SCHEMES

The schemes of a mutual fund can be classified into two classes namely open-ended schemes and close-ended schemes.
Open -End Schemes: A scheme which give an investor an option to subscribe to the units of the scheme at any time and have the units repurchased also by the fund at any time is known as an Open-end Scheme.
Close-End Scheme: A closed-end fund is so named because its basic capitalization is limited, or “closed”. That is these schemes sell shares or units much as a regular industrial company does. Instead of using the proceeds from stock sale to purchase land, equipment and inventory the closed end scheme uses the proceeds to purchase securities of other firms. The shares/units of closed end scheme are traded on organized stock exchanges like those of any other company. Thus, when an investor buys shares in a closed end scheme, he must generally buy them from another person. The buyer pays the nominal commission on such a purchase.
However, if a closed end scheme desires to raise more capital, it can do so just as any other company can, through the sale of additional shares. The shares of a closed end scheme can sell above or below the net asset value of the units.
Types of Schemes Disclaimer
INVESTMENT OBJECTIVES
Schemes can be classified by way of their stated investment objective such as Growth Fund, Balanced Fund, Income Fund etc.
Equity Oriented Schemes
These schemes, also commonly called Growth Schemes, seek to invest a majority of their funds in equities and a small portion in money market instruments. Such schemes have the potential to deliver superior returns over the long term. However, because they invest in equities, these schemes are exposed to fluctuations in value especially in the short term.
Equity schemes are hence not suitable for investors seeking regular income or needing to use their investments in the short-term. They are ideal for investors who have a long-term investment horizon. The NAV prices of equity fund fluctuates with market value of the underlying stock which are influenced by external factors such as social, political as well as economic.HDFC Growth Fund, HDFC Tax Plan 2000 and HDFC Index Fund are examples of equity schemes.
General Purpose
The investment objectives of general-purpose equity schemes do not restrict them to invest in specific industries or sectors. They thus have a diversified portfolio of companies across a large spectrum of industries. While they are exposed to equity price risks, diversified general-purpose equity funds seek to reduce the sector or stock specific risks through diversification. They mainly have market risk exposure. HDFC Growth Fund is a general-purpose equity scheme.
Sector Specific
These schemes restrict their investing to one or more pre-defined sectors, e.g. technology sector. Since they depend upon the performance of select sectors only, these schemes are inherently more risky than general-purpose schemes. They are suited for informed investors who wish to take a view and risk on the concerned sector.
Special Schemes
Index schemes
The primary purpose of an Index is to serve as a measure of the performance of the market as a whole, or a specific sector of the market. An Index also serves as a relevant benchmark to evaluate the performance of mutual funds. Some investors are interested in investing in the market in general rather than investing in any specific fund. Such investors are happy to receive the returns posted by the markets. As it is not practical to invest in each and every stock in the market in proportion to its size, these investors are comfortable investing in a fund that they believe is a good representative of the entire market. Index Funds are launched and managed for such investors. An example to such a fund is the HDFC Index Fund.
Tax Saving schemes
Investors (individuals and Hindu Undivided Families (“HUFs”)) are being encouraged to invest in equity markets through Equity Linked Savings Scheme (“ELSS”) by offering them a tax rebate. Units purchased cannot be assigned / transferred/ pledged / redeemed / switched – out until completion of 3 years from the date of allotment of the respective Units.
The Scheme is subject to Securities & Exchange Board of India (Mutual Funds) Regulations, 1996 and the notifications issued by the Ministry of Finance (Department of Economic Affairs), Government of India regarding ELSS.
Subject to such conditions and limitations, as prescribed under Section 88 of the Income-tax Act, 1961, subscriptions to the Units not exceeding Rs.10, 000 would be eligible to a deduction, from income tax, of an amount equal to 20% of the amount subscribed. HDFC Tax Plan 2000 is such a fund.
Real Estate Funds
Specialized real estate funds would invest in real estates directly, or may fund real estate developers or lend to them directly or buy shares of housing finance companies or may even buy their securitized assets.
Debt Based Schemes

These schemes, also commonly called Income Schemes, invest in debt securities such as corporate bonds, debentures and government securities. The prices of these schemes tend to be more stable compared with equity schemes and most of the returns to the investors are generated through dividends or steady capital appreciation. These schemes are ideal for conservative investors or those not in a position to take higher equity risks, such as retired individuals. However, as compared to the money market schemes they do have a higher price fluctuation risk and compared to a Gilt fund they have a higher credit risk.
Income Schemes
These schemes invest in money markets, bonds and debentures of corporates with medium and long-term maturities. These schemes primarily target current income instead of capital appreciation. They therefore distribute a substantial part of their distributable surplus to the investor by way of dividend distribution. Such schemes usually declare quarterly dividends and are suitable for conservative investors who have medium to long term investment horizon and are looking for regular income through dividend or steady capital appreciation. HDFC Income Fund, HDFC Short Term Plan and HDFC Fixed Investment Plans are examples of bond schemes.
Liquid Income Schemes
Similar to the Income scheme but with a shorter maturity than Income schemes. An example of this scheme is the HDFC Liquid Fund.
Money Market Schemes
These schemes invest in short term instruments such as commercial paper (“CP”), certificates of deposit (“CD”), treasury bills (“T-Bill”) and overnight money (“Call”). The schemes are the least volatile of all the types of schemes because of their investments in money market instrument with short-term maturities. These schemes have become popular with institutional investors and high networth individuals having short-term surplus funds.
Gilt Funds
This scheme primarily invests in Government Debt. Hence the investor usually does not have to worry about credit risk since Government Debt is generally credit risk free. HDFC Gilt Fund is an example of such a scheme.
Hybrid Schemes
These schemes are commonly known as balanced schemes. These schemes invest in both equities as well as debt. By investing in a mix of this nature, balanced schemes seek to attain the objective of income and moderate capital appreciation and are ideal for investors with a conservative, long-term orientation. HDFC Balanced Fund and HDFC Children’s Gift Fund are examples of hybrid schemes.
Constitution
Schemes can be classified as Closed-ended or Open-ended depending upon whether they give the investor the option to redeem at any time (open-ended) or whether the investor has to wait till maturity of the scheme.
(A) Open ended Schemes
The units offered by these schemes are available for sale and repurchase on any business day at NAV based prices. Hence, the unit capital of the schemes keeps changing each day. Such schemes thus offer very high liquidity to investors and are becoming increasingly popular in India. Please note that an open-ended fund is NOT obliged to keep selling/issuing new units at all times, and may stop issuing further subscription to new investors. On the other hand, an open-ended fund rarely denies to its investor the facility to redeem existing units.
(B) Closed ended Schemes
The unit capital of a close-ended product is fixed as it makes a one-time sale of fixed number of units. These schemes are launched with an initial public offer (IPO) with a stated maturity period after which the units are fully redeemed at NAV linked prices. In the interim, investors can buy or sell units on the stock exchanges where they are listed. Unlike open-ended schemes, the unit capital in closed-ended schemes usually remains unchanged. After an initial closed period, the scheme may offer direct repurchase facility to the investors. Closed-ended schemes are usually more illiquid as compared to open-ended schemes and hence trade at a discount to the NAV. This discount tends towards the NA closer to the maturity date of the scheme.
(C) Interval Schemes
These schemes combine the features of open-ended and closed-ended schemes. They may be traded on the stock exchange or may be open for sale or redemption during pre-determined intervals at NAV based prices.
COMPARING MUTUAL FUNDS
Choosing a mutual fund seems to be a very complex affair . There is no dearth of funds in the market and they all clamor for attention. The most crucial factor in determining which one is better than the rest is to look at returns. Returns are the easiest to measure and compare across funds. At the most trivial level, the return that a fund gives over a given period is just the percentage difference between the starting Net Asset Value (price of unit of a fund) and the ending Net Asset Value.
Returns by themselves don't serve much purpose. The purpose of calculating returns is to make a comparison. Either between different funds or time periods. And one must be careful not to make a mistake here. Or else, it could end up investing in the wrong funds.
Invest in various funds, not one
Absolute returns
Absolute returns measure how much a fund has gained over a certain period. So looking at the NAV on one day and looking at it, say, six months or one year or two years later. The percentage difference will tell the return over this time frame.
But when using this parameter to compare one fund with another, one must be sure that he or she compare the right fund. To use the age-old analogy, don't compare apples with oranges.
So if looking at the returns of a diversified equity fund (one that invests in different companies of various sectors), it should be compare with other diversified equity funds. It shouldn’t be compared with a sector fund which invests only in companies of a particular sector.
It shouldn’t even compared with a balanced fund (one that invests in equity and fixed return instruments).
Benchmark returns
This gives a standard by which to make the comparison. It basically indicates what the fund has earned as against what it should have earned.
A fund's benchmark is an index that is chosen by a fund company to serve as a standard for its returns. The market watchdog, the Securities and Exchange Board of India, has made it mandatory for funds to declare a benchmark index.
In effect, the fund is saying that the benchmark's returns are its target and a fund should be deemed to have done well if it manages to beat the benchmark. Let's say the fund is a diversified equity fund that has benchmarked itself against the Sensex. So the returns of this fund will be compared vis-a-viz the Sensex.
Now if the markets are doing fabulously well and the Sensex keeps climbing upwards steadily, then anything less than fabulous returns from the fund would actually be a disappointment.
If the Sensex rises by 10% over two months and the fund's NAV rises by 12%, it is said to have outperformed its benchmark. If the NAV rose by just 8%, it is said to have underperformed the benchmark.
But if the Sensex drops by 10% over a period of two months and during that time, the fund's NAV drops by only 6%, then the fund is said to have outperformed the benchmark. A fund's returns compared to its benchmark are called its benchmark returns.
At the current high point in the stock market, almost every equity fund has done extremely well but many of them have negative benchmark returns, indicating that their performance is just a side-effect of the markets' rise rather than some brilliant work by the fund manager.
Time period
The most important thing while measuring or comparing returns is to choose an appropriate time period. The time period over which returns should be compared and evaluated has to be the same over which that fund type is meant to be invested in. If comparing equity funds then must use three to five year returns. But this is not the case of every other fund.
For instance, cash funds are known as ultra short-term bond funds or liquid funds that invest in fixed return instruments of very short maturities. Their main aim is to preserve the principal and earn a modest return. So the money invested will eventually be returned to you with a little something added.
Investors invest in these funds for a very short time frame of around a few months. So it is alright to compare these funds on the basis of their six month returns.
Market conditions: It is also important to see whether a fund's return history is long enough for it to have seen all kinds of market conditions. For example, at this point of time, there are equity funds that were launched one to two years ago and have done very well. However, such funds have never seen a sustained declining market (bear market). So it is a little misleading to look at their rate of return since launch and compare that to other funds that have had to face bad markets.
If a fund has proved its mettle in a bear market and has not dipped as much as its benchmark, then the fund manager deserves the real appreciation.
Final checklist: Here are some quick pointers when comparing funds.
- Compare funds that are similar. For instance, compare Alliance Equity with Franklin India Prima. Both are diversified equity funds. Similarly, compare UTI Auto with J M Auto, both being auto sector funds. Or Birla Midcap with Magnum Midcap, both being funds that invest in mid-cap companies. Don't compare the performance of Alliance Equity with UTI Auto or even Alliance Equity with Birla Midcap.
- When returns are compared, make sure that the time period is identical. Or else, one may be looking at the one-year returns for one fund and the three-year returns for another. For instance, if you were told that the return of HDFC Equity was 59.72% and that of Franklin India Prima was 61.74%, it would be misleading because the return stated of HDFC Equity is a one year return while that of Franklin India Prima is the three-year return.