Close-ended funds: under this scheme, the corpus of the fund and its duration are prefixed. In other words, the corpus of the fund and he number of units are determined in advance. Once the subscription reaches the pre-determined level, the entry of new investors is closed.
After the expiry of the fixed period, the entire corpus is dis-invested and the proceeds are distributed to the various unit holders in proportion to their holding. Thus, the fund ceases to be a fund, after the final distribution.
Open-ended funds:such a fund is opposite of close-ended fund. Under such a fund type, the size or the time period of the fund is not pre-determined. The investors are free to buy and sell any number of units at any point in time.
Example: The Unit Scheme (1964) of the Unit Trust of India is an open-ended fund.
On the basis of Yield and Investment Pattern:
Income fund: as the name suggests, this fund aims to generate and distribute income to the members (unit holders) on regular basis. This fund concentrates on distribution of income (regular income) and it also sees that the average return is higher than that of the income from bank deposits.
Pure Growth funds (Growth-oriented funds):unlike the income fund, growth funds concentrate on long term gains – which is capital appreciation. They do not offer regular income distribution. They aim at giving capital appreciation in the long run. Hence they have been described as “Nest Eggs” investment.
Balanced Fund:such a fund is a combination of income and balanced fund. They aim at regular distribution of income to unit holders and also aims to provide capital appreciation. They try to achieve this by balancing their investments between the high growth equity shares on one hand and fixed income earning securities on the other hand.
Specialised funds: such funds offer special schemes so as to meet the specific categories of people like pensioners, widows, etc.. There are also funds for investment of securities in specific areas like – Japan fund, South Korea Fund, etc..In fact, these funds open the door for foreign investors to invest on the domestic securities of these countries.
Sometimes, such funds maybe sector specific (fertilizers, sugar, automobiles, banking, etc.). These funds carry heavy risk as they are invested in one sector only. Any adverse movements in that particular sector and the entire fund value crashes.
Money Market Funds:such funds are open-ended funds and they invest in highly liquid and safe securities like commercial paper, banker’s acceptances, certificates of deposits, treasury bills, etc. – these instruments are called money market instruments.
Taxation fund: A taxation fund is basically a growth-oriented fund. But, it offers tax rebates to the investors either in the domestic or foreign capital market it is suitable to salaried people who want to enjoy tax rebates particularly during the month of February and March (year-end).
Some more classifications:
Index fund: Index funds refers to those funds where the portfolios are designed in such a way that they reflect the composition of some broad based market index. This can be achieved either by investing only in index directly or by buying the stocks that make up the index in exact proportion which goes into making of an index.
Bond fund: Such funds invests mainly in fixed income securities (Primarily Bonds). On an average they offer slightly higher returns than bank fixed deposits. The capital appreciation offered by such funds are lesser than equity funds.
Property fund: as the name suggests, this fund invests in real estate.
Fund of funds: A fund of fund scheme is a mutual fund scheme that invests in other mutual fund schemes. The concept is widely prevalent abroad. Mutual funds in India are allowed to launch fund-of-funds.
Example: The Quantum Equity Fund of Funds is a perfect investment for investors who would like to invest in various Equity funds, and would want a professional fund manager to choose and manage the funds for them.
Exchange Traded Fund:
What are ETFs (Exchange Traded Funds)?
ETFs are generally passively managed mutual fund schemes that track a benchmark index and the performance of that index, subject to tracking error. ETF’s can be classified as Equity ETFs, Debt ETFs, and Commodity ETFs.
An ETF, or exchange-traded fund, is a marketable security that tracks an index, a commodity, bonds, or a basket of assets like an index fund. Unlike mutual funds, an ETF trades like a common stock on a stock exchange. ETFs experience price changes throughout the day as they are bought and sold. ETFs typically have higher daily liquidity and lower fees than mutual fund shares, making them an attractive alternative for individual investors.
Because it trades like a stock, an ETF does not have its net asset value (NAV) calculated once at the end of every day like a mutual fund does.
Why invest in ETFs:
• Tradable: ETFs are mutual funds that are listed on the stock exchange and can be traded just like stocks.
• Cost effective and expense: ETFs generally charge a lower expense fee as compared with conventional mutual fund schemes
• Diversification: Constituents of ETFs are generally diversified across sectors. This may help in reducing concentration and enhancing risk adjusted returns over long-term time periods.
• Transparency in holding and price: The underlying securities are generally disclosed on a regular basis. Moreover, unlike conventional mutual fund schemes, ETFs also disclose their underlying securities every day on the website.
• Liquidity: units of ETF can be traded on a real time basis on stock exchange.
Gold ETF: A gold exchange traded fund is nothing but exchange listed mutual fund representing some units of gold. Each unit represents one gram of gold generally and in the case of quantum gold ETF, it is 0.5 grams. The ETF can be traded on the stock exchange. To buy one needs to have a demat and a trading account
Investors can enjoy the benefit of price appreciation of gold without any issue of safety or warehousing (storage or storage charges).
Recently some mutual funds have come forward to invest in Gold ETF schemes under the fund-of-fund option.
Net Asset Value:
The NAV is nothing but the market price of each unit of a particular scheme in relation to all the assets of that scheme.
It may be otherwise called the ‘intrinsic value’ of each unit. This value determines how much value of our investment has earned for us (to calculate Return on Investment).
If the NAV is more than the face value of the unit, it means that the fund is doing well and has made a profit.
In other words, Net Asset Value is the worth, in market terms, for each unit of the fund. It is calculated as the market value of all investments in the fund less liabilities and expenses divided by the outstanding number of units in the fund. Most schemes announce their NAVs on a daily basis.
If the applicable NAV is Rs. 10.00 and the exit/redemption load is 1%, then the Repurchase Price will be Rs. 9.90.