Mutual Funds - I
Mutual funds – Scheme-Based
There are several types of mutual funds in the market today. These are divided into different categories based on their nature like:
1. Fund scheme or structure
2. Assets invested in
3. Investment objective
In this article, we shall cover mutual funds based on fund scheme. There are three types in this category:
A. Close-ended funds
In this type, date of buying and selling are fixed. Units are purchased during the initial offer period and redeemed on a specified maturity date. After the offer period, you can buy only the already-issued units listed on the stock exchange. Also these can be sold only through the stock exchange and at their current market price.
Suitable for: Those who are happy with a one-time buy and sell.
Advantage: The unit capital of such a fund is protected from daily fluctuations.
Disadvantage: You cannot sell at any time even if in urgent need of liquidity. The units cannot be sold back to the mutual fund. Their price will not be the same as the NAV of the scheme and will depend on factors like demand and supply. Investors will sell their own shares at the market price even if it is lower than the NAV of the portfolio represented by their shares.
B. Open-ended funds
You can buy or sell units of the shares any time of the year and at their current NAVs. Units can be issued at any time and without a fixed maturity date.
Suitable for: Those looking for flexibility.
Advantage: You can buy or sell at any time. This type has unlimited capitalisation hence total capital in the fund keeps growing. Liquidity is available at any time without dependence on transfer deeds, signature verifications and bad deliveries.
Disadvantage: Fees are higher because it is managed actively by a fund manager. Unit capital keeps varying.
C. Interval Funds
These have mixed features. Unlike close-ended funds, you can offload shares during the investment period to the fund house but unlike open-ended you can do this only at periodical intervals.
Suitable for: Those who want both flexibility and rigidity.
Advantage: Best of both worlds.
Disadvantage: Fees are higher than other mutual funds.