Theme: Organizational aspects and procedure of mutual funds

Mutual funds give retail investors access to large, well-researched portfolios at low cost. Retail investors can invest in mutual funds in two ways.

General direction

One-time investments in mutual funds are made through a one-time route. Retail investors can invest their savings, bonus or any bulk amount under this route. There is no obligation to make further investments in a one-time direction. After investors invest, mutual fund units are distributed within t + 2 days. Minimum investment through one-time route is INR 1000 for some funds and

Functional Classification of Mutual Funds

(1) Open-ended schemes: In case of open-ended schemes, investors can sell and buy its units at any time at the net asset value (NAV) or NAV-based prices. Investors can enter and exit the scheme at any time during the tenure of the open-end fund. The main feature of open funds is liquidity. Since there is no lock-in over time, these funds increase the liquidity of investors as units can be bought and sold at any time.
(2) Closed-Ended Schemes: Closed-ended schemes have a fixed body and a fixed tenure of 2 to 10 years. Investors can invest in the scheme when it opens for subscription for a few days as a new fund offer (NFO). The scheme will remain open for a limited period not exceeding 45 days. The fund does not interact with investors until it is redeemed, other than paying dividends or bonuses. In exceptional circumstances, some closed-end mutual funds may announce buy-back schemes, for example Morgan Stanley has announced a buy-back scheme for its closed-end mutual fund. These schemes have a restriction on the purchase period in the form of purchase lock-in. These schemes are listed for trading on the stock exchange.
(3) Interval Circuits: Interval circuits provide the characteristics of both open and closed circuits. They are open for sale or purchase at predetermined time intervals at prices linked to the NAV. They are also called partially open circuits.

Portfolio Classification of Mutual Funds

(1) Growth funds (equity-oriented funds): The main objective of growth funds is capital appreciation in the medium and long term. They invest a large portion of their corpus in stocks that have significant growth potential and which provide high returns to investors in the long term with moderate risk. The risks associated with equity investment and the absence of any guarantee or guarantee of return are the features of these equity schemes. Growth funds are further classified into various schemes such as large cap fund, mid cap fund and small cap fund, multi/diversified equity fund, equity linked savings scheme (ELSS), sector funds and index funds.
(2) Income funds (debt oriented funds): The objective of income funds is to provide investors with security of investment along with constant income. These schemes mainly invest in income generating instruments such as bonds, debentures, government securities and commercial paper. The returns and risks are lower in income funds than in growth funds. Debt funds, liquid funds, monthly income plans, fixed term plans and variable rate funds are various types of income fund schemes under the banner of income funds. These funds are also called fixed income or money funds. These funds also have some risk in the event of corporate bond defaults.
(3) Balanced Funds: The objective of a balanced scheme is to provide both capital growth and constant income. They allocate their investments between equities and fixed-rate debt instruments in such a way that the portfolios are balanced. These funds typically consist of companies with good earnings and dividend records. The risk as well as the rate of return is moderate.
(4) Money market mutual funds: They specialize in investing in short-term money market instruments such as treasury bills and certificates of deposit. The goal of such funds is the highest liquidity with at least the lowest possible level of risk.