What are the important Types of Mutual Fund Schemes?

A Mutual Fund is free to design its schemes (subject to SEBI regulations) to suit the needs of various group of investors in terms of nature of invest­ments, dividend distribution, capital appreciation and liquidity, etc. Broadly, Mutual Fund schemes can be categorized as open-ended and close ended.

A. Open Ended Schemes:

An open ended scheme is a scheme in which an investor can buy and sell units on a daily basis, w herein the scheme has perpetual existence, and a flex­ible ever changing corpus. In simple terms, investors are free to buy and sell any number of units at any point of time, at prices announced by the Fund.

In other words, an open-ended fund issues new units every time an investor puts in his money. Similarly when the units are repurchased by the Fund the units are retired to the extent they are repurchased. Hence, the value of the Fund keeps on changing on day to day basis.

The prices that is buying and selling price of the unit are linked to the NAV of the units (see paragraph 25.11 for explana­tion of NAV).

Features of Open Ended Funds: The following are the important features of open ended funds.

1. Regular Investment Plan:

Some Open Ended Funds offer a Regular Investment Plan wherein a fixed amount can be invested every month subject to a minimum of Rs.1, 000 and in multiples of Rs.100 thereafter. The investor in such a case gives 12 post dated cheques dated first of every month.

The amount so invested is converted into units at the day’s sale price. The same is added to the unit balance of the unit holder. Certain class of investors who go in for recurring monthly deposit schemes can avail this plan to maximize returns with easy liquidity.

2. Regular Withdrawal Plan:

Conversely, the Open Ended Fund also offers Regular With­drawal Plan wherein a fixed amount can be withdrawn every month subject to a minimum of Rs.500, for a minimum period of 12 months. The amount so withdrawn by sale is con­verted at NAV of the 15th / 30th working day of every month and the same is subtracted from the unit balance of the unit holder.

Investors wanting monthly income to manage their affairs can withdraw every month with easy liquidity. Certain Open Ended Fund offer the option of Dividend Reinvestment Plan, in which any dividend, if declared is automatically reinvested and adequate number of units based on the day’s sale price are credited to the unit holders account.

3. Instant Liquidity:

As the units can be sold on any working day at the repurchase price, the investor is offered instant liquidity all through the year. Instant liquidity means, the fund operates like a bank account wherein the investor is able to get cash across the counter for the units sold.

4. Free Entry:

There is free entry and exit of investors in an Open Ended Fund. The investor can join in and come out from the fund as and when he desires. Often he enters when the NAV is at a low price and comes out when the NAV is quoted at a higher rate thereby making cash profits.

B. Close Ended Schemes:

A Close Ended Scheme has a fixed corpus and operates for a fixed duration, at the end of which the entire corpus is disinvested and, proceeds distrib­uted to the various unit holders in proportion to their holdings. After final distribution, the scheme ceases to exist.

Thus, close-ended fund has a fixed number of units or shares like a company. These units or shares are traded on stock exchange where they are listed. Their stock market price may be more or less over their NAV depending upon supply and de­mand for the units.

Close Ended Schemes can be further classified as follows:

a) Pure Growth Schemes:

A pure growth scheme aims at generating long-term capital appreciation for the investors by investing a substantial portion of the corpus (i.e., funds collected) in high growth equity shares or other equity related instruments of corporate bodies.

Although declaration of dividend is not prohibited, the principal objective remains capital appreciation.

b) Pure Income Schemes:

A Pure Income Scheme aims at generating and distributing regular income (yearly/half yearly, etc.) to the investors by investing a substantial portion of the corpus in high income yielding, fixed income instruments, such as debentures, bonds. Declaration of regular dividends is the main objective in such schemes.

c) Balanced Schemes:

A Balanced Scheme is one which aims at both, distributing regular income and also ends-scheme capital appreciation to the investors by balancing the invest­ments of the corpus between the high growth equity shares and also the fixed income earn­ing debt securities of the companies.

d) Tax Savings Schemes:

Tax savings schemes are basically growth schemes which also offer tax rebates to the investors under the Income Tax Laws. Currently, the law related to rebates is covered under Section 88 of the Income Tax Act 1961, which entitles an investor to a 20% rebate in Income Tax for investments made under such schemes up to a “maximum investment of Rs.10, 000 per annum.

In the Union Budget for 1999-2000, Finance Minister announced tax exemption on the dividend received by unit holders from Mutual Funds. This concession, as of now, is available only for 3 financial years.

e) Mutual Fund Industry – Abroad:

In the developed countries, a large number of specialty schemes are offered, which focus on meeting specific needs of specific groups of people. It is expected that as the Indian market matures, as the investor becomes more aware and as the back office systems become more sophisticated, Indian mutual funds will also offer such specialty schemes.

The Mutual Fund Industry in USA controls a huge chunk of retirement savings of people. Every alternate household in USA has investment in Mu­tual Fund industry.

The US Mutual Fund Industry jointly with Pension Funds and Insur­ance Companies (known as Institutional Investors) collectively hold assets over US Dollar 13,000 billion in 1996 (A Billion is 100 crore and a Dollar is equivalent to Rs.43.40 in No­vember 1999).

This was more than three times the assets held in the banking system in USA in that year. This shows how effectively they are competing with banks for funds.