Thematic to ETFs: Types of Mutual Fund

Mutual Funds have a variety of schemes to suit every investment objective and risk tolerance. From capital appreciation, income, to liquidity, every investor's financial goal has a mutual fund scheme that serves it. They collect money from many investors and invest it across different asset classes in order to maximise returns and keep risks under check.

Investing in mutual funds calls for a definitive understanding of the different schemes on offer. Mutual funds are tailored to suit the needs of different investors, for instance, long-term wealth generation, short-term returns, tax benefits, or risk coverage. Mutually classifying mutual funds by investment strategy, underlying portfolio, and structure, there are various categories they belong to.

Mutual fund schemes can be classified according to their organizational structure into three broad categories:

1. Open-ended Schemes: These are evergreen schemes where investors can purchase or sell units at any time at the current Net Asset Value (NAV). This feature makes them a favorite among investors seeking liquidity and long-term investment.

2. Close-ended Schemes: Close-ended schemes also have a maturity period, and subscriptions are allowed only at the time of the initial offer. At maturity, the investors can redeem, but they can trade on stock exchanges to provide liquidity before maturity.

3. Interval Schemes: Interval schemes are a mix of open-ended and close-ended schemes. They provide the facility of purchase and redemption at periodic intervals to provide limited liquidity for certain period intervals.

Mutual funds are managed actively or passively, based on the approach to investment chosen:

- Active Funds: These funds make use of experienced fund managers, who make decisions actively, buying securities to deliver excess returns (alpha) over the benchmark index. They use styles and strategies of various kinds to exceed the market's performance.

- Passive Funds: Passive funds mimic the performance of a particular index or benchmark. Examples are index funds and exchange-traded funds (ETFs). Passive funds have lower expense ratios, as they involve minimal active management.

1. Growth Funds: The funds invest mainly in equities and have a long-term target of capital appreciation. They are appropriate for investors with a higher risk tolerance and a long-term investment horizon.

2. Income Funds: The funds invest in fixed-income securities like government bonds and corporate debentures to generate stable and regular income. They are best suited for conservative investors seeking steady returns.

3. Liquidity Funds: Money market and liquid mutual funds invest in short-term products such as commercial papers and treasury bills, providing immediate access to funds with low risk. Such funds are ideal for investors who are looking for short-term parking of excess cash.

4. Tax-Saving Funds: Alternatively referred to as Equity Linked Savings Schemes (ELSS), these funds are eligible for tax relief under Section 80C of the Income Tax Act. These funds invest mainly in equities and have a three-year lock-in period.

Mutual Funds classification according to securities investment

1. Equity Funds: They invest mainly in shares and are also categorized based on market capitalization (large-cap, mid-cap, small-cap) and investment approach (value, growth, sectoral, or thematic funds).

2. Debt Funds: They invest in fixed-income securities such as government bonds, corporate bonds, and money market instruments. They are appropriate for conservative investors who want stable returns.

3. Hybrid Funds: These funds invest in a combination of equity and debt securities, managing risk and return. Examples are balanced funds and dynamic asset allocation funds.

4. Money Market Funds: These funds invest in very liquid instruments with short maturities, making them suitable for short-term investment.

5. Multi-Asset Funds: These funds distribute investments across various asset classes, including equities, debt, commodities, and real estate, offering diversified exposure.

There are mutual fund schemes that are aimed at addressing particular themes or the needs of investors:

- Thematic Funds: Thematic funds concentrate on special industries or economic themes, e.g., technology, healthcare, or infrastructure.

- Tax-Saving Funds: ELSS funds save taxes for investors while providing growth opportunities.

- Retirement Benefit Funds: Retirement benefit funds are aimed at creating a corpus for retirement with a long investment tenure.

- Child Welfare Funds: The funds enable parents to save for their child's education or future expenses.

- Arbitrage Funds: The funds use differences in prices across various markets to deliver low-risk returns.

1. Exchange-Traded Funds (ETFs): Passively managed funds that are listed on stock exchanges like ordinary stocks. They provide liquidity, transparency, and low-cost investment schemes.

2. Fund of Funds (FoFs): FoFs invest in other mutual funds rather than in stocks or bonds directly, and they offer diversification and expert fund management.

3. Overseas Funds: Overseas funds invest in foreign markets, enabling investors to access foreign assets and diversify their investments outside domestic markets.

Mutual Funds offer numerous investment options specific to various investor requirements. For capital appreciation, periodic income, or liquidity on a short-term basis, the investor can opt for a host of mutual fund schemes depending upon his financial needs and risk profile. Knowledge about these categories will enable the investor to make effective choices and construct a diversified portfolio of investments commensurate with his goals.