TYPES OF MUTUAL FUND SCHEMES :
Mutual funds encompass a diverse range of schemes tailored to address various investor objectives. These schemes can be broadly categorized based on different factors.
Classification by Organizational Structure :
1. Open-ended Schemes :
Open-ended schemes operate perpetually, offering continuous subscription and repurchase facilities on all business days at the prevailing Net Asset Value (NAV).
2. Close-ended Schemes :
Close-ended schemes have fixed maturity dates. Units are issued during the initial offering and can only be redeemed upon maturity. These schemes are listed on stock exchanges to provide investors with an exit route before maturity, allowing for sale/trading.
3. Interval Schemes :
Interval schemes facilitate purchase and redemption during specified transaction periods or intervals. These periods typically last for a minimum of 2 days, with a mandatory 15-day gap between consecutive transaction periods. Units of interval schemes are also listed on stock exchanges.
Classification by Portfolio Management :
1. Active Funds :
Active funds involve fund managers making active decisions regarding buying, holding, or selling underlying securities and stock selection. These funds engage in frequent buying and selling to outperform specific benchmarks or indices. Active funds employ various strategies and styles to manage the portfolio with the aim of generating superior returns, albeit with higher risks.
2. Passive Funds :
Passive funds replicate the performance of a specific benchmark or index to match its returns. This category includes:
– Index Funds
– Exchange Traded Funds (ETFs)
In passive funds, the fund manager plays a passive role, with stock selection and decision-making driven by the benchmark index. The fund manager’s task is to replicate the index with minimal tracking error. Passive funds offer consistent, long-term returns at lower costs but expose investors to market-level risks.
By understanding these classifications, investors can make informed decisions aligned with their financial objectives and risk tolerance levels.