the Funds are not allowed. However, to protect the interests of the investors, SEBI provides investors with two avenues to liquidate their positions:

Closed-end Funds are listed on the stock exchanges where investors can buy/sell units from/to each other. The trading is generally done based on NAV at a discounted rate. The NAV of a closed-end fund is computed on a weekly basis (updated every Thursday).

Closed-end Funds may also offer “buy-back of units” to the unit holders. In this case, the corpus of the Fund and its outstanding units do get changed.