TYPES OF MUTUAL FUND:
A. BY CONSTITUTION
1.OPEN ENDED FUNDS
DEFINITION: “These funds buy & sell units on a continuous basis &, here, allow investors to enter & exit as per their convenience. The units can be purchased & sold even after the initial offering (IFO) period (in case of new fund). The units are bought & sold at the net asset value (NAV) decleared by the fund.”
The number of outstanding units goes up or down every time fund house sells or repurchases the existing units. This is the reason that the unit capital of an open ended mutual fund keeps varying. The fund expanse in size when the fund house sells more units than it repurchases as more money is flowing in.
An open ended fund provides investors an easy, low cost way to pool their money & purchase a diversified portfolio reflecting a specific investment objectives, such as growth & income. Investors do not need a lot of money to gain entry into an open ended fund, making the fund easily accessible for investment.
Open ended funds are available in most developed countries, but T terminology & operating rules vary. US mutual funds, UK units trusts & OEICs, European SICAVs, & hedge funds are all examples of open ended funds.
On the other hand, the funds size reduces when the fund house repurchases more units than it sells. An open ended fund is not obliged to keep selling new units all the time. For instanace, if the management thinks that it cannot manage a large sized fund optimally, it can stop accepting new subscription requests from investors. However it has to repurchase the units at all times.
2.CLOSE ENDED FUND:
A close ended fund is also known as closed end investment or closed end mutual fund. A closed ended fund is organized as publicly traded investment company by the securities & exchange commission (SEC). Like a mutual fund a closed end fund is a pooled investment fund with a manager overseeing the portfolio, it raises a fixed amount of capital through.
New shares in a closed end funds are not created by managers to meet demand from investors, the shares can be purchased & sold only in the markets, which as the original design of the mutual fund, which predctes open end mutual funds but offers the same actively-managed pooled investment.
Usually a characteristic of closed end schemes is that they are generally traded at a discount to NAV, but clear to maturity, the discount narrows.
· DIFFERENCE BETWEEN OPEN ENDED & CLOSE ENDED MUTUAL FUND:
Both open end & closed end funds have been around for many decades. Close end funds are the oldest among these introduced in the late 19th century. Exchange traded funds or ETFs are a relatively recent innovation in the fund business & were launched about 20years ago. Currently, there are 7,407 open ended funds with total net assets of $12.1 trillion. But close end fund by far have the smallest market share, with 568 funds worth about $252.6 billion. This doesn’t mean that open ended funds are always the best option & their funds types should be ignored.
| BASIS FOR COMPARISON |
OPEN-ENDED FUNDS |
CLOSED-ENDED FUNDS |
| Meaning |
Open-ended funds can be understood as the schemes that offer new units to the investors on a continuous basis. |
Closed-ended funds are the mutual funds, which offer new units to investors for a limited period only. |
| Subscription |
These funds are available throughout the year for subscription. |
These funds are available only during specified days for subscription. |
| Maturity |
There is no fixed maturity. |
Fixed maturity period, i.e. 3 to 5 years. |
| Liquidity provider |
Funds itself |
Stock market |
| Corpus |
Variable |
Fixed |
| Listing |
No listing on stock exchange, transactions are performed directly through fund. |
Listed on a recognized stock exchange for trading. |
| Transactions |
Executed at the end of the day. |
Executed in real time. |
| Determination of price |
Price can be determined by dividing NAV from shares outstanding. |
Price is determined by supply and demand. |
| Selling price |
Net Asset Value (NAV) plus load, if any. |
Premium or discount to Net Asset Value (NAV). |
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3.INTERVAL FUND
DEFINITION : “A non- traditional types of closed ended mutual fund that periodically offers to buy back a percentage of outstanding shares from shareholders. Shareholders are not required to sell their shares to the fund.”
Interval fund shares typically do not trade on the secondary market although many interval funds do offer shares for sale at current net asset value (NAV) on a continuous basis.
Fess for interval funds tend to be higher than for other types of mutual funds as do returns. High yields are the main reason investors are attracted to interval funds. Here is a closer look at these investments. Minimum investment are often between $10,000 & 25,000 & have expense ratio as high as 3%.
B. BY INVESTMENT OBJECTIVE
1.GROWTH FUND & EQUITY FUND:
These fund invest in stocks. Wealth creation & capital appreciation is the primary objective of equity fund. They have the potential to generate higher return & are best for long term investment. These funds goal is to grow faster than money market or fixed income funds with higher risk comes higher reward. There are many different types of equity funds because there are many different types of equities.
I. DIVERSIFIED FUND
A diversified fund is a fund that is broadly diversified across multiple market sectors or geographic regions. It holds multiple securities, often in multiple asset classes. Its broad market diversification helps to prevent idiosyncratic event in one area from affecting on entire portfolio.
a. SMALL CAP
Small cap funds invest primarily in stock in companies with sizes between &300million & $2billion. Small cap fund that invest in small sized companies. Mutual funds have restrictions that limit them from buying large portions of any one issuers outstanding shares, which limit the risk while giving an investors exposure to this segment of the market.
b. MID CAP
A mid cap fund invest in companies between $2billion to $10billion in the market cap. These are established business that are still considered developing & thus have a higher growth rate than large cap fund. Mid cap which invest in mid sized business.
c. LARGE CAP FUNDS
Large cap funds invest in stocks in the largest companies in the world, with market caps in excess of $10billion. These can include apple,exxon,&google.
II. INDEX FUND
These funds aim to track the performance of a specific index such as the S&P/TSX COMPOSITE INDEX. The value of the mutual fund will go up or down as the index goes up or down. Index funds typically have lower costs than actively managed mutual funds because the portfolio manager doesn’t have to do as much research or make as many investment decisions.
III. SECTORAL FUNDS
Sectoral fund invest mostly in a particular sector or along the lines of a defined theme. Since the investment are concentrated on a single sectors or theme, sector funds are considered extremely risky. It is very important to time the entry into & exit from them as the fortunes of sectors changing in different cycles in the economy. They are meant for investor should take only a small exposure in them.
Sectoral funds have performed have done well over the period of 10 years & better than other equity funds, but there is risk associated with it & you need to stay invested in the fund for longer period for a economy & sectors like IT. So if you are convinced that these sectors will move forward in the long run, then you can invest with long term return in your view.
Foreign equity funds or global/ International funds, invest in a specific region outside of an investors home country. These funds sometimes have very high returns, but it is hard to classify them as either riskier or safe than domestic investment.
2.DEBT/INCOME/BOND/FIXED INCOME FUNDS
These invest in fixed income securities, like government securities or bonds, commercial papers & debentures, bank certifications of deposits & money market instruments like treasury bills, commercial paper etc. These are relatively sufer investments & are suitable for income generation.
3.HYBRID FUND
These invest in both equities & fixed income, thus offering the best of both, growth potential as well as income generation. They try to balance the aim of achieving higher returns against the risk of losing money. Most of these funds follow a formula to split money among the different types of investments.
4.MONEY MARKET FUND
The money market fund (also called a money market mutual fund) is an open ended fund that invest in short term debt securities such as U.S. treasury bills & commercial paper. Money market funds are widely (though not necessarily accurately) regarded as being as safe as bank yet providing a higher yield. Regulated in the UNITED STATES under the investment company Act of 1940. Money market funds are important providers of liquidity to financial intermediaries.
A money market fund is an investment whose objective is to earn interest for shareholders while maintaining a Net Asset Value (NAV) of $1 per share. Money market funds portfolio is comprised of short term, or less than one year, securities representing high quality, liquid debt & monetary instruments. Investors can purchase shares of money market funds through mutual funds, brokerage firms & banks.
A money market funds purpose is to provide investors with safe place to meet easily accessible.
It is types of mutual fund characterized as a low risk, low return investment. They have no loads, which are fees mutual funds may charge for entering or exiting the funds.
A money market funds might also hold short term U.S. treasury securities, such as T-Bills, certificates of deposit (COD); & corporate commercial buyer & other instruments specified by RBI. These funds have a minimum lock in period of 15 days. Till recently, the RBI regulated money market funds but they now come under SEBI.
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