Mutual funds can also be broadly classified into three distinguishable types as per class of investments Objectives:
- Growth Funds
The objective of a Growth Fund Scheme is to provide capital appreciation over the medium to long term. These schemes normally invest a major portion of their funds in equities and are willing to bear short-term decline in value for possible future appreciation in the net asset value of the scheme. These schemes are suitable for investors seeking growth over the long term.
- Income Funds
The aim of such funds is to provide regular and steady income to investors. These funds or schemes generally invest in fixed incomes such as bonds and corporate debentures. Capital appreciation in such schemes may be limited. These are suitable for retired people and others with a need for capital stability and regular income.
- Balanced Funds
They aim to provide both growth and income by periodically distributing a part of the income and capital appreciation to the investors or re- investing such income and capital appreciation to enhance the net asset value of the fund. They invest in both shares and fixed income securities in the proportion indicated in their offered document. Such funds are suitable for those investors, who are willing to take some risk and seek both income and capital appreciation.
As per Risk Profile:
Mutual funds can also be broadly classified into three distinguishable types as per class of Risk Profile:
- High Risk Funds
- Moderate Risk Funds
- Low Risk Funds
The following other types of funds are also available for investment:
- Commodity Funds – These funds invest in commodity stocks
- Real Estate Funds – These funds invest in stocks of real estate companies
- Infrastructure Funds – These funds invest in the securities of the companies who have undertaken development of different infrastructure projects
- Exchange Traded Funds – These funds trade like a single stock on the stock Exchange
- Fund of Funds – These funds invest in other mutual fund schemes
- Offshore Funds – These funds invest solely in foreign markets and are also referred to international funds. The majority of these funds have been routed through Mauritius or Singapore
- Tax Saving Funds – These funds offer tax rebates to the investors under tax laws as prescribed from time to time. This is possible because the government offers tax incentives for investment in specified avenues
- Sectoral Funds – These funds invest the funds in the securities of the companies developing particular sector of economy such as Energy Funds, Petro Funds, Power Funds etc.
Load and No Load Funds
- Load Funds – It is one time fee payable by the investor when they enter/exit an open ended scheme of mutual fund. Loads are charged to recover initial issue expenses including marketing and selling expenses, brokerage, advertising cost. Their can be entry load or exit load or both. Entry Load is also called Front end Load where as Exit Load is also called Back end Load or Deferred Load
- No Load Funds – In a no load funds, marketing and selling expenses are absorbed by the AMC and investor buys and sells units at net asset value (NAV) Price.
New Types of Funds in the Market:
- New Real Estate mutual Funds -These real estate funds are mutual funds that will invest not in stocks and debt securities of real estate companies but will invest the funds in actual real estate. It seeks to benefit out of capital appreciation in its holdings. The returns are the benefits likely to be available over a longer time frame of 5 to 7 years and due to this reasons investors have to be patient. This is a different type of the fund in terms of the underlying asset.
- Index Funds -These funds mimic the portfolio of an index. They are constructed in such a manner that the portfolio of the scheme will be similar to the portfolio of index. The portfolio of the index fund score over other funds because of low cost of operation and research. In view of this, the regulator considering these factors has set up a low ceiling on the load chargeable on these funds. The maximum load chargeable on these funds is pegged at 1.5% on NAV instead of 2.5% chargeable on other equity schemes. The index fund portfolio moves in tune with the movement of the index and thus the actual returns also track the returns on the index on which this was constructed. Thus, it may not give better returns then the benchmarked index itself. However, because of lack of awareness index funds are not popular with the Indian investors but are very popular in developed countries.
- Sector Mutual Funds -There are now sectoral fund options galore for investors. The Indian Mutual Fund industry offers number of funds that focus on specific sectors. These funds include funds that focus on FMCG, Petro, Brands, Services, Pharma, Power and ICE. These provide the opportunity for focused investments and also the facility to construct your own portfolio in terms of sectoral preferences. But investors may have to read between the lines and look at the portfolios before making choices that are appropriate for them. Each of the options available in this group may pass off as similar ones because of their sectoral focus. But that is certainly not the case. Among the funds that target a sector, there are subtle and not-so-subtle aspects that differentiate various funds. But at the core of these differences lies the risk factor. Sectoral funds, as a class, carry a higher degree of risks because of the concentrated nature of the investment universe. Within this `high-risk’ domain, there are funds that have a higher degree of risk compared to the others, because of the portfolio composition and the fund management style.
So, what factors should investors consider, while evaluating sectoral funds? The key aspects to be considered are:
- The portfolio’s composition.
- The kind of stocks chosen and avoided.
- The level of investment in equity at any point in time.
- The manner and time-frame in which fresh flows are invested.
- The frequency with which the portfolio composition is altered.
- The size of the corpus and net assets.
- The level of concentration of the fund’s top exposures.