Mutual Fund Schemes may be Classified on the Basis of its Structure and its Investment Objective.
1. By Structure
a. Open – Ended Funds
An open-ended mutual fund is the one whose units can be freely sold and repurchased by the investors. Such funds are not listed on bourses since the Asset Management Companies (AMCs) provide the facility for buyback of units from unitholders either at the NAV, or NAV-linked prices. Instant liquidity is the USP of open-ended funds: you can invest in or redeem your units at will in a matter of 2-3 days. In the event of volatile markets, open-ended funds are also suitable for investment appreciation in the short-term. This is how they work: if you expect the interest rates to fall, you park your money in an open-ended debt fund. Then, when the prices of the underlying securities rise, leading to an appreciation in your fund’s NAV, you make a killing by selling it off. On the other hand, if you expect the Bombay Stock Exchange Sensitivity Index-the Sensex-to gain in the short term, you can pick up the right open-ended equity fund whose portfolio has scrips likely to gain from the rally, and sell it off once its NAV goes up.
How Suitable Are Open-Ended Funds for An Increase In My Investment?
Open-ended equity funds are, indeed, suitable for an increase or appreciation in your investment. Again, your choice in an equity fund can vary, depending on your appetite for risk. Sector-specific funds like Infotech/Technology or Pharma funds invest only in companies of that particular sector, and are more risky. At the same time, if the scrips of a particular sector are doing well, the returns from investing in an sector-specific mutual fund may prove to be worth the risk.
Are Open-Ended Mutual Funds Suitable For Regular Income?
An open-ended debt fund is best suited for income. Debt funds generally give you an option of receiving dividend on a monthly, quaterly, half-yearly or on annual basis.
To What Extent Do Open-Ended Funds Protect Me Against Inflation?
Open-Ended Mutual Funds provide a fair amount of protection against inflation. But funds with an equity portfolio-growth funds-provide better protection than debt funds because equities, over the long term, provide the best means of beating inflation. Moreover, long term capital gains are taxed after indexing for inflation.
b. Close – Ended Funds
Closed-ended mutual funds have a fixed number of units, and a fixed tenure (3, 5, 10, or 15 years), after which their units are redeemed or they are made open-ended. These funds have various objectives: generating steady income by investing in debt instruments, capital appreciation by investing in equities, or both by making an equal allocation of the corpus in debt and equity instruments.
How Suitable are Closed-Ended Funds For an Increase in My Investment?
Since units of closed-ended funds rise and fall in the market like any other stock, they are well suited for an increase in your investment. However, a mutual fund is more influenced by the value of its own portfolio than any other factor. Units of an equity fund are more frequently traded than a debt fund. Also, the NAV of an equity fund rises and falls at a much faster pace. On the other hand, an equity fund provides healthy appreciation in NAV in the long term.
Are Closed-Ended Mutual Funds Suitable For Regular Income?
Closed-ended debt funds, with their conservative investment approach, are best suited for income. These funds declare dividend annually or semi-annually
To What Extent Do Closed-Ended Funds Protect Me Against Inflation?
With stocks being better than bonds in providing returns on a long term basis, an equity closed-ended fund is better equipped to guard your investment against inflation in the long run.
Can I Borrow Against Closed-Ended Mutual Funds?
How Assured Can I Be Of Getting My Full Investment Back?
You cannot be completely sure of getting your full investment back. Depending on their investment objective and underlying portfolio, closed-ended funds can be very volatile or be fairly stable. Hence, your principal is not assured.
How Assured Is My Income?
It depends on the portfolio of your closed-ended fund. A portfolio of debt instruments or shares of some blue-chip companies may provide regular dividends.