Types of Mutual Fund Schemes – An Overview

An investor in an equity mutual fund scheme often comes across many types of mutual fund schemes for investment.  An overview of the features of major types of mutual fund schemes is covered in this article. An understanding of the features will enable an investor to take informed decisions. There are different schemes in the market. But major portion of the schemes can be grouped under eight types. 

It is to be noted that based on the prevailing norms of SEBI, the regulator of mutual fund industry in India, mutual fund houses are required to offer investment options under five types of schemes. The details of these schemes are covered under the article MF Schemes become transparent following categorization and rationalization directive by SEBI.  However, prior to that mutual funds have been offering funds based on the below mentioned categorization and the terms are being now also. 

There are mainly eight types of mutual fund schemes. They are 

1.    Equity Funds (Diversified Equity Funds )
2.    Sectoral Funds
3.    Index Funds (Passive Funds)
4.    Balanced Funds
5.    Debt Funds
6.    Monthly Income Plans
7.    Fixed Maturity Plans
8.    Equity Linked Savings Schemes (ELSS ) (Also known as Tax Saving MF scheme)

Overview of different types of mutual fund schemes

1.    Equity Funds (Diversified Equity Funds ) 

All investments are in the stock market in various companies.  High returns with high risks.
2.    Sectoral Funds
Investments are made only in stocks of companies belonging to a particular sector or sectors.  Potential for very high return with very high associated risks.
3.    Index Funds (Passive Funds)
Investments are made in stocks in the constituents of  a particular Index and with the same weightage as in the index.  There is potential for high to medium returns with similar risk.
4.    Balanced Funds
They invest in a mix of Stocks and Debt (bonds, government securities, etc ) in a specified ratio for medium to high returns at medium risks.
5.    Debt Fund
They invest in bonds, debentures, government securities, etc.  Expect medium returns at low risks. Best suited as age increases. 
6.    Monthly Income Plans
Most of their investments are in debt.  Remaining 10 – 20% is in stocks.  Returns can be low to medium with similar risks
7.    Fixed Maturity Plans
Almost similar to fixed deposits with banks. But offer better tax efficiency due to indexation on plans that have a minimum tenure of 3 years.
8.    Equity Linked Savings Schemes (ELSS ) (Also known as Tax Saving MF scheme)
ELSS carries a lock in period and offers tax benefit under section 80 C. It is one of the most popular instruments as tax saver.

Detailed features of the different types of mutual funds are covered in the article Major types of Mutual Fund Schemes (MF schemes)

All these mutual fund schemes are offered under open  ended or close  ended funds.  The majority of the schemes in the market are open ended that enables an investor buy and sell at any  time. Open ended mutual fund units are easily available, easier to understand and manage and hence best suited for initiators to MFs. The important differences between the features of open ended and close ended funds are mentioned below:

Open ended MF schemes can manage an unlimited amount of money and they can issue any number of units.  Close ended mutual funds handle a fixed amount of capital and units.

Units of open ended mutual fund schemes can be bought any time from the mutual fund company at the prevailing NAV. Units of close ended mutual fund schemes can be bought only during initial offering. There after they must be bought from the stock exchange like a share at the prevailing rate which need not represent the NAV. The rate can either more or less than their actual NAV. Please refer the article Closed End and Open End Mutual Fund schemes for better understanding