Mutual funds may be classified in various ways. Few of the most popular ways of classification are as follows
Open-Ended Funds, Close-Ended Funds and Interval Funds
Open-ended funds are open for investors to enter or exit at any time, even after the NFO. When existing investors buy additional units or new investors buy units of the open ended scheme, it is called a sale transaction. It happens at a sale price, which is equal to the NAV. When investors choose to return any of their units to the scheme and get back their equivalent value, it is called a re-purchase transaction. This happens at a re-purchase price that is linked to the NAV. Although some unit-holders may exit from the scheme, wholly or partly, the scheme continues operations with the remaining investors. The scheme does not have any kind of time frame in which it is to be closed. The ongoing entry and exit of investors implies that the unit capital in an open-ended fund would keep changing on a regular basis.
Close-ended funds have a fixed maturity. Investors can buy units of a close-ended scheme, from the fund, only during its NFO. The fund makes arrangements for the units to be traded, post-NFO in a stock exchange. This is done through a listing of the scheme in a stock exchange. Such listing is compulsory for close-ended schemes. Therefore, after the NFO, investors who want to buy Units will have to find a seller for those units in the stock exchange. Similarly, investors who want to sell Units will have to find a buyer for those units in the stock exchange. Since post- NFO, sale and purchase of units happen to or from a counter-party in the stock exchange – and not to or from the mutual fund – the unit capital of the scheme remains stable.
Interval funds combine features of both open-ended and close ended schemes. They are largely close-ended, but become open ended at pre-specified intervals. For instance, an interval scheme might become open-ended between January 1 to 15, and July 1 to 15, each year. The benefit for investors is that, unlike in a purely close-ended scheme, they are not completely dependent on the stock exchange to be able to buy or sell units of the interval fund.
Actively Managed Funds and Passive Funds
Actively managed funds are funds where the fund manager has the flexibility to choose the investment portfolio, within the broad parameters of the investment objective of the scheme. Since this increases the role of the fund manager, the expenses for running the fund turn out to be higher. Investors expect actively managed funds to perform better than the market.
Passive funds invest on the basis of a specified index, whose performance it seeks to track. Thus, a passive fund tracking the NSE Nifty would buy only the shares that are part of the composition of the Nifty Index. The proportion of each share in the scheme’s portfolio would also be the same as the weightage assigned to the share in the computation of the Nifty Index. Thus, the performance of these funds tends to mirror the concerned index. They are not designed to perform better than the market. Such schemes are also called index schemes. Since the portfolio is determined by the index itself, the fund manager has no role in deciding on investments. Therefore, these schemes have low running costs.
Aggressive, Conservative and Balanced funds (also termed as Equity, Debt and Hybrid Funds)
A scheme might have an investment objective to invest largely in equity shares and equity-related investments like convertible debentures. Such schemes are called equity schemes.
Schemes with an investment objective that limits them to investments in debt securities like Treasury Bills, Government Securities, Bonds and Debentures are called debt funds.
Hybrid funds have an investment charter that provides for a reasonable level of investment in both debt and equity.
