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16 October, 2021 20:36 IST
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Schemes I can Buy and ones I can't
Take any scheme, it is either open or closed. Quite literally, schemes are either open for you to buy or just closed for you.
 
Close-ended schemes:
These have fixed maturity periods (ranging from 2 to 15 years). You can invest in the scheme at the time of the initial issue. That’s because such schemes can not issue new units except in case of bonus or rights issue. All is not lost if you missed out on units of a closed scheme. After the initial issue, you can buy or sell units of the scheme on the stock exchanges where they are listed (certain Mutual Funds however, in order to provide investors with an exit route on a periodic basis do repurchase units at NAV related prices). The market price of the units could vary from the NAV of the scheme due to demand and supply factors, investors’ expectations and other market factors.
 
Open-ended schemes:
These do not have a fixed maturity period. Investors can buy or sell units at NAV-related prices from and to the mutual fund on any business day. Most people prefer open-ended mutual funds because they offer liquidity. Such funds can issue and redeem units any time during the life of a scheme. Hence, unit capital of open ended funds can fluctuate on a daily basis.
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Fund Category : Matching objectives
 

Let us get back to the basic questions that brought us here. We are here to invest with some objective of our own. And we are looking for investment options that best fit our investment objective.

Much like for an individual investor, a scheme’s objective is the result that a fund manager desires out a scheme. While setting objective for a scheme the manager asks the question: what are the kind of returns I expect the scheme to deliver and to get assure such returns what are the securities and in what proportion should I invest in?

So, now which are those schemes that suit our objectives best? The obvious next step then is to look all fund schemes and make a match between their and our investment objectives, correct? Hmmm, that’s not as simply done as it sounds. Unless you have all the time in the world, going through each of the 350 or so schemes in the market today and reading their investment objectives is a foolhardy job.

What makes life easier is that based on their objectives schemes have been clubbed together in categories. These are broad market classifications and help investors narrow down their search for a scheme. After shortlisting schemes by their common objectives one can further look into each scheme for more specific differences in their objectives.

At Myiris we have broadly grouped schemes by the following categories:

Equity schemes: Stock heavy
Equity schemes are those that invest predominantly in equity shares of companies. An equity scheme seeks to provide returns by way of capital appreciation. As a class of assets, equities are subject to greater fluctuations. Hence, the NAVs of these schemes will also fluctuate frequently. Equity schemes are more volatile, but offer better returns. They are good for long-term investors who do not need to make a killing in the next few years. Over the past few years it has been seen that over a long term period equity schemes tend to give returns between 15-25% per annum. Equity schemes can be further classified as:
Diversified Equity schemes:
The aim of diversified equity funds is to provide the investor with capital appreciation over a medium to long period (generally 2 – 5 years). The fund invests in equity shares of companies from a diverse array of industries and balances (or tries to) the portfolio so as to prevent any adverse impact on returns due to a downturn in one or two sectors. Over the years these schemes have given returns between 15-25% annually. These schemes are less volatile compared to sectoral equity schemes. Ideally the portfolio of such schemes should not have more than 50% of the investment in one sector.
Sectoral Equity schemes: most eggs in one basket
These are schemes whose objective is to invest only in the equity of those companies existing in a specific sector, as laid down in the fund’s offer document. For example, an FMCG sectoral fund shall invest in companies like HLL, Cadbury’s, Nestle etc., and not in a software company like Infosys. Currently there exist approximately four broad classification of basic sectors namely – technology, media & telecom (TMT), fast moving consumer goods (FMCG), basic industry (that invest in core industries like petrochemicals, cement, steel, etc.), MNC (comprising of multinational companies in various sectors) and pharmaceuticals. Sectoral Funds tend to have a very high risk-reward ratio and investors should be careful of putting all their eggs in one basket. Investors generally see such schemes to benefit them in the short term, usually one year. Returns could be as high as 50% in a good year provided the investor chooses the right sector.
Equity Linked Saving Schemes (ELSS): nothing taxing about it
These schemes generally offer tax rebates to the investor under section 88 of the Income Tax law. These schemes generally diversify the equity risk by investing in a wider array of stocks across sectors. ELSS is usually considered a variant of diversified equity scheme but with a tax friendly offer. Typically returns for such schemes have been found to be between 15-20%.
Index schemes: follow the market
Index funds are schemes that try to invest in those equity shares which make up a particular index. For example, an Index fund which is trying to mirror the BSE-30 (Sensex) will invest in only those 30 scrips that constitute this particular index. Investment in these scrips is also made in proportion to each stocks weight in the index. Fund managing an index fund is usually called passive management because all a fund manager has to do is to follow the index. Hence, who the portfolio manager or what his style is does not really matter in such funds. Volatility of such schemes are in sync with the index. A bull market could get you as high as 40% returns over a period of one year. In a bad year (current year) it could erode your principal by as much as 30%.
Debt schemes
These schemes invest mainly in income-bearing instruments like bonds, debentures, government securities, commercial paper, etc. These instruments are much less volatile than equity schemes. Their volatility depends essentially on the health of the economy e.g., rupee depreciation, fiscal deficit, inflationary pressure. Performance of such schemes also depends on bond ratings. These schemes provide returns generally between 7 to 12% per annum.

Debt schemes are divided in four categories to meet different investor requirements:

Liquid or Money market: hey, isn’t everything about money?
Money market schemes invest in short-term debt instruments such as T-bills, certificates of deposits, commercial papers, call money markets, etc. Their goal is to preserve the principal while yielding a modest return. They are ideal for corporate and big investors looking for avenues to park their short-term surplus funds. Why liquid? Since they provide the investor to enter or exit within a short period of time without any load. You can even invest for two working days. Normally, you can get back your cash within 24 hours of redemption. All liquid schemes are open-ended. Typical returns for liquid schemes have been between 7-8% per annum.
Gilt schemes: the golden goose?
Gilt schemes invest in government bonds, money market securities or some combination of these. They tend to give a higher return than a liquid scheme at the same time retaining the qualities of a liquid fund. They are slightly volatile because 95% of the traded volume of fixed income instruments in India comprise of gilts and therefore pricing of such schemes is done daily. In case the fund manager needs to exit he can do so almost immediately at whatever price the market is willing to pay. Gilt schemes generally give a return of 8.5-10% per annum.
Income schemes:
Beside investing in Government of India securities and money market instruments, they are slightly more overweighed on corporate India. Approximately 50-60% of the portfolio would consist of fixed income instruments issued by corporate India. They therefore provide a higher return typically between 11-12% per annum. Ideally suited for investors looking beyond a period of 1 year.
Monthly Income Plan (MIP):
A variant of the income scheme. They generally provide investors an option to get monthly returns in the form of dividends. UTI is the only fund house giving out assured returns on MIP (distributed as post-dated cheques). Private sector mutual funds are not allowed to give assured returns on MIPs. Usually, the returns from such schemes are between 10.5 –11.5%.
 
 
 
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