Types of Mutual Fund Schemes | Classification Guide

1. Scheme Classification by Organization Structure

1. Open-Ended Mutual Fund Schemes

An open-ended mutual fund does not have a fixed investment tenure. Investors can purchase additional units or redeem their existing units on any business day at the prevailing Net Asset Value (NAV), subject to the scheme's terms and applicable regulations.

Illustration: Suppose you invest ₹50,000 in an open-ended equity fund today. Six months later, if you wish to invest another ₹20,000, you can do so at the prevailing NAV. Likewise, if you need ₹15,000 for an emergency, you may redeem the required units on any business day without waiting for the scheme to mature.

2. Close-Ended Mutual Fund Schemes

A close-ended mutual fund has a predefined investment period, such as 3 years or 5 years. Investors can subscribe to the scheme only during its New Fund Offer (NFO). Once the subscription window closes, fresh investments are generally not permitted.

The invested amount is normally returned only upon completion of the scheme's tenure. However, to provide investors with an opportunity to exit before maturity, the units are listed on recognised stock exchanges, where they may be bought or sold, subject to market demand and availability.

Illustration: Imagine a close-ended fund with a 5-year tenure. You invest ₹1,00,000 during the NFO. If you wish to exit after 2 years, you cannot redeem the units directly with the fund. Instead, you may sell them on the stock exchange if a buyer is available. Otherwise, you receive the redemption proceeds when the scheme completes its 5-year term.

3. Interval Mutual Fund Schemes

An interval mutual fund combines features of both open-ended and close-ended schemes. Investors cannot transact every business day. Instead, purchases and redemptions are permitted only during predefined transaction windows, known as intervals, announced by the fund house.

As per regulatory requirements, each transaction window remains open for at least two business days, and there must be a minimum gap of 15 days between two such windows. The units of interval schemes are also listed on recognised stock exchanges.

Illustration: Suppose an interval fund accepts transactions during the first three business days of every quarter. If you wish to redeem your investment in May, you may need to wait until the next scheduled transaction window. Alternatively, if liquidity is available, you may choose to sell your units through the stock exchange.

2. Scheme Classification by Portfolio Management

Mutual fund schemes can be broadly grouped into Active Funds and Passive Funds according to the way their investment portfolios are managed.

Active Funds

An Active Fund is managed through continuous research, analysis, and decision-making by the fund manager. The manager evaluates market conditions and company fundamentals to determine which securities should be purchased, retained, or sold to achieve the fund's objective.

The fund manager actively identifies investment opportunities.
Investment decisions are based on research, market outlook, and valuation analysis.
The primary objective is to outperform the benchmark index by generating additional returns (alpha).

Illustration: Suppose the benchmark index allocates 10% to Company A. After conducting detailed research, the fund manager believes Company A has strong growth potential and increases its allocation to 18%. These active decisions aim to earn returns higher than those of the benchmark.

Passive Funds

A Passive Fund seeks to mirror the performance of a specified market index rather than outperform it. Instead of selecting securities based on individual research, the fund invests in the same securities and in the same proportions as those included in the chosen benchmark index (e.g., Index Funds, ETFs).

Portfolio composition follows a predetermined benchmark index.
No attempt is made to outperform the market.
Lower management costs and lower portfolio turnover.
Focuses on minimizing tracking error.

3. Scheme Classification by Investment Objectives

Investment Objective	Purpose
Capital Growth	Increase the value of your investment over time.
Capital Protection	Focus on preserving the invested amount while aiming for moderate returns.
Regular Income	Generate periodic income through interest or other earnings.
Liquidity	Provide quick access to your money whenever needed.
Tax Saving	Help investors save taxes while building long-term wealth (ELSS).

Growth Funds

Growth Funds aim to increase the value of your investment over the long term by investing primarily in equity and equity-related securities. Short-term returns can fluctuate, making them best suited for investors comfortable with market volatility.

Income Funds

Income Funds invest primarily in fixed-income securities such as Government Securities, Corporate Bonds, and Debentures. Returns come through periodic interest and capital appreciation when bond prices rise.

Liquid, Overnight and Money Market Funds

These funds invest in short-term money market instruments with short maturities (Treasury Bills, Commercial Papers, Certificates of Deposit, Call Money). They are designed for emergency cash reserves or short-term surplus parking.

4. Classification Based on Investment Portfolio

Funds are first categorized by asset class (Equity, Debt, Money Market, Gold, Hybrid), and then further refined by investment strategy:

Equity Categories: Large Cap, Mid Cap, Small Cap, Value Funds, Sectoral/Thematic Funds.
Debt Categories: Income Funds, Dynamic Bond Funds, Money Market Funds, Liquid Funds.

Investor Goal	Suitable Portfolio
Long-term wealth creation	Equity-oriented portfolio
Stable income	Debt-oriented portfolio
Short-term cash management	Money market instruments
Diversified growth with moderate risk	Hybrid portfolio