A. By StructureOpen-Ended Schemes These do not have a fixed maturity. You deal directly with the Mutual Fund for your investments and redemptions. The key feature is liquidity. You can conveniently buy and sell your units at net asset value ("NAV") related prices. Open-Ended Schemes Schemes that have a stipulated maturity period (ranging from 2 to 15 years) are called close-ended schemes. You can invest directly in the scheme at the time of the initial issue and thereafter you can buy or sell the units of the scheme on the stock exchanges where they are listed. The market price at the stock exchange could vary from the scheme's NAV on account of demand and supply situation, unitholders' expectations and other market factors. One of the characteristics of the close-ended schemes is that they are generally traded at a discount to NAV; but closer to maturity, the discount narrows. Some close-ended schemes give you an additional option of selling your units directly to the Mutual Fund through periodic repurchase at NAV related prices. SEBI Regulations ensure that at least one of the two exit routes are provided to the investor. Interval Schemes These combine the features of open-ended and close- ended schemes. They may be traded on the stock exchange or may be open for sale or redemption during pre-determined intervals at NAV related prices.
B. By Investment Objective
Growth SchemesAim to provide capital appreciation over the medium to long term. These schemes normally invest a majority of their funds in equities and are willing to bear short- term decline in value for possible future appreciation. These schemes are not for investors seeking regular income or needing their money back in the short-term. Ideal for:
Income-SchemesAim to provide regular and steady income to investors. These schemes generally invest in fixed income securities such as bonds and corporate debentures. Capital appreciation in such schemes may be limited. Ideal for:
Balanced-SchemesAim to provide both growth and income by periodically distributing a part of the income and capital gains they earn. They invest in both shares and fixed income securities in the proportion indicated in their offer documents. In a rising stock market, the NAV of these schemes may not normally keep pace, or fall equally when the market falls. Ideal for:
Money Market SchemesAim to provide easy liquidity, preservation of capital and moderate income. These schemes generally invest in safer, short-term instruments, such as treasury bills, certificates of deposit, commercial paper and inter- bank call money. Returns on these schemes may fluctuate, depending upon the interest rates prevailing in the market. Ideal for:
Tax Saving SchemesThese schemes offer tax rebates to the investors under tax laws as prescribed from time to time. This is made possible because the Government offers tax incentives for investment in specified avenues. For example, Equity Linked Savings Schemes (ELSS) and Pension Schemes. Recent amendments to the Income Tax Act provide further opportunities to investors to save capital gains by investing in Mutual Funds. The details of such tax savings are provided in the relevant offer documents. Ideal for:
Special SchemesThis category includes index schemes that attempt to replicate the performance of a particular index such as the BSE Sensex or the NSE 50, or industry specific schemes (which invest in specific industries) or sectoral schemes (which invest exclusively in segments such as 'A' Group shares or initial public offerings). Index fund schemes are ideal for investors who are satisfied with a return approximately equal to that of an index. Sectoral fund schemes are ideal for investors who have already decided to invest in a particular sector or segment. Keep in mind that any one scheme may not meet all your requirements for all time. You need to place your money judiciously in different schemes to be able to get the combination of growth, income and stability that is right for you. Remember, as always, higher the return you seek higher the risk you should be prepared to take. A few frequently used terms are explained here below:
Net Asset Value ("NAV")
Net Asset Value is the market value of the assets of the scheme minus its liabilities. The per unit NAV is the net asset value of the scheme divided by the number of units outstanding on the Valuation Date.
Sale Price Is the price you pay when you invest in a scheme. Also called Offer Price. It may include a sales load.
Repurchase Price Is the price at which a close-ended scheme repurchases its units and it may include a back-end load. This is also called Bid Price.
Redemption Price Is the price at which open-ended schemes repurchase their units and close-ended schemes redeem their units on maturity. Such prices are NAV related.
Sales Load Is a charge collected by a scheme when it sells the units. Also called, 'Front-end' load. Schemes that do not charge a load are called 'No Load' schemes.
Repurchase or 'Back-end' Load Is a charge collected by a scheme when it buys back the units from the unit holders.
An Initial Public Offer or IPO is the first sale of a company’s shares to investors on a public stock exchange. While IPOs are effective at raising capital, being listed on a stock exchange imposes regulatory compliance and reporting requirements.
When a shareholder sells shares it is called a “secondary offering” and the shareholder, not the company who originally issued the shares, retains the proceeds of the offering. To avoid confusion, it is imporatnt to remember that only a company which issues shares can make a “primary offering”. Secondary offerings occur on the “secondary market”, where shareholders (not the issuing company) buy and sell shares to each other.
Primary Market refers to a market which provides the channel for creation and sale of securities. Primary market provides an opportunity to investors to apply & own stocks issued by the corporate (as well as the government) through an IPO (Initial Public Offer). A corporate raises capital from the public to meet its expansion plans or discharge financial obligations.
The resources in this kind of market are mobilized either through the public issue in which anyone can subscribe for it, or through the private placement route in which the issue is made available only to a selected group of subscribers such as banks, FIs, MFs and high net worth individuals. In private placement, the stringent public disclosure regulations and registration requirements are relaxed since these securities are allotted to a few sophisticated and experienced investors,. The Companies Act, 1956, states that an offer of securities to more than 50 persons is deemed to be public issue.
Secondary Market refers to a market where shares are traded after being initially offered to the public in the primary market. It is a market in which an investor purchases shares from another investor through stock exchange. Majority of the stock trading is done in the secondary market. The secondary market enables participants who hold securities to adjust their holdings in response to changes in their assessment of risk and return. They also sell securities for cash to meet their liquidity needs.