Portfolio Classification of Mutual Funds
Mutual Funds differ with reference to the type of instruments in which the money has been invested as per the requirements of the investors. These are specified Mutual Funds structured for feeding a particular investible purpose. Therefore, different Mutual Funds are designed to meet the objectives of different types of savers and are named as such:
BOND FUNDS
Bond Funds provide fixed return for those who desire safety. The savings are invested in various kinds of bonds that are more liquid, diversified and conservative investments with modest capital gains. Price of bond Mutual Funds fluctuates with changing interest rates. In India, income from Mutual Funds is tax exempt and as such no classified Mutual Funds have come to exist as in the USA where tax-free income in municipal bond funds or other fixed income bearing securities is an attractive investment.
STOCK FUNDS
Stock Funds are established for those who are willing to accept significant risks in the hope of very high returns. These are called common stock funds. The assets held in the fund are entirely the common stocks of diversified list of industrial corporations. These may be further classified as ‘growth funds' which assume high risk to obtain stocks expected to yield high return. When these funds are invested in stocks which pay consistently high dividend, they are known as Income Funds.
INCOME FUND
Income Fund is established to maximize the current income (i.e., interest and dividend) of investors. There are two aspects of Income Funds namely, low investment risk, generating constant income and high investment risk generating maximum income. Investment is made in various combinations of high yielding common stocks and bonds with a view to extract income on regular basis with the principal amount of investment enjoying safety. Conservative investment strategy characterizes the Income Funds with modest amount of risk.
ONEY MARKET FUNDS
Money Market Funds are used in short-term liquid assets like Certificate of Deposits [CD(s)] or commercial papers. Capital is raised by selling shares to the investing public at a price equal to the asset value of the then existing shares outstanding plus a loading fee or service charge. These are known as high liquid asset funds with very low risk and virtually no capital loss. Interest income fluctuates because of volatile interest rates, but investors get better yield than is available from passbook saving accounts. In the USA, Money Market Mutual Funds were set-up in November 1972 and have been a very successful vehicle of savings mobilization. In India, the Government has only recently taken a decision to allow establishment of MMMFs.
SPECIALIZED FUNDS
Specialized Mutual Funds envisage to specialize investment in securities of firms of certain industries or specific income producing securities. Such funds carry more risk for lack of diversification approach.
LEVERAGED FUNDS
Leveraged Funds or borrowed funds are used in order to increase the size of the value of the portfolio and benefit the shareholders by gains exceeding the cost of the borrowed funds. Such funds are used in speculative and risky investments like short sale to take advantage of declining market to realize gains.
BALANCED FUNDS
Some Mutual Funds are called ‘Balanced Funds' where assets are a judicious mixture of industrial stocks and bonds. To embrace modest risk of investment and secure reasonable rate of return, the funds are employed in high grade common stock with 25% to 40% investment in conservative fixed income securities like debentures, bonds and preference shares.
GROWTH FUNDS
Growth funds have the principal objective of capital appreciation of the investment over a period of time. The investment is made in equity stock which has above average growth potential. This is a high risk investment fund with high capital gain potential and low current income assurance.
PERFORMANCE FUNDS
Performance Funds were set-up in the USA in 1960s to seek large profits from investments in high-flying common stocks. The investment is made in buying equity shares of small unseasoned companies with relatively high price-earnings ratio and higher price volatility.
SPECIALTY FUNDS
These funds, as the name goes, are invested in equity shares of good track record companies which offer long-term capital growth and provide handsome dividend income. In the USA specialty companies include electronics, chemicals or the foreign securities like Japanese stocks, etc. Sometimes, Specialty Mutual Funds are established to cater to financial requirement of one particular type of industry or unit within it, for example, commodity funds, offshore drilling funds, etc. These are highly risky investment funds and require deep knowledge and expertise and extensive experience.
DUAL PURPOSE FUNDS
Income and growth are two objectives, which are achieved by offering half of the amount of funds to those investors who wish regular income and half to those who wish growth. The funds thus received are pooled together and used for investment. Any income derived from the portfolio goes to the investors who hold income shares. The investors who hold capital shares receive no income. Instead they receive capital gains or losses that result from investments of total portfolio.
REAL ESTATE FUNDS
Real Estate Fund is of close-ended type. The fund is named so because of primary investment in real estate ventures. Such funds are of various types depending upon real estate transactions.
Thus, a Mutual Fund depends upon the nature of securities it issues or sells and purchases. In this way, it is observed that a mutual fund can be named keeping in view the immediate objective behind its creation.