FAQ on Mutual Funds

Mutual Funds

What are the types of schemes available in mutual funds?

The following are broadly the schemes offered by mutual fund companies.

Income Category

This category of schemes invests only into debt instruments issued by government, public or private companies.

Liquid Funds: These schemes invest in short term income instruments such as certificate of deposits, treasury bills and short-term bonds. The objective of these schemes is to provide current income with high liquidity. The ideal investment horizon is 1 day to 1 month.

Short-Term Income Funds: These schemes invest in short-term money market instruments and corporate bonds. The objective of these schemes is to provide a higher current income than liquid funds but without compromising the liquidity. The ideal investment horizon is 1 month to 3 months.

Medium-Term Income Funds: These schemes invest in medium-term treasury bills and corporate bonds. The objective of these schemes is to provide a higher current income than short-term income funds with reasonable liquidity. The ideal investment horizon is 3 months to 6 months.

Long-Term Income Funds: These schemes invest in medium to long term treasury bills, dated government securities and corporate bonds. The objective of these schemes is to provide consistent returns higher than medium term income funds with reasonable liquidity. The ideal investment horizon is more than 6 months to 2 years.

Floating Rate Funds: These schemes invest in short-term to long-term instruments comprising of government securities and corporate bonds. The objectives of these schemes to provide consistent returns by investing in floating rate instruments, which are indexed to interest rate or consumer price indexes. These schemes also provide reasonable liquidity to the investors. The ideal investment horizon depends on the type of floating rate scheme chosen � short term floating rate scheme, medium term floating rate scheme, floating rate income scheme, etc.

GILT Funds: These schemes invest in securities issued by the government. The securities in which these funds invest are called �sovereign� securities and they are assigned the highest credit rating. These securities, usually, doesn�t carry any credit risk. However, they carry interest rate risk due to fluctuations of their trading prices based on current interest rate environment in the economy and a plethora of fundamental economic conditions. The ideal investment horizon depends on the type of gilt security scheme chosen � medium term or long term. Usually, an investment horizon of more than 1 year is recommended.

Bond funds: These schemes invest in securities issued by central government, state government, public sector companies and private sector companies. The objective of these schemes is to provide a consistent high return from a portfolio of bonds comprised of the securities described above. The ideal investment horizon is about 1 year to 2 years.

Fixed Maturity Plans: These schemes have a fixed maturity date wherein the scheme gets matured. These schemes are closed ended in nature. They are open for a fixed duration, at first, during which investors can subscribe for units of the scheme. After the fixed duration gets over, the schemes close for further subscriptions. Units are allotted only to the persons who have invested during the initial opening period. The plans have fixed maturities like 3 months, 6 months, 1 year, etc. After such a fixed period or on maturity date, units of the investors are bought back by the mutual fund at the NAV applicable on that day. The objective of these schemes is to provide a fixed income for a fixed period to the unit holders from a portfolio of various types of debt instruments.



Equity Category

This category of schemes invests only into shares of companies.

Diversified Equity Funds: These schemes invest in equity shares of public and private companies across different sectors. The objective of the scheme is to provide long term capital appreciation while reducing risk by diversifying investments into various sectors of the economy.

Broadly, all the companies can be categorized into three types � large cap companies, mid cap companies and small cap companies. Mutual funds offer diversified equity schemes even in these narrow classifications. The following are the sub categories of funds under the diversified equity class:
  • Large Cap Funds: These schemes invest only in large capitalized companies.
  • Mid Cap Funds: These schemes invest only in medium capitalized companies.
  • Small Cap funds: These schemes invest only in small-capitalized companies.
  • Mix of large, mid and small cap funds: These schemes invest in a mix of large, mid and small-capitalized companies.
Sector Equity Funds: These schemes invest in shares of public and private companies of a particular sector of the economy only. The objective of these funds is to focus on a particular sector, which presents opportunities for high capital appreciation in the medium to long-term time horizon. Even this class of equity funds can have narrower classifications of large cap, mid cap and small cap schemes.

Index Funds: These schemes are a replicate or try to replicate a popular index of a stock exchange. The objective of the fund is to allow investors to invest in stocks, which represent the popular index and in the same proportions in which the stocks are in that popular index.

Tax Funds: These schemes are basically diversified equity schemes but with a tax advantage. Amounts invested into these schemes qualify for deduction while computing taxable income of an individual. Hence, these schemes not only give returns from investment but also save us taxes. However, investment into these schemes for tax deductions is restricted to a certain amount.

And, Global Equity Funds.



Hybrid Funds

These funds invest in a mix of equity and debt securities

Balanced Funds: These funds invest in a mix of equity and debt in the proportions of 50:50 or 60:50 or other proportions of similar kind. The objective of these funds is to provide a reasonable and consistent return from the mix of both the asset classes.

Monthly Income Schemes: These funds invest in a mix of equity and debt in the proportions of 20:80 or 30:70 or other proportions of similar kind. The objective of these funds is to provide enhanced regular returns to risk-averse investors by taking small positions in equity assets.

And, Fixed Maturity Plans.

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Mutual Funds
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