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Monday, February 1, 2016

Classification of Mutual Funds in India




Classification of Mutual Funds in India

Mutual funds allow investors to pool in their money for a diversified selection of securities, managed by a professional fund manager.
The Mutual Funds usually invest their funds in equities, bonds, debentures, call money etc., depending on the objectives and terms of scheme floated by MF.   Now a days there are MF which even invest in gold or other asset classes.
Some important mutual fund schemes under the following three categories based on maturity period of investment:
I. Open-Ended - This scheme allows investors to buy or sell units at any point in time. 

    This does not have a fixed maturity date.
1. Debt/ Income - In a debt/income scheme, a major part of the investable fund are channelized towards debentures, government securities, and other debt instruments. Although capital appreciation is low (compared to the equity mutual funds), this is a relatively low risk-low return investment avenue which is ideal for investors seeing a steady income.
2. Money Market/ Liquid - This is ideal for investors looking to utilize their surplus funds in short term instruments while awaiting better options. These schemes invest in short-term debt instruments and seek to provide reasonable returns for the investors.
3. Equity/ Growth - Equities are a popular mutual fund category amongst retail investors. Although it could be a high-risk investment in the short term, investors can expect capital appreciation in the long run. If you are at your prime earning stage and looking for long-term benefits, growth schemes could be an ideal investment.
3. i. Index Scheme - Index schemes is a widely popular concept in the west. These follow a passive investment strategy where your investments replicate the movements of benchmark indices like Nifty, Sensex, etc.
 3.ii. Sectoral Scheme - Sectoral funds are invested in a specific sector like infrastructure, IT, pharmaceuticals, etc. or segments of the capital market like large caps, mid caps, etc. This scheme provides a relatively high risk-high return opportunity within the equity space.
 3.iii. Tax Saving - As the name suggests, this scheme offers tax benefits to its investors. The funds are invested in equities thereby offering long-term growth opportunities. Tax saving mutual funds (called Equity Linked Savings Schemes) has a 3-year lock-in period.
4. Balanced - This scheme allows investors to enjoy growth and income at regular intervals. Funds are invested in both equities and fixed income securities; the proportion is pre-determined and disclosed in the scheme related offer document. These are ideal for the cautiously aggressive investors.
II. Closed-Ended - In India, this type of scheme has a stipulated maturity period and investors can invest only during the initial launch period known as the NFO (New Fund Offer) period.
1. Capital Protection - The primary objective of this scheme is to safeguard the principal amount while trying to deliver reasonable returns. These invest in high-quality fixed income securities with marginal exposure to equities and mature along with the maturity period of the scheme.
2. Fixed Maturity Plans (FMPs) - FMPs, as the name suggests, are mutual fund schemes with a defined maturity period. These schemes normally comprise of debt instruments which mature in line with the maturity of the scheme, thereby earning through the interest component (also called coupons) of the securities in the portfolio. FMPs are normally passively managed, i.e. there is no active trading of debt instruments in the portfolio. The expenses which are charged to the scheme, are hence, generally lower than actively managed schemes.
III. Interval - Operating as a combination of open and closed ended schemes, it allows investors to trade units at pre-defined intervals.

NAV means Net Asset Value:
The investments made by a Mutual Fund are marked to market on daily basis. In other words, we can say that current market value of such investments is  calculated on daily basis.  NAV is arrived at after deducting all liabilities (except unit capital) of the fund from the realisable value of all assets and dividing by number of units outstanding. Therefore,  NAV on a particular day reflects the realisable value that the investor will get for each unit if the scheme is liquidated on that date. This NAV keeps on changing with the changes in the market rates of equity and bond markets.

Difference between Mutual Funds and Hedge Funds:
 Hedge Funds are the investment portfolios which are aggressively managed and uses advanced investment strategies, such as leveraged, long, short and derivative positions in both domestic and international markets with a goal of generating high returns .  In case of Hedged Funds, the number of investors is usually small and minimum investment required is large.   Moreover, they are more risky and generally the investor is not allowed to withdraw funds before a fixed tenure.
ULIP or Unit Linked Insurance Plan :
The money You Pay as premium is Split into two portions:
A Large portion is invested in shares of companies or bonds and debentures.You are allotted units which represent your share in the total value of the ULIP.
A smaller portion goes towards insuring your life.
Where as Mutual funds ?
The money You Invest is invested in shares of companies or bonds and debentures.
You are allotted units which represent your share in the total value of the mutual fund.
ULIPs are sold primarily based on this ‘Two-in-One” promise and at first glance it seems like a good idea. But as an investor you have to be careful that you don’t get something that does neither of the two things very well.
So the comparison is not between ULIPs and mutual funds but between ULIPs and a combo of Mutual funds + Term life insurance.

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