Mutual Funds Demystified...

A mutual fund is a professionally-managed form of collective investments that pools money from many investors and invests it in stocks, bonds, short-term money market instruments, and/or other securities. In a mutual fund, the fund manager, who is also known as the portfolio manager, trades the fund's underlying securities, realizing capital gains or losses, and collects the dividend or interest income.

The investment proceeds are then passed along to the individual investors. The value of a share of the mutual fund, known as the net asset value per share (NAV), is calculated daily based on the total value of the fund divided by the number of shares currently issued and outstanding.
[source: wikipedia]


Mutual Funds come in various hues and colors. They can be catorized on various basis.

Mutual Funds can be categorized by their structure.

• Open Ended
• Closed Ended
• Interval

They can be categorized by their investment objective.

• Equity Scheme
• Debt Schemes
• Growth Scheme
• Balanced Scheme
• Income Scheme
• Money Market Scheme
• Tax-Saving Scheme
• Sectoral(Industry Specific) or Thematic Scheme
• Index Scheme
• and so on to list a few.......

and they can also be categorized into investment options

• Growth
• Bonus
• Dividend
• Dividend Reinvestment

We will discuss each one of them so that it helps you in choosing and picking right fund according to your investment objective.
-----------------------------------------------------------------------------------------------------------
1. By Structure

Open Ended Scheme doesn't have a fixed maturity and are available for sale and repurchase on any business day. These schemes are highly liquid and have become very popular.

Closed Ended Schemes comes with a fixed maturity period and are launched with an Initial Pulbic Offer(or New Fund Offer), Investor can buy and sell once they are listed.
Closed-ended schemes are usually more illiquid as compared to open-ended schemes and hence trade at a discount to the NAV. This discount tends towards the NAV closer to the maturity date of the scheme.

Interval Schemes are combination of open and closed schemes, they can be traded or might be open for sale or repurchase.
---------------------------------------------------------------------------------------------------------
So now we can discuss the schemes with their
2. Investment objectives

Equity Schemes are also known as growth schemes and aims to provide capital appreciation over a period of time. These schemes invest majority of their funds in Equity and small portion in debt or money market instruments. These schemes are not for investor seeking regular income.
They are ideal for investors who have a long-term investment horizon.


Balanced Schemes are for the investor seeking both income and moderate growth. They invest both in shares and fixed income securities. They regularly distribute part of their income and capital gains. They are safe from huge market fluctuation because part money is invested in fixed income, so when market rise they don't rise as much, but when market fall it protects you from steep fall.

Tax Saving Schemes also known ELSS ( Equity Linked Saving Schemes) comes with a lock in period of 3 years where units purchased cannot be assigned / transferred/ pledged / redeemed / switched. These schemes are promoted to encourage individuals to save and invest in equities. They offer tax rebates and are good for investor seeking tax exemption under section 88.


Sectoral or thematic funds invest in a particular sector as defined in their investment objective. They tend to outperform if the sector is showing relative growth than the overall market. But these products are also risky because they are not diversified and weightage is given on a particular sector or industry. Recently Infrastructure, power and real estate funds have become very popular.

Index Schemes are schemes which aims to provide the returns equivalent of a particular index of an exchange. Some investors are interested in getting returns equivalent of the market and not of an particular sectors.
Index schemes are some times unmanaged schemes as they don't churn their portfolio and just try to perform equivalent to the index.

Money Market Schemes are for investors who wants to park their surplus money for a short period of time. These schemes provide moderate income with safety of invested capital. These schemes invest in gilts, inter bank call money, deposit certificate, commercial papers etc...
----------------------------------------------------------------------------------------------------------------

Next we need to discuss the schemes based on investment options. This can be a bit interesting topic because investor normally spend lot of time selecting a particular fund house and then a particular scheme in it, but once they have decided on the fund, they tend to ignore the investment option or sometime it is totally arbitrary or on the whims of the agent.

So I will take up the discussion on the mutual fund investment option in the part II of this article which will be published soon.