Mutual Funds can be variously classified according to their Investment Objectives.

 

Equity / Growth Oriented Scheme
The aim of Equity / Growth funds is to provide capital appreciation over the medium to long- term. Such schemes normally invest a major part of their corpus in equities, which have comparatively high risks. These schemes provide options like Growth (capital appreciation), Dividend Payout, Dividend Reinvestment etc. and the investors can choose an option depending on their preferences. The investors must indicate the option in the application form. The mutual funds also allow the investors to change the options at a later date. Growth schemes are good for investors having a long-term outlook seeking capital appreciation over a period of time.

 

Income / Debt Oriented Scheme
The aim of Income / Debt Oriented funds is to provide regular and steady income to investors. Such schemes generally invest in fixed income securities such as bonds, corporate debentures, government securities and money market instruments. Such funds are less risky compared to equity schemes. These funds are not affected because of fluctuations in equity markets. However, opportunities of capital appreciation are also limited in such funds. The NAVs of such funds are affected because of change in interest rates in the country. If the interest rates fall, NAVs of such funds are likely to increase in the short run and vice versa. However, long-term investors may not bother about these fluctuations.

 

Balanced / Hybrid Fund
The aim of Balanced / Hybrid funds is to provide both growth and regular income as such schemes invest both in equities and fixed income securities in the proportion indicated in their offer documents. These are appropriate for investors looking for moderate growth. They generally invest 40-60% in equity and debt instruments. These funds are also affected because of fluctuations in share prices in the stock markets. However, NAVs of such funds are likely to be less volatile compared to pure equity funds.

 

Sector / Thematic Fund
Sector / Thematic Funds are funds, which invest in the securities of only those sectors or themes as, specified in the offer documents e.g. Pharma, IT, FMCG, Infrastructure, Banking stocks, etc. The returns in these funds are dependent on the performance of the respective sectors / themes. While these funds may give higher returns, they are riskier compared to diversified funds. Investors need to keep a watch on the performance of those sectors / themes and must exit at an appropriate time. Given the nature of the funds, one needs to approach these funds with a Trading strategy rather than a Buy-and-Hold strategy like diversified funds.

 

Index Fund
These funds try to replicate the portfolio of a particular index such as the SENSEX, NIFTY, etc. These schemes invest in the securities in the same proportion 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”.

Exchange Traded Fund (ETF)

An ETF tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock on a stock exchange. ETFs experience price changes throughout the day as they are bought and sold. Because it trades like a stock, an ETF does not have its net asset value (NAV) calculated every day like a mutual fund does. However, unlike mutual funds which currently do not charge an entry load on Purchase, when buying and selling ETFs, you have to pay the same commission to your broker that you'd pay on any regular order for a stock.

 

Tax Saving Fund (ELSS)
These funds offer tax deduction to the investors under Section 80C of the Income Tax Act, 1961. Pension schemes launched by the mutual funds like UTI and Franklin Templeton also offer tax benefits under the same Section.

The ELSS funds are growth oriented and invest pre-dominantly in equities. The growth opportunities and risks involved are somewhat similar to an equity-oriented scheme. In case of Pension funds, the growth opportunities and risks involved are somewhat similar to a debt-oriented Hybrid Fund.

 

Money Market / Liquid Fund
These funds are also income funds and their aim is to provide easy liquidity, preservation of capital and moderate income. These schemes invest exclusively in safer short-term instruments such as Treasury Bills, Certificates of Deposit, Commercial Paper, Government Securities etc. Returns on these schemes fluctuate much less compared to other funds. These funds are appropriate for Corporate and individual investors as a means to park their surplus funds for short periods.

 

Gilt Fund
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 just like income or debt-oriented schemes.