Mutual Fund (MF) - Definitions, Categories & Types

Mutual Fund (MF)

Mutual fund is a type of financial services which act as financial intermediaries between investors and their investment. Mutual fund mobilized the saving from a large number of investors and invest these funds in shares, stock, bond, money market, securities, etc. through the fund manager and under his/her expert team.

Mutual fund has two broad categories based on maturity period :

1. Closed - ended fund

Closed-ended mutual fund are generated for a specific duration. After the IPO's, they trade on the stock exchange or over-the-counter-markets. Capital is fixed and selling a specific number of units/shares. Participation is only till the NFO(New Fund Offer) is on. The value is based on the NAV(Nett Asset Value) but the actual price is determined by the demand and supply for the shares/units. It has a fixed maturity period which can normally range from 2-5 years. It published on a weekly basis.

2. Open - ended fund

Open-ended mutual fund are generated for unlimited period of time. Investor can join and leave the funds any time. There is no fixed number of shares or units. Price determination is based on the NAV per share minus the liabilities of a mutual fund divided by the number of shares/units outstanding. In open-end fund, mutual fund are obligated to buy and sell shares at the current NAV.

Types of Mutual Funds

1. Equity funds

Equity fund is a mutual fund that invests principally in a stocks for a high return. The size of the equity fund is determined by the market capitalization. These funds is the riskiest class of the mutual funds. Investors earns capital gains on the redemption of their fund units. The capital gain are taxable in the hands of investors.

2. Income funds

Income fund or exchange-traded fund (ETF) that has an objective of a high current return, and have investment in bonds, or other fixed income securities as well as preferred shares and dividend stocks. Income funds are considered as a lower risk. Share prices of income funds are not fixed, they tends to fall when interest rate are risings and to increase when interest rates are falling.

3. Growth funds

Growth fund is a compile portfolio of a stocks of the companies which are expected to grow at a rate faster than overall stock market. It has features such as high returns, ideal for medium investment horizon and high risk. They aim for capital gains and hence invest large proportion of their funds in equity shares with high growth potential.

4. Balanced funds

Balanced funds is a type of hybrid fund which contains a stock components, a bond components and sometimes a money market components in a single portfolio. It combine the objectives of earning current income and capital appreciation. So, their portfolio consists of both equities and bonds.

5. Tax saving funds

Tax saving mutual funds are just like any other mutual funds with an added tax-saving benefit. The special feature of this type of mutual fund is that the investments made in the tax-saving mutual funds are eligible for tax benefits under section 80C of the Indian Income Tax Act. Most of the tax saving mutual funds are ELSS (Equity Linked Savings Scheme) and make investments in the growth-oriented equity market. Tax saving funds are targeted to investors in high tax brackets. Income for these funds is tax-exempt.

6. Sector-based funds

Mutual funds which invest in a particular sector or industry such as Infrastructure, Technology, and Pharmaceutical are said to be sector-specific funds. Since the portfolio of such mutual funds consists mainly of investment in one particular type of sector, they offer less amount of diversification and are considered to be risky.

Note : Mutual funds are subject to market, or systematic, risk. This is because there is no way to predict what will happen in the future or whether a given asset will increase or decrease in value. Because the market cannot be accurately predicted or completely controlled, no investment is risk-free.

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