Different Types of Mutual Fund Schemes in India - HDFC Mutual Fund Understanding Mutual Fund Schemes: Types, Categories, and Plans (2024)

Mutual Funds are investment instruments that pool money from multiple investors to invest in a diversified portfolio of assets. Asset Management Companies (AMCs) offer mutual fund (MF) schemes as a key investor offering. The objective is to service a variety of investor needs. MF schemes have well-defined attributes that cater to these needs. Categorising these scheme attributes helps investors to group schemes in four different ways:

1. Based on Asset Class:

   The return and risk profile for MF schemes is largely defined by the underlying asset class the MF scheme invests in. There are four basic asset class combinations:

   1. Equity Funds: Invest mainly in equities
   2. Fixed Income/Debt Funds: Invest in debt and money market instruments
   3. Commodity Funds: Invest in commodities such as gold or silver
   4. Hybrid Funds: Invest in a combination of different asset classes

2. Based on whether Active or Passive:

   Mutual fund schemes invest in a portfolio of securities. The securities in the MF scheme’s portfolio are selected based on the MF scheme’s asset class category. For instance, equity MF schemes invest mainly in equity-oriented securities; fixed income schemes invest in debt securities. For active schemes, the MF scheme’s portfolio manager, based on the research backed by a team of research professionals and market circ*mstances, actively decides which securities to buy and which securities to sell. In other words, for active schemes, the portfolio manager takes active bets/ decision. The goal in active fund management is to outperform (seek better returns) the scheme’s benchmark index (such as NIFTY 50 or Sensex for equities).

   For passive schemes, the portfolio manager has a relatively less-active role to play. The goal for passive schemes is to track the benchmark index as closely as possible. Passive schemes endeavour to invest in securities that are part of an underlying index (for example NIFTY 50 or Sensex) in the same proportion as the index, to the extent possible.

3. Based on sector or theme:

   This categorisation is mainly for equity-oriented fund schemes. As noted earlier, equity MF schemes invest mainly in equities. Sector funds look to invest in a particular sector. For instance, the Pharma theme-based MF schemes invest mainly in pharmaceutical companies (securities). Banking sector schemes will invest predominantly in banking companies.

   Thematic funds are similar to sector funds. MF schemes in the thematic category invest in securities that belong to a group of securities that share traits. For example, MNC funds (multinational companies) invest in MNC stocks. However, thematic schemes have a broader market to invest in compared to Sectoral Schemes.

4. Open-ended and Closed-ended:

   This type of MF scheme classification is based on the availability of units for purchase.

   • Open-ended Funds: Investors can buy and sell units on a continuous basis.
   • Close-ended Funds: Units are issued at the time of a New Fund Offer (NFO). After the NFO period, investors can buy or sell units on the stock exchanges. Close-ended schemes can be equity or debt schemes.
   • Interval Funds: These funds are a mix of open-ended and closed-ended funds, that can be bought or sold during the New Fund Offer and post that at designated intervals; intervals are pre-decided time periods.

Schemes have the following Plans under them:

Mutual Funds can be purchased based on the plan (or route) investors choose:

• Regular Plan: Regular Plan is for investors who wish to route their investment through any distributor.
• Direct Plan: Direct Plan is for investors who wish to invest directly without routing the investment through any distributor.

It is useful here to understand ETFs (Exchange-traded funds). ETFs trade on stock exchanges just like stocks. But for ETFs, investors buy units directly from a broker. (Click here for understanding differences between mutual funds and ETFs).

Regular and Direct Plans have the following options under them:

Investors have an option in choosing the distribution mode of their MF investment proceeds. For example, consider equity-oriented MF schemes. The underlying equity portfolio for equity MF schemes pays dividend. The MF scheme owns this income distribution on behalf of its investors. MF schemes are able to pass on this income to the scheme’s investors. Some investors choose to receive the income distribution from time to time, while others may elect to reinvest the income distribution back into the MF scheme. Investors therefore have two options to choose from:

• IDCW option (Income distribution cum capital withdrawal): Investors choose to receive proceeds from the mutual fund scheme’s holdings subject to availability of distributable surplus, as computed in accordance with SEBI Mutual Funds Regulations. Investors should note that the IDCW amount can be distributed out of investor’s capital (Equalization Reserve), which is part of the sale price that represents realized gains. This Option offers following Sub-Options / facilities:
• • Payout of IDCW Option / facility
  • Re-investment of IDCW Option / facility
• Growth Option: Investors instruct the fund to retain the proceeds back into the scheme.

Understanding the diverse viewpoints (also see Figure 1) to look at mutual fund schemes will help investors in making a more informed decision for selecting mutual fund schemes.

MF schemes offer the direct and regular routes as scheme plan options. The direct route involves investing in MF schemes directly with the Asset Management Company, and in the regular option, transactions are routed through a distributor. Thus, the expenses of Direct Plans under schemes are lower to the extent of distribution related expenses.

Figure 1

The information contained in this document is for general purposes only and not an investment advice. Readers should seek professional advice before taking any investment related decisions.

MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS. READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.

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