Open-ended Fund/Scheme - An open-ended fund or scheme is one that is available for subscription and repurchase on a continuous basis. These schemes do not have a pre-defined maturity period. Investors can conveniently buy and sell units at Net Asset Value (NAV) per unit which is declared on a daily basis. The key feature of open-end schemes is liquidity.
Close-ended Fund/Scheme - A close-ended fund or scheme has a stipulated maturity period e.g. typically 3–5 years. The fund is open for subscription only during a specified period at the time of launch of the scheme. Investors can invest in the scheme at the time of the new fund offer and thereafter they can buy or sell the units of the scheme on the stock exchanges where the units are listed, however liquidity may be very low for such schemes in the secondary market. In order to provide an exit route to the investors, some close-ended funds give an option of selling back the units to the mutual fund through periodic repurchase at NAV related prices. SEBI Regulations stipulate that at least one either of the two exit routes is provided to the investor i.e. repurchase facility or through listing on stock exchanges.
Schemes according to Investment Objective - A scheme can also be broadly classified as Equity, debt or Hybrid considering its investment objective. Such schemes may be open-ended or close-ended schemes as described earlier. Such schemes may be classified mainly as follows:
Equity Scheme - These invest predominantly in equities i.e. shares of companies. The primary objective is wealth creation or capital appreciation. They have the potential to generate higher return and are best for long term investments.
Debt Scheme - Debt Mutual Funds mainly invest in a mix of debt or fixed income securities such as Treasury Bills, Government Securities, Corporate Bonds, Money Market instruments and other debt securities of different time horizons. Generally, debt securities have a fixed maturity date & pay a fixed rate of interest. The return from such funds is attributed to interest income and capital appreciation /depreciation in value due to changes in interest rates and market dynamics.
Hybrid Scheme - Funds which invests in a mix of assets are known as Hybrid funds. These funds can invest in equity, debt and/or gold. The most popular funds choose to invest in a mix of equity & debt. The asset allocation is mentioned in their offer documents. These are appropriate for investors looking for moderate growth. They generally invest 40–60% in equity and debt instruments.
Money Market or Liquid Schemes - These schemes invest in liquid instruments with an aim is to provide easy liquidity, preservation of capital and moderate income.
These schemes invest exclusively in short-term instruments such as treasury bills, certificates of deposit, commercial paper and inter-bank call money, Government securities, etc. Such funds are appropriate for investors as a means to park their surplus funds for short periods.
Gilt Funds - These funds invest exclusively in government securities. Government securities have no default risk. NAVs of these schemes also fluctuate due to change in interest rates and other economic factors as is the case with income or debt oriented schemes.
Index Funds - Index Funds replicate the portfolio of a particular index such as the BSE Sensitive Index (Sensex), NSE 50 Index (Nifty), etc. These schemes invest in securities in the same weightage comprising of an index. NAVs of such schemes would rise or fall in accordance with the rise or fall in the index, though not exactly by the same percentage due to some factors known as ‘tracking error’ in technical terms. Necessary disclosures in this regard are made in the offer document of the mutual fund scheme.
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