Direct & Indirect Taxes, Tax Ready Reckoner, Tax Management, Tax Act. & Rules, Tax Planning & Tax Savings.

Direct & Indirect Taxes, Tax Ready Reckoner, Tax Management, Tax Act. & Rules, Tax Planning & Tax Savings.

Types of Mutual Fund Schemes – based on Tenor

Mutual Fund Schemes can be categorised based on Tenor, Asset Class, Position Philosophy or Geography.

Types of Mutual Fund Schemes – based on Tenor
[Types of Mutual Fund Schemes – based on Tenor]

1.   Open-end Mutual Fund Schemes

These are schemes that do not have a fixed maturity. The mutual fund announces sale and re-purchase prices for the units of such a scheme on an ongoing basis.

Sale price is the price at which an open-end scheme will sell new units to an investor; Re-purchase price is the price at which an investor can return her units to an open-end scheme. As per current SEBI guidelines, the Sale Price is equal to the NAV.

Post-NFO, the date of allotment of units is called “inception date”. Sale and Repurchase prices are announced from the following day, which marks the commencement of the continuous offer period.

Every sale or re-purchase transaction results in a change in the unit capital of the scheme. The unit capital increases, when additional units are sold; and decreases if existing units are re-purchased.

In general, open-end schemes are not listed. However, a mutual fund can choose to provide liquidity by listing the scheme in the stock market. In such a scenario, investors can either trade in the stock market, in which case there is no change in unit capital of the scheme; or opt for a sale or re-purchase, in which case unit capital of the scheme is impacted.

As can be expected, arbitrage opportunities come up when there are two alternative options for dealing in the same units.

This is not the same as “listing” of the schemes in the stock market. The transaction engines are only a platform to facilitate transactions (sale or repurchase) between the investor and the scheme. Such transactions do affect the unit capital of the scheme.

(A)   Advantages of Investing in Open-Ended Mutual Fund Scheme

Here are the key advantages of investing in these funds

– Access to liquidity:

There are no restrictions on the investor to redeem the units of an open-ended fund. This provides access to liquidity to the investors at any time they want. Moreover, the investors can redeem the funds as per the net asset value as on the day of redemption.

– Past performance:

Investors of these funds can track the performance of the funds. The historical data available helps the investor take the best investment decision.

– Various systematic options available:

These funds allow investors to make use of systematic plans for making investments and withdrawal. The investor can choose from SIPs, SWPs and systematic transfer plans.

– Professionally managed plans:

There is an experienced fund manager who manages the fund. These managers have the expertise, experience, and resources to make the right investment decision for the investors.

Diversified portfolios: Open-ended funds invest a range of assets. The stocks belong to a variety of industries and companies. A diversified portfolio helps to reduce the risks associated with investments.

– Higher returns:

These funds provide better returns in the long run compared to other schemes. For an investor with a short-term investment horizon, open-ended funds offer the perfect solution.

(B)   Tax benefits of Open-Ended Mutual Funds Scheme

The tax treatment on open-ended funds depends on whether it is an equity- or debt-oriented fund.

Type of fund Particulars Short-term capital gains tax (STCG) Long-term capital gains tax (LTCG)
Equity-oriented scheme Holding period Up to 1 year More than 1 year
Tax rate 15% 10%*
Debt-oriented scheme Holding period Up to 3 years More than 3 years
Tax rate According to the tax slab of the investor 20% after indexation

*LTCG on equity funds are exempt from tax for up to Rs1 lakh p.a.

See also  Investment Styles of Mutual Fund

Open-ended mutual funds also offer tax benefits to investors. Investments in ELSS mutual funds, a type of open-ended mutual scheme, are eligible for a tax deduction of up to Rs. 1.5 lac on the invested amount. An investor can thus save up to Rs. 46,800 per annum by investing in ELSS funds provided that they fall under the 30% tax bracket.

(C)   How to invest in open-ended funds?

Open-ended mutual funds allow you to invest via the lumpsum, SIP, STP, or SWP methods. If you are wondering how to buy open-ended funds, follow these simple steps:

  1. Create a mutual fund account with an AMC (Asset Management Company)
  2. Complete your KYC (know your customer) formalities if you have not already done it
  3. Input all the necessary details, as required
  4. Identify the fund(s) you wish to invest in based on your personal and financial goals, risk tolerance, and investment horizon
  5. Select the apt open-ended fund(s) that best suits your requirements and choose the method of investment, i.e. lumpsum, SIP, etc.
  6. You can give standing instructions to your bank in case you want to invest via the SIP mode.

Open-ended funds can be a useful investment option for those who have minimal or no knowledge of the markets. It is always recommended to seek the advice of a professional before selecting the right fund(s) for your portfolio. Happy Investing!

(D)   List of Open-Ended Mutual Funds Scheme in India

Based on past 5 years performance here is the list of best open ended mutual funds in India 2019

Name of the scheme Returns
1 year 3 year 5 year
SBI Small Cap Fund -12.48 10.99 18.18
Mirae Asset Emerging Bluechip Fund -0.50 12.07 17.47
Motilal Oswal NASDAQ 100 Exchange Traded Fund 4.33 18.23 16.70
Aditya Birla Sun Life Banking & Financial Services Fund -10.15 8.56 15.53
ICICI Prudential Banking & Financial Services Fund -2.12 11.54 15.13
Reliance Gilt Securities Fund Institutional 16.21 9.07 8.79
SBI Magnum Gilt Fund 15.05 8.63 10.81

Please do not consider this list as a recommendation of funds. Invest according to your risk and investment profile

2.   Closed-end Mutual Fund Schemes

These are schemes that have a fixed maturity. Liquidity in such schemes is available through listing in the stock market. Trades in the market entail change in the ownership of the units, but do not alter the scheme’s unit capital.

Occasionally, closed-end schemes provide a re-purchase option to investors, either for a specified period or after a specified period. Such a re-purchase facility in a closed-end scheme is normally offered up to a total annual limit for all investors together, or a limit per investor. Such re-purchase would reduce the unit capital of the scheme.

It is not normal for closed-end schemes to sell new units on an ongoing basis, though they could make a rights offering to existing investors. In a rights offering, existing investors can choose to acquire new units from the scheme. The rights offer will specify the number of such units an investor is entitled to, and the price that would need to be paid for acquiring those units.

(A)   Advantages of Investing in Close-Ended Mutual Fund Scheme

There are numerous advantages of investing in a close-ended mutual fund:

Stability:

Redemption of the fund is only allowed on the expiry of the maturity period. This helps the portfolio managers to build a steady asset base and devise the right investment strategy. Investment in a close-ended mutual fund means that there is no unexpected inflow outflow of investment due to the stable asset base.

Enhanced flexibility:

These funds can be liquidated as per the norms of the fund house. The investors are allowed to sell these units based on the real-time prices available during the trading day.

Maximum possible returns:

An investor of a close-ended mutual fund is bound by the lock-in period. This helps investors the temptation to fall prey to risky investments. By staying committed to the mutual fund, they enhance their chances of taking home the maximum possible returns offered by the fund.

Unique Portfolio: 

These funds allow the fund manager to create a unique portfolio that can give great returns. Due to the extended lock-in period, the fund manager can explore undervalued equity and debt instruments which would otherwise not feature in the portfolio.

(B)   Disadvantages of Closed-Ended Mutual Funds Scheme

Poor Performance:

Performance of the closed-ended schemes has not been on par with open-ended peers across different time horizons. The lock-in period on closed-ended funds are aimed at giving the fund managers the flexibility to allocate the funds without the fear of outflows has not helped much in generating better returns.

Lump Sum Investment:

Closed-ended funds require you to invest a lump sum at the time of their launch. This can be a risky approach to deal with your investments. It exposes you to take bigger bets than otherwise warranted. Moreover, a large number of salaried class of investors are unable to afford lump sum investments. They, instead, prefer staggered investments by way of systematic investment plans (SIP).

See also  Net Asset Value (NAV) of Mutual Fund Scheme

Non-Availability of Track Record:

In case of open-ended funds, investors can review the performance of the funds over different market cycles on account of availability of historical data. However, in the case of closed-ended funds, the track record is not available. Hence, investing in a closed-ended fund attracts uncertainties for which you can only depend on the fund manager.

(C)   Key Characteristics of a Closed-end Mutual Fund Scheme

A closed-end mutual fund comes with the following key characteristics:

1.      Management fees

It charges management fees.

2.      Actively managed

It is actively managed by a fund manager.

3.      Fixed capital and shares

It raises a fixed amount of capital and number of shares through an SPO.

4.      Trades on an exchange

It trades on a secondary market (stock exchange).

5.      No share issuance or redemption

It does not issue or redeem shares beyond the share issued in its IPO.

6.      Changing share price

The share price of a closed-end mutual fund reflects the net asset value of the assets in the portfolio in addition to market supply and demand. A closed-end mutual fund can trade at a premium or discount to net asset value per share.

(D)   List of Closed Ended Mutual Funds Scheme in India

Based on the performance over the last 5 years, here are the closed ended mutual funds in India:

Name of the scheme Returns
1 year 3 year 5 year
SBI Tax Advantage Fund – Series III – Regular Plan 2.61 9.60 13.02
ICICI Prudential Growth Fund – Series 2 3.31 10.98 12.99
SBI Tax Advantage Fund – Series II -2.26 9.68 12.88
ICICI Prudential Growth Fund – Series 1 4.39 9.08 11.83
ICICI Prudential R.I.G.H.T. Fund -12.14 6.99 10.00
Reliance FHF XXV Series 15 8.28 8.38 9.00
HDFC FMP 793D Feb 2014 (1) Reg 8.97 7.32 8.42

This list is just a compilation of best performing closed ended funds Remember, this is not a recommendation but a list of well-performing closed ended funds in India. Please invest in these funds only if the investment objective and risk profile is in alignment

(E)   Difference between Open-Ended vs Closed-Ended Mutual Funds Scheme

It is difficult to say whether open-ended funds are better than closed-ended funds or vice versa. The performance of a fund, whether open-ended or closed-ended depends on the fund category, fund management, and investment style.

Some open-ended fund investors are quick to redeem their units after the NAV appreciates by 5%–10% to book short-term profits. This hurts the investors who remain invested in the funds. Closed-ended funds are better options in such situations because the lock-in period prevents early redemption and protects the interest of long-term investors.

Open-ended funds can be useful for someone who has minimal or no knowledge of the markets and desires an annualised return in the range of 12%–15%. As professionals and experts manage these funds, with the NAV being updated daily and highly liquid these get slightly more advantage for investors than the closed-ended funds.

3.   Interval Mutual Fund Schemes

These are schemes that are largely closed-end. However, they become open-end during pre-specified time periods (known as transaction periods). For instance, the specified transaction period may be the first week of every quarter, or the second week of every month. Under SEBI regulations, each transaction period has to be a minimum of two working days.

The period between two successive transaction periods is called interval period. This has to be a minimum of 15 days.

Listing of interval funds is mandatory. Therefore, investors will normally be able to trade their units in the stock exchange. However, the limited periods of openness ensures liquidity for investors, if the units do not get traded in the stock exchange.

The stock exchanges have stipulated that (except for certain small value transactions) anyone who wishes to trade in the stock exchange should have a trading account with a broker and a demat account. This is equally applicable to all listed mutual fund units including those of interval funds. The transaction period in an interval fund, when the investor can deal directly with the scheme, is especially useful for those who do not have a trading or demat account, or do not prefer to transact through a stock exchange broker.

Interval schemes are permitted to invest only in such securities that mature on or before the opening of the next transaction period.

(A)   Features of Interval Mutual Fund Schemes

The features of interval funds are as under:

Asset Allocation:

An interval fund can invest in both equity and debt. However, it mostly invests in debt instruments.

Illiquidity:

Since the units of an interval fund can be bought and sold only during specific intervals, it does not provide much liquidity to investors. Thus, an interval fund cannot act as an emergency fund. However, due to this illiquidity, the fund manager of an interval fund is better positioned to invest in securities which have tenures matching the fund’s maturity period and provide better returns to investors.

See also  Portfolio of Mutual Fund Schemes

Cost:

The expense ratio of an interval fund is generally higher than other mutual funds.

Risk:

Since an interval fund predominantly invests in debt securities, it is a low-risk investment instrument.

(B)   Benefits of Interval Mutual Fund Schemes

The benefits associated with interval funds are as follows:

  • The returns on interval funds are often more than that of open-ended mutual funds.
  • Retail investors will be provided access to institutional-grade alternative investments with low minimums.
  • Periodic offers may be made by the fund to the investor to repurchase shares at NAV.

(C)   Advantages of interval Mutual Fund Schemes

  1. Compared to most open-ended mutual funds, the returns on interval mutual funds are significantly higher
  2. The NAV of interval mutual funds is less volatile because of lesser exposure to the stock markets
  3. Retail investors like you have the option of investing in institutional-grade investments at a relatively lower lump sum amount
  4. Because these funds are illiquid, it prevents “buy high – sell low” mentality

(D)   Disadvantages of interval Mutual Fund Schemes

  1. There may potentially be conflict of interest and transparency issues because the fund manager may invest in other funds of the AMC
  2. In comparison to open-ended mutual funds, interval mutual funds are highly illiquid
  3. Generally, the minimum investment amount is significantly higher than the limit levied by open-ended funds
  4. You may not be able to redeem all your units during the redemption period because of pro rata repurchase by the fund houses
  5. Although interval mutual funds deliver higher yields, the expenses are also higher than open-ended mutual funds

(E)   Who Should Invest in Interval Funds?

An interval fund is ideal for investors who have short-time financial goals and who are willing to take low to moderate level of risk. Since Interval funds are not listed on stock exchange, their assets are in the form of forestry tracts, commercial property, business loans, and private assets. Investors who are willing to get exposure to such unconventional assets may invest in these funds.

While investing in Interval funds, it is important that you keep a thorough check on the risks involved, the returns to be expected, financial goals, tax implications and the investment horizon.

(F)   List of Interval Mutual Funds Scheme in India

Based on the performance of interval funds over the last five years, here are the list of interval funds in India 2019.

Name of the scheme Returns
1 year 3 year 5 year
IDFC Yearly Series Interval Fund – Series II 8.55 7.47 8.03
Reliance Yearly Interval Fund – Series I – Growth 8.53 7.71 7.98
Reliance Interval Fund – Annual – Series I – Retail Growth 7.99 7.46 7.85
Reliance Interval Fund – Quarterly – Series II – Retail Growth 7.60 7.43 7.82
UTI Fixed Interval Income Fund – Annual Interval Plan – Series IV – Growth 6.19 6.95 7.69

Remember, this is not a recommendation but a list of well-performing interval funds in India. Please follow your investment objective and risk profile before investing.

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