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Types of Mutual Fund Schemes In India

 Viplav Majumdar  07-09-2017   01-12-2017

 Types of Mutual Fund Schemes In India 

“Different types of Mutual Funds are present for investment in India. These can be differentiated on features, investment style, type of asset in the fund, sales channel and many other parameters. One should be very careful while choosing a scheme for one’s objectives.”

The most common type of mutual fund known is Equity Mutual Fund, but there are different types of MF schemes for investors. These can be categorised on different points and every scheme type or category has some pros and cons attached to it. While choosing the best suitable option investor should consider the underlying asset class in which scheme is investing. For the purpose of achievement of your objective, some points should be considered. The objective of the fund, Asset type and investment style should be given top priority.

 Some Common Features of Mutual Fund Schemes

Subscription Status

Open-Ended Mutual Fund Schemes

If a scheme is open for fresh purchase or redemption of units after the NFO Subscription period at daily -current NAV, the scheme is known as open-ended scheme. Generally, these schemes are always open for subscription in some cases depending on the market situation and limited opportunities Fund Manager may stop taking a fresh subscription.

Closed Ended MF Schemes

When units can be purchased only in the specific period of NFO and the fund will redeem on a specific date or in a particular situation, this is known as closed-ended Mutual Fund Scheme. 

Options of MF Schemes

Almost every MF scheme has these options, which give the investor the flexibility to choose according to his preferences.

Growth Option of Mutual Fund Schemes

In this option, the investor invests the amount and the investor gets profit or loss at the time of selling the units at market value, he/she doesn’t get anything in between. Generally, the NAV of this scheme grows with time and the main objective of these options is capital appreciation.

Dividend Option of MF Schemes

In this type of scheme option Fund Manager books profits periodically on the situation of opportunities and options in the market {Normally when the value of assets goes up} and distributes a dividend to the unit holders. Mutual Fund Dividend is calculated on a percentage of the face value of Rs. 10 (initial price at NFO). If the dividend is Rs. 3, it can be said as 30% dividend distribution.  The actual dividend yield is calculated on NAV, like if NAV of the fund was Rs. 300, the dividend yield is 1%. In these schemes after the dividend is distributed the nav of scheme goes down by the amount of distribution, in above example nav of the scheme will be Rs. 297 after the date of dividend distribution. This option may be better in Equity Mutual Funds for lump sum investments of senior citizens, who want periodic profit booking. In Equity MFs dividend is Tax-Free but in funds other than equity taxation, the dividend is distributed after deduction of Dividend Distribution Tax, so the returns are reduced by dividend distribution tax. The investor is not supposed to pay any tax on dividends received by him or her. Dividend option has two sub-options.

 Dividend Payout Sub Option of MF Schemes

When an investor chooses to receive the dividend declared in his/her account, the “Dividend Payout” sub-option is to be taken. In this sub-option, the amount of dividend will be paid to the investor. This amount of dividend is tax-free in the hands of the investor.

Dividend Reinvestment Option of MF Schemes

This is basically a sub-option of Dividend Schemes, in this dividend distributed by the scheme is reinvested in the scheme at current NAV, with every dividend reinvestment number of units increase. Investors should always check the implication of Dividend Distribution Tax on their invested scheme or choose the scheme option carefully by considering DDT.

Sales Channel

There two plans of every scheme Regular and Direct. There are different sales channels for you to invest in your Regular Plan of mutual fund scheme, these are through intermediaries like banks, mutual fund agents, share brokers, post office and an investor can also buy me scheme directly from the mutual fund company by choosing Direct Plan.

Regular Plan of Mutual Fund Schemes

All schemes in mutual funds distributed through some intermediary like Banks, Brokerage houses, Mutual Fund Agents – AMFI Agents are sold with ARN CODE. These schemes are known as Regular Plans. Normally these funds have a higher expense ratio of .5% to 1.25% yearly. This amount is charged to the investors of this plan.

Direct Plan of Mutual Fund Schemes

All schemes bought directly from Asset Management Company (AMC) without any intermediary are Direct Plans, these plans have lower expense ratio the commission paid in a Regular plan is added to the returns of investors in Direct Plan.

 Types of Mutual Funds – Based on Asset Class in scheme

Mutual Funds are the indirect way of investment in the different asset class like money market, certificate of deposits, commercial papers, pass-through certificates, bonds, Government security, T bills, equity shares, gold and much more. Based on the underlying assets in the scheme, mutual fund can be categorized like:-

Liquid Fund

Income Fund

Fixed Maturity Plan

Monthly Income Plan

Gilt Fund

Arbitrage Fund

Gold Fund

Balanced Fund

Diversified Equity Fund

Sector Fund

Thematic Fund

Index Fund

Asset allocation Fund

Exchange Traded Fund

Solutions Based

Based on different solutions and other objectives the schemes can be further categorized. These objectives are Tax saving u/s 80 (C), Retirement, Insurance, Child investments, Life stage, etc. These categories are

  • ELSS
  • Retirement Funds
  • Children Gift Plans
  • Life Stage Funds
  • Fund of Funds – FoF

For passive investors these solutions can be very useful and a kind of no-brainer which give them ease of management in future. In some cases, these funds are ready-made solutions for a specific goal of the investors. In general, these products have higher expense ratio.

Strategy of investment in Mutual Fund Scheme

Every Chief Investment Officer – CIO and Board of Mutual Fund Company has the different style of investment, and investment strategy can be different from scheme to a scheme of the same Asset Management Company. An investor should carefully follow the style of investment as if your goal and investment style doesn’t match the results may not be as per our expectations. There are different strategies for every asset type the scheme invests in. Some of the main strategies for different assets are

Debt Funds

Credit Fund

Duration Fund

Accrual Fund

Equity Fund

Arbitrage Fund

Value Fund

Growth Fund

Contra Fund

Structured Funds

These funds are created with the mix of the different asset class for a particular objective. These products can have multiple asset types, like Shares, Bonds, Gold, etc. There can be a number of schemes by mixing different assets in different combinations.

Investment in country

Most of the mutual fund schemes invest in assets from India and some of the schemes have investments in abroad like China, US, Asia, Europe and others. We can categorized like:

Domestic Fund

Offshore Fund

The investors should carefully study the present and future economic conditions of the country they are investing in through offshore funds. Moreover, they should consider the price fluctuation in an exchange rate of Rupee and Dollar.

Investors who are investing or planning to invest in Direct Plans of mutual funds should develop an understanding of the types of schemes available to them. Most importantly the understanding of types of asset class and investment style should be developed over the period to transact in Direct Plans. Article on “Asset wise – type of Mutual Fund Schemes” can be useful in developing the understanding. It’s wiser to take the assistance of qualified advisors to manage the investments. Only the right schemes will grow the value of your investments with the actual assets in the scheme.


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