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Investing in Mutual funds has become one of the popular ways to enter the markets. People choosing to grow wealth via mutual funds are rising. There are more than 44 asset management companies in India with numerous schemes. Choosing the right asset management company and the right scheme has now become a challenge for investors. One way to categorize mutual funds is by their structure. Understanding the several types of mutual fund structures can help you make informed investment decisions. In this article, we will explore the several types of mutual fund schemes based on their structure and highlight their unique features and benefits.Also Read: Mutual Fund Investment Vs Other Investment Options- What Should You Select?
Categories of mutual fund schemes:
Based on their structure, mutual fund schemes can be broadly classified into four categories: open-ended, closed-ended, interval, and exchange-traded funds (ETFs).
1. Open ended scheme:
Open-ended funds are the most common type of mutual fund scheme in India. An open-ended mutual fund scheme is a type of investment fund that is open for subscription and redemption on a continuous basis. This means that investors can buy and sell units of the mutual fund at any time, depending on the prevailing market conditions and their investment goals. This is one of the biggest reasons for its popularity that it is extremely flexible. If the investors feel the need to withdraw their money at any point in time or are not satisfied with the funds’ performance, this is the best structure for them.The price of units in an open-ended mutual fund is determined by the net asset value (NAV) of the fund, which is calculated by dividing the total value of the fund's assets by the number of units outstanding. The NAV of an open-ended mutual fund is calculated daily, and investors can buy or sell units at the NAV price. So as these funds are not time bound, investors have the option to invest at any point of time whenever they have surplus funds at the prevailing NAV. This scheme is suitable for the investors who are looking to create long-term wealth and also for the short-term investors.
2. Close ended scheme:
Close ended funds are for a fixed interval of time. The time interval is usually between 3-7 years. They are open for a limited number of times and an investment option is available only during that time. Once the time period is over, investors can no longer buy the units. Close-ended mutual funds typically have a fixed number of units, and they are traded on the stock exchange just like stocks. If the investors want to sell the units, they can do so just like how a stock is sold. This means that the price of the units fluctuate on the basis of demand and supply.One key feature of close-ended mutual funds is that they are typically designed for a specific investment objective or a theme. For example, a close-ended mutual fund may invest only in stocks of companies in the technology sector or may have a specific geographic focus, such as investing only in companies in India.The units of closed ended mutual funds are listed on the stock exchange. The close ended mutual funds are suitable for the investors who have a specific investment goal and do not expect immediate flow of funds. The goals can be a child’s education, retirement, marriage etc.One of the disadvantages of the closed-ended mutual fund is that liquidity is lower, and investors may face difficulty in exiting their investment if there is not enough demand for the units of the fund on the stock exchange.
3. Interval funds
If you want the combined benefits of the open ended and the closed ended mutual fund, then interval funds are the right option for you. Like closed-end funds, interval funds also trade on the exchange and issue a fixed number of shares via an IPO (initial public offering). However, like open-ended funds, interval funds can also issue new shares and redeem existing shares on a periodic basis, usually every three, six, or twelve months. Therefore, these funds are partially flexible.Interval funds are designed to give investors access to alternative investments such as private equity, real estate, and other non-traditional assets that are typically not available through traditional mutual funds or exchange-traded funds (ETFs). Interval funds can also provide more liquidity than traditional closed-end funds, as investors have the option to redeem shares at regular intervals. However, interval funds typically have higher fees than traditional open-ended funds due to the costs associated with managing alternative investments.
4. Exchange traded funds
As the name suggests, these funds are traded on the stock exchange. These funds are designed to track specific indexes such as BSE Sensex, bank nifty, etc. An ETF is a basket of securities that can be bought or sold on a stock exchange, just like a stock. While many ETFs track popular stock market indexes, such as the ones mentioned above, ETFs can also track other types of assets such as bonds, commodities, and currencies. Therefore, ETFs can provide investors with exposure to a diversified portfolio of assets in a single trade.One of the major benefits of ETFs is their flexibility. They can be bought and sold throughout the trading day, just like individual stocks, and are generally more tax-efficient than mutual funds. Additionally, because ETFs track specific indexes, they offer investors exposure to a broad range of assets without requiring the same level of research and management as individual securities.Overall, ETFs are a popular investment choice for many investors due to their low fees, transparency, and ease of trading.Also Read: Know The Benefits And Risks Of Mutual Fund
FAQS - FREQUENTLY ASKED QUESTIONS
How are ETF different from mutual funds ?
ETFs are different from mutual funds in several ways:
Trading: ETFs are traded on an exchange like a stock, and their price can fluctuate throughout the day. On the other hand, mutual funds are bought and sold at the end of the day at the net asset value (NAV) price.
Cost: ETFs tend to have lower expenses than mutual funds because they are typically passively managed and do not require the same level of active management as mutual funds.
Minimum Investment: ETFs do not have minimum investment requirements, while mutual funds may require a minimum investment amount.
Flexibility: ETFs can be bought and sold throughout the day, providing greater flexibility to investors who want to enter or exit a position quickly. Mutual funds, on the other hand, can only be bought or sold at the end of the trading day.
Transparency: ETFs are generally more transparent than mutual funds, as their holdings are disclosed daily. Mutual funds typically only disclose their holdings quarterly.
What is the minimum investment amount for open-ended mutual fund schemes ?
The minimum investment amount for open-ended mutual fund schemes varies depending on the fund house and the scheme. It can range from as low as Rs. 100 to Rs. 5000.
Can investors make partial withdrawals from open-ended mutual fund schemes ?
Yes, investors can make partial withdrawals from open-ended mutual fund schemes. However, the minimum amount for partial withdrawals varies depending on the scheme and the fund house.
Can I redeem my investment before the maturity date in a close-ended scheme ?
Yes, you can redeem your investment in a closed-ended scheme before the maturity date, but it is subject to the scheme's rules and regulations. Some closed-ended schemes may have a lock-in period during which you cannot redeem your units.
How are close-ended schemes different from open-ended schemes ?
The primary difference between closed-ended schemes and open-ended schemes is that in closed-ended schemes, investors can buy or sell units only during the initial offer period, whereas in open-ended schemes, investors can buy or sell units at any time.
How do I invest in an interval fund ?
Investors can buy and sell shares of interval funds through a brokerage account, just like other closed-end funds. However, because they are less common than mutual funds or exchange-traded funds, investors should do their due diligence before investing in an interval fund.
How are interval funds taxed ?
Interval funds are typically taxed as regular closed-end funds, with investors receiving taxable distributions based on the fund's net investment income and capital gains.
How do interval funds work ?
Interval funds issue a fixed number of shares and trade on an exchange like other closed-end funds. However, instead of trading at a premium or discount to net asset value (NAV), interval funds offer to buy back shares at regular intervals, typically every three or six months.
Are there SIP options available in the close ended/interval scheme ?
No, SIP option is available only in open ended schemes. For both the other schemes, it has to be purchased directly through stock exchanges.
The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.
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