Page 263 - DCOM304_INDIAN_FINANCIAL_SYSTEM

Indian Financial System

Notes 13.2 Types of Mutual Funds

In order to cater to the varying needs and preferences of large number of savers across the
country and abroad, many types of mutual funds have come into existence. Choice of a fund by
a saver would depend on what he desires his money to earn for him and how much risk he is
willing to assume. Thus, mutual funds can be classified into the following three major groups:

Functional Classification

Functional classification, based on basic characteristic of the mutual fund schemes opened for
public subscription, can be grouped into:
1. Open-ended funds continuously offer new shares for sale and always stand ready to buy
securities at any time. The capitalization of the funds is constantly changing as investors
buy and sell their shares directly with the fund. US-64 and Franklin Blue Chip are examples
of such funds.
2. Closed-ended mutual funds are open for subscription only once and can be redeemed
only after a fixed investment period. These funds have a fixed number of shares that can be
owned by the investing public. Morgan Stanley Growth fund, Canpep 95, UTI Master
Equity 98, Pru ICICI premier, UTI/UGS 2,000 and UTI/UGS 5,000 are some examples of
such funds.
3. Interval funds are the variations of the above stated two concepts. Thus, some funds are
close-ended for the first couple of years and become open-ended after sometime. Some
funds allow fresh subscriptions and redemptions at fixed intervals every year in order to
reduce the hassles of daily entry and exit, yet providing reasonable liquidity.

Portfolio Classification

Mutual funds can be categorized according to the type of instruments in which the funds have
been invested. As such, different funds are designed to meet the diverse notions of savers and
generally designated as stock funds, bond funds, balanced funds, money market/liquid funds
and other funds.
1. Stock Funds: These funds invest primarily in common stocks. There is a broad range of
common stock funds - from those that invest solely in the new, unestablished companies.
There may be several subdivisions of stock funds. Thus, Growth and Income Funds place
relatively equal weight on capital growth and dividend income and accordingly invest in
equity stock and preference shares. Growth funds invest their funds in common stock
primarily for capital growth purpose. They meet the investors' need for appreciation,
high risk-bearing capacity and ability to defer liquidity. As such, the investments by
growth-oriented funds are predominantly made in equities. Income funds aim at ensuring
to their investors high current income; growth in the value of the portfolio is of small
importance. Such funds employ their funds in high yielding common stock. There are two
basic groups within the income funds; those that focus on constant income possible even
with the use of leverage. Naturally, the greater the anticipated return of any investment,
the higher the potential risk of the investment.

2. Bond Funds: Bond funds obviously employ their funds in bonds so as to ensure regular
and fixed income to their investors. In the US, it is common to have two types of bond
funds, one emphasizing high-yielding but risky bonds and the other low-yielding but
high grade bonds.

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