Study Notes

Types of Mutual Funds

Types of Mutual Funds

Types of Mutual Funds

There are many types of Mutual Funds that exist in India and there are many different kinds
of funds also. The Mutual Fund industry has been in India since 1963. Today there are more
than 10,000 schemes that exist in India. Mutual funds can be categorised into various types
based on structure and investment objectives.

open-ended

by structure close-ended

interval
Mutual Funds
equity

by investment
debt
objective

hybrid

Types of Mutual Funds – based on Structure

Open-ended Mutual Funds

 Open-ended mutual funds are mutual funds which are open for subscription (or
purchase) by investors at any time. This type of mutual funds would just issue new
units to investors who want to get into the fund at the NAV of that day.
 For redemption, the AMC has to buy back the units and an investor can exit from the
fund anytime at the NAV declared on a daily basis.
 The majority of mutual funds in India are open-ended in nature.
 In a rare scenario, the Asset Management Company (AMC) can stop further
purchase by investors if the AMC feels that there are not enough and good
opportunities to deploy the fresh monies.
 The key feature of open-end schemes is liquidity.

Closed-ended Mutual Funds

 Closed-ended mutual funds are mutual funds that are closed for further subscription
(or purchase) by investors after the NFO.
 A close-ended fund or scheme has a stipulated maturity period e.g. 3-5 years

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Types of Mutual Funds

 Unlike, Open-ended funds, investors cannot buy fresh units of these types of mutual
funds after the NFO period. Hence, investing in closed-ended funds is possible only
during the NFO period.
 Investors cannot exit via redemption in the closed-ended fund. The redemption takes
place once the period matures.
 As per SEBI regulations, to provide an opportunity to exit, Mutual Fund Houses list
the closed-ended funds on the stock exchange. Hence, investors would need to trade
the closed-ended funds on the exchange to exit them before the maturity period.

Interval Funds
 Interval Fund is a Mutual Fund wherein the fund house allows the purchase or sale of
the units only during a particular pre-decided time period at the prevailing NAV.
 These funds might be listed on a stock exchange like other closed-end funds
 These funds might invest in both equities and debt securities but they are mostly
found to invest in debt instruments.
 Interval Funds have a lot in common with fixed maturity plans (FMPs). The money
remains invested for a fixed tenure and the investment cannot be redeemed before
maturity. The fund manager of these funds is better positioned to utilize the
investments by allocating the money in securities for a tenure which matches the
fund’s maturity.

Types of Mutual Funds – based on investment objective

In October 2017, Securities of Exchange Board of India (SEBI) introduced new and broad
categories in Mutual Funds in order to bring uniformity in similar schemes launched by the
different Mutual Funds. This is to aim and ensure that investors can find it easier to compare
the products and evaluate the different options available before investing in a scheme.

As such, SEBI mandated Mutual Fund Houses to categorize all their schemes (existing &
future scheme) into 5 broad categories and 36 sub-categories.

Mutual Fund
Categories

Solution
Equity Funds Debt Funds Hybrid Funds Other Schemes
Oriented Funds

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Types of Mutual Funds

Equity Funds

 Such schemes normally invest a major part of their corpus in equities.

 Such funds have comparatively high risks.
 The aim of these funds is growth i.e. to provide capital appreciation over the medium
to long-term.
 These schemes provide different options to the investors like dividend option, growth,
etc. and the investors may choose an option depending on their preferences. The
mutual funds also allow the investors to change the options at a later date.

As per SEBI, the Equity funds are categorised as:

S No Type of Scheme Meaning

1 Large Cap Funds Like the name suggests, large-cap schemes will invest at least
80% of their assets in large-sized companies. The scheme
possesses low risk and will provide modest returns when
compared to mid and small-cap schemes.
2 Large and Mid-Cap funds These schemes will invest minimum 35% in large-cap stocks
and 35% in midcap stocks. These schemes are slightly riskier
than large-cap schemes but can provide higher returns as well.
3 Mid-cap funds The schemes will invest a minimum of 65% of their assets in
midcap stocks. Since the schemes will bet on mid-sized
companies, it possesses a little higher risk. These schemes
have the capability to provide higher returns.
4 Small cap funds These schemes will invest 65% of its assets in small-cap stocks.
These schemes will invest in small-sized companies which may
or may-not become big companies. They are extremely risky but
can provide phenomenal returns
5 Multi Cap Funds There is no major change in the multi-cap category of schemes.
These schemes will continue to invest across market
capitalisations i.e. these schemes can invest in large-cap,
midcap or small-cap stocks. A minimum of 65% should be
allocated to equities.

Note – in Sep 2020, SEBI mandated that a minimum 25%

allocation to large-, mid- and small-cap stocks each has to be
made. This was done to make multi-cap schemes more
diversified and fund houses will have to align their portfolios to
these new limits by January 31, 2021.
Flexi cap Fund In November 2020, SEBI has introduced a new category “flexi
cap fund” in equity mutual funds. It will be an open-ended
dynamic equity scheme investing across large-cap, mid-cap
and small-cap stocks. Under this scheme category, the minimum
investment in equity and equity-related instruments has to be at
least 65% of the total assets.

6 Dividend Yield funds This scheme will invest a minimum 65% of assets in stocks that
can provide periodic dividends to investors.
7 Value Funds and Contra Mutual funds can offer only one of these two categories. Value
Funds funds will follow the value investment strategy where the fund
manager will pick stocks which he/she believes are undervalued.
On the other, contra funds will follow a contrarian investment
strategy.
8 Focused Funds These schemes are mandated to invest in a maximum of 30
stocks. The schemes have to mention which market cap it
intends to invest.
9 Sectoral/Thematic Funds 80% of the total assets of these schemes will be invested in a
particular sector or theme. These schemes are generally not

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Types of Mutual Funds

S No Type of Scheme Meaning

recommended to retail investors as their fortunes depend only
on the performance of a particular sector or theme.
10 Equity Linked Savings These tax-saving schemes will invest 80% in equities in
Scheme (ELSS) accordance with the Finance Ministry notification in 2005 on
Equity Linked Savings Schemes. These schemes will continue
having a lock-in period of three years and will provide tax benefit
under Section 80C of the Income Tax Act.

Note: Large-cap companies are big sized companies with large balance sheets, big teams
and a clear organisation structure in place while are the emerging stars in their sector and
have a potential for growth. Being small in size, these mid-cap companies are very nimble
footed and can make changes to product & strategy very quickly.

SEBI has set a clear classification as to what is a large cap, mid cap and small cap:

Market Cap Meaning

Large Cap 1st to 100th company in terms of full market capitalization
Mid-cap 101st to 250th company in terms of full market capitalization
Small cap 251st company onwards in terms of full market capitalization

Debt Funds

 The aim of debt funds is to provide regular and steady income to investors and
preservation of capital
 Such schemes generally invest in fixed income securities such as bonds, corporate
debentures, Government securities and money market instruments.
 Such funds are less risky compared to equity schemes but have limited capital
appreciation
 The NAVs of such funds are affected because of change in interest rates in the
country. If the interest rates fall, NAVs of such funds are likely to increase in the short
run and vice versa. However, long term investors may not bother about these
fluctuations.

As per SEBI, the Debt funds are categorised as:

S No Type of Scheme Meaning

1 Overnight Funds These schemes are open-ended schemes investing in overnight
securities with a maturity of one day.
2 Liquid Funds These schemes will invest in debt and money market securities
with a maturity of up to 91 days
3 Ultra short duration funds These schemes will invest in debt and money market securities
with a Macaulay duration between three and six months.
Macaulay duration measures how long it will take the scheme to
recoup the investment.
4 Low Duration funds These schemes will invest in debt and money market securities
with a Macaulay duration between six to 12 months
5 Money Market funds These schemes will invest in money market instruments such as
treasury bills with a maturity of up to one year.
6 Short duration funds These schemes will invest in debt and money market
instruments with a Macaulay duration of one and three years.
7 Medium Duration funds These schemes will make investments in debt and money
market instruments with a Macaulay duration between three to
four years.

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Types of Mutual Funds

S No Type of Scheme Meaning

8 Medium to Long duration These schemes will invest in debt and money market
Funds instruments with a Macaulay duration of four to seven years.
9 Long Duration Funds These schemes will invest in debt and money market
instruments with a Macaulay duration greater than seven years.
10 Dynamic Bonds Fund
Schemes under this category will invest across all the duration.
11 Corporate Bonds Fund These schemes will predominantly invest in highest-rated
corporate bonds. They should invest a minimum 80% of their
total assets in the highest-rated corporate bonds.
12 Credit Risk Funds These schemes will invest in below the highest-rated corporate
bonds. These debt schemes should invest a minimum of 65% of
their corpus in lower-rated corporate bonds.
13 Banking & PSU Fund These schemes will invest a minimum 80% of their total assets
in debt instruments of banks, public sector undertakings and
public financial institutions
14 Gilt Funds These schemes will invest in government securities across
maturity. These will invest a minimum 80% of their total assets in
government securities.
15 Gilt funds with 10-year These schemes will invest in government securities with a
constant duration maturity of 10 years. They will invest a minimum 80% in
government securities.
16 Floater Funds These schemes will predominantly invest in floating rate
instruments. They should invest a minimum 65% of their total
assets in floating rate instruments.
Note -

 In November 2020, SEBI announced that effective February 01, 2021, debt mutual
fund schemes have to hold at least 10% of their net assets in liquid assets like
cash, government securities (G-Secs), treasury bills and repo on G-Secs.
 The move is aimed at to augment the liquidity risk management framework for all
open ended debt schemes. This decision comes in wake of the liquidity crisis faced
by Franklin Templeton mainly due to its inability to sell bonds from its portfolio to
meet increasing redemption pressure, which led to the closure of 6 of its debt funds.
 The overnight, liquid and gilt schemes have been exempted from this rule since
a major part of the portfolio of these schemes are invested in liquid assets already.
 It also has mandated debt schemes to conduct stress testing.

Hybrid Funds

 The aim of balanced schemes is to provide both growth and regular income,
 Such schemes invest both in equities and fixed income securities in the proportion
indicated in their offer documents.
 These are appropriate for investors looking for moderate growth.
 NAVs of such funds are likely to be less volatile compared to pure equity funds.

As per SEBI, the hybrid funds are categorised as:

S No Type of Scheme Meaning

1 Conservative Hybrid Fund These schemes will invest 75 to 90% of their total assets in debt
instruments. They can also invest around 10 to 25% in equity-
related instruments. These schemes are called conservative
because they invest predominantly in debt instruments

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Types of Mutual Funds

S No Type of Scheme Meaning

2 Balanced Hybrid Funds Balanced Hybrid will invest around 40 to 60% of their total
And assets in either equity or debt instruments. These schemes
Aggressive Hybrid Funds cannot invest in arbitrage.

Aggressive hybrid fund will invest around 65 to 85% of their total

assets in equity-related instruments. They can also invest
around 20 to 35% of their assets in debt instruments.

Mutual fund houses can offer only one of i.e. either a

balanced hybrid or an aggressive hybrid fund
3 Dynamic Asset Allocation These schemes would dynamically manage their investments in
or Balanced Advantage equity and debt instruments.
Funds
4 Multi asset allocation fund These schemes can invest in three asset classes i.e. they can
invest in an extra asset class apart from equity and debt. They
should invest a minimum of 10% in each of the asset classes.
Foreign securities will not be treated as a separate asset class.
5 Arbitrage funds These schemes will follow arbitrage strategy and will invest a
minimum 65% of total assets in equities or equity-related
instruments.
6 Equity Savings funds These schemes will invest in equity, debt and arbitrage. They
will have to invest at least 65% of the total assets in stocks and a
minimum 10% in debt. They would declare the minimum hedged
and un-hedged investments in the scheme information
document.

Solution Oriented Funds

S No Type of Scheme Meaning

1 Retirement Fund This is a retirement solution oriented scheme that will have a
lock-in of five years or till the age of retirement.
2 Children’s Funds This is children oriented scheme having a lock-on for five years
or until the child attains the age of majority, whichever is earlier

Other Funds

S No Type of Scheme Meaning

1 Index Fund Index Funds refer to the Mutual Fund schemes whose portfolio
is constructed using a market index as a base. In other words,
the performance of an index fund is dependent on the
performance of a particular index. These schemes are passively
managed. These funds contain shares in the similar proportion
as they are in a particular index. In India, many of the schemes
use Nifty or Sensex as the base to construct their portfolio. For
example, if the Nifty portfolio constitutes of SBI shares whose
proportion is 12% then; the Nifty Index fund will also have 12%
equity shares. This fund can invest at least 95% of its total asset
in securities of a particular index.
2 Fund of Funds (FoF) Fund of funds is an option for those whose investment amounts
are not too large and it is easier to manage one fund (a fund of
funds) rather than a number of Mutual Funds. In this form of
mutual fund investment strategy, investors get to hold a number
of funds under the umbrella of a single fund, hence the name
funds of funds. Often going by the name of multi-manager
investment; it is considered as one of the mutual fund
categories. One of the key advantages of multi-manager

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Types of Mutual Funds

S No Type of Scheme Meaning

investments is that at a lower ticket size, the investor can
diversify themselves across a gamut of mutual fund schemes.
This fund can invest a minimum of 95% of its total assets in the
underlying fund
3 International Funds International Funds invest in international securities or into
master funds that are domiciled out of India. Most of these funds
invest in equity as an asset class. These can be of various types
such as emerging market funds, developed markets funds,
commodity-related international funds etc. The DSP Blackrock
World Gold Fund is an example of a fund that invests in a
master fund based out of India. This fund invests predominantly
in gold and other precious metals. Today, there are many
international Mutual Funds available in India to the investor
4 Gold Funds Gold funds are a new class of funds. These invest in gold ETFs.
While gold ETFs are available to the retail investor, anyone
wanting to buy an ETF has to do it through the stock exchange,
which requires one to have a broking account. In a Mutual Fund,
there is no such requirement, an investor can simply fill an
application form and get the units allotted after making the
payment

Some other funds

Exchange Traded fund (ETF)

 ETF or an Exchange Traded Fund is a mutual fund that investors can buy or sell at
the stock exchange. This is in contrast to a normal mutual fund unit that an investor
buys or sells from the AMC (directly or through a distributor).
 In the ETF structure, the AMC does not deal directly with investors or distributors.
Units are issued to a few designated large participants called Authorised Participants
(APs). The APs provide buy and sell quotes for the ETFs on the stock exchange,
which enable investors to buy and sell the ETFs at any given point of time when the
stock markets are open for trading.
 ETFs therefore trade like stocks and experience price changes throughout the day as
they are bought and sold.
 Buying and selling ETFs requires the investor to have demat and trading accounts.

Capital protection-oriented scheme

 A capital protection-oriented scheme is typically a hybrid scheme that invests
significantly in fixed-income securities and a part of its corpus in equities.
 These are close-ended schemes that come in tenors of fixed maturity e.g. three to
five years.

Structure of the scheme - Example

If the fund collects Rs.100, it invests Rs.80 in fixed-income securities and Rs.20 in
equities or equity related instruments. The money is invested in such a way that the
Rs.80 portion is expected to grow to become Rs.100 in three years (assuming that
the scheme has a maturity period of three years). Thus, the aim is to preserve the
Rs.100 capital till maturity of the scheme.

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Types of Mutual Funds

 Thus, the scheme is oriented towards protection of capital and not with guaranteed
returns.
 Further, the orientation towards protection of capital originates from the portfolio
structure of the scheme and not from any bank guarantee or insurance cover.
Investors are neither offered any guaranteed/indicated returns nor any guarantee on
repayment of capital by the scheme