There are three ways in which you can classify mutual funds, according to their according to their structure, their objective and the sectors they invest in. Here’s a quick round-up of mutual fund categories for all three classifications.
Structure-based
Open Ended Schemes: Schemes without a fixed maturity period, that let you subscribe for or redeem units any time. They offer the benefit of liquidity.
Close Ended Schemes: Schemes with a fixed maturity period, which are open for subscription for a specified duration during the launch, and allow you to invest in them from 3-10 years. After the launch, interested investors can buy or sell units of the scheme on stock exchanges where they are listed. As an exit route, closed mutual funds necessarily have to offer either a repurchase at market value, for a specific time frame or allow trading of units on stock exchanges.
Interval Schemes: A combination of open ended and close ended schemes, interval schemes are open for sale and repurchase only during a specific duration.
Objective-based
Growth Schemes: Schemes that invest in equities and are designed to offer maximum growth over medium and long term, ideal for investors who are in their prime earning years. These schemes are comparatively high risk, and offer investors options like capital appreciation and dividend option.
Income Schemes: These schemes invest in fixed income securities, are less risky, and a good option for investors who want to generate steady income streams.
Balanced Schemes: Investments are done in equity and debt securities to generate regular income and moderate growth. They invest 40% and 60% in equity and debt respectively, and their NAVs are likely to be less volatile than those of pure equity schemes.
Liquid Schemes: Safe, short term instrument investments to generate quick returns while still offering liquidity. Returns on these schemes fluctuate much less as compared to other funds and they are a good option for individual investors who want to park their surplus funds.
Gilt Funds: For investors who are looking for extremely safe investments, these schemes invest only in government bonds and securities. While these schemes have no default risk, their NAVs still fluctuate as a result of change in interest rates and other economic factors.
Tax Saving Schemes: Investments in funds that offer tax deduction or whose returns in the form of dividends are not taxed. These tax rebates are offered by the government to incentivize investments. The funds are mainly invested in equities and growth and opportunities associated with tax saving schemes are similar to those of equity schemes.
Index Funds: These funds invest exactly according to the portfolio and weightage of a specific stock exchange index. Their NAVs rise and fall according to the changes in the index, with a slight difference in percentage. These could also be Exchange traded Funds (ETFs), which get traded on stock exchanges.
Special Schemes
Sector Specific Funds: Invest in funds of companies based on certain sectors that are booming or are expected to do well in light of the prevalent market situations. The returns of these funds depend on how the sector performs, and it is important to track sectors carefully, or seek help from an expert while investing in these funds. Though high on returns, these funds tend to be more risky as compared to diversified funds.