Types of Mutual Funds

Open-ended Funds

Open-ended means you can enter and exit the fund anytime, at daily NAV, subject to exit load at the time of withdrawal, if applicable. For example, you can exit from equity funds, which are essentially long-term products, within 6 months.

Closed-ended Funds

Few funds take a long-term approach and restrict withdrawal to avoid volatility caused by huge redemptions. Such funds are close-ended, say for 3 or 5 years. This means, on expiry of the term, the portfolio is liquidated and the funds are distributed. Typically, there is liquidity as these funds are listed on the exchange where you can sell units to another investor only. List price is generally lower than the NAV.

Active & Passive Funds

The fund manager in an actively managed fund picks stocks based on his expert view on the market, sector and the company. A passively managed fund also known as an index fund, mirrors market indices such as the S&P BSE Sensex (an index of the 30 largest companies in India) or the CNX Nifty (an index of the 50 largest companies in India). Since passive funds don’t need research for stock selection, the expenses in such funds are lower than in actively managed funds.

Exchange Traded Funds (ETFs)

Exchange Traded Fund (ETF) is another category in passively managed funds. It has a standard portfolio reflecting either an equity index (like the CNX Nifty) or a commodity, such as Gold. Unlike index funds where NAV is available at the end of the day, ETFs trade on exchanges like stocks with prices available throughout the trading hours.

Equity, Debt & Balanced/Hybrid Funds

Equity funds invest primarily in stocks with some cash allocation – 0 to 10%. Debt funds invest in bond papers of varying maturities – 6 months to 20 years, depending on the type, i.e. short-term or long-term debt fund. Balanced and hybrid funds have a mix of both equity and debt.

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