<p style="text-align: left;">Mutual funds come in many varieties, designed to meet different investor goals. This article explains how mutual fund schemes are classified, and describes the equity, debt, hybrid and other scheme categories defined by SEBI.</p> <h3 style="text-align: left;">Classification of Mutual Fund Schemes</h3> <p style="text-align: left;">Mutual funds can be broadly classified based on:</p> <ul> <li><strong>Organisation Structure:</strong> Open-ended, Close-ended, Interval</li> <li><strong>Management of Portfolio:</strong> Active or Passive</li> <li><strong>Investment Objective:</strong> Growth, Income, Liquidity</li> <li><strong>Underlying Portfolio:</strong> Equity, Debt, Hybrid, Money market instruments, Multi Asset</li> <li><strong>Thematic / solution-oriented:</strong> Tax saving, Retirement benefit, Child welfare, Arbitrage</li> <li><strong>Exchange Traded Funds</strong></li> <li><strong>Overseas funds</strong></li> <li><strong>Fund of funds</strong></li> </ul> <h3 style="text-align: left;">Scheme Classification by Organisation Structure</h3> <ul> <li><strong>Open-ended schemes:</strong> These are perpetual, and open for subscription and repurchase on a continuous basis on all business days at the current NAV.</li> <li><strong>Close-ended schemes:</strong> These have a fixed maturity date. The units are issued at the time of the initial offer and redeemed only on maturity. The units of close-ended schemes are mandatorily listed to provide an exit route before maturity, and can be sold / traded on the stock exchanges.</li> <li><strong>Interval schemes:</strong> These allow purchase and redemption during specified transaction periods (intervals). The transaction period has to be a minimum of 2 days, and there should be at least a 15-day gap between two transaction periods. The units of interval schemes are also mandatorily listed on the stock exchanges.</li> </ul> <h3 style="text-align: left;">Scheme Classification by Portfolio Management</h3> <h4 style="text-align: left;">Active Funds</h4> <p style="text-align: left;">In an Active Fund, the Fund Manager is "active" in deciding whether to buy, hold or sell the underlying securities and in stock selection. Active funds adopt different strategies and styles to create and manage the portfolio.</p> <ul> <li>The investment strategy and style are described upfront in the Scheme Information Document (offer document).</li> <li>Active funds expect to generate better returns (alpha) than the benchmark index.</li> <li>The risk and return of the fund depend upon the strategy adopted.</li> <li>Active funds implement strategies to "select" the stocks for the portfolio.</li> </ul> <h4 style="text-align: left;">Passive Funds</h4> <p style="text-align: left;">Passive Funds hold a portfolio that replicates a stated Index or Benchmark, for example Index Funds and Exchange Traded Funds (ETFs).</p> <p style="text-align: left;">In a Passive Fund, the fund manager has a passive role, as the stock selection / buy, hold, sell decision is driven by the Benchmark Index. The fund manager / dealer merely needs to replicate the index with minimal tracking error.</p> <h4 style="text-align: left;">Active vs Passive Funds</h4> <table style="border-collapse: collapse; width: 100%;" border="1"> <tbody> <tr> <td style="width: 50%;"><strong>Active Funds</strong></td> <td style="width: 50%;"><strong>Passive Funds</strong></td> </tr> <tr> <td> <ul> <li>Rely on professional fund managers who manage investments</li> <li>Aim to outperform the Benchmark Index</li> <li>Suited for investors who wish to take advantage of fund managers' alpha generation potential</li> </ul> </td> <td> <ul> <li>Investment holdings mirror and closely track a benchmark index, e.g., Index Funds or Exchange Traded Funds (ETFs)</li> <li>Suited for investors who want to allocate exactly as per the market index</li> <li>Lower expense ratio, hence lower costs to investors and better liquidity</li> </ul> </td> </tr> </tbody> </table> <h3 style="text-align: left;">Classification by Investment Objectives</h3> <p style="text-align: left;">Mutual funds offer products that cater to the different investment objectives of investors, such as:</p> <ul> <li>Capital Appreciation (Growth)</li> <li>Capital Preservation</li> <li>Regular Income</li> <li>Liquidity</li> <li>Tax-Saving</li> </ul> <p style="text-align: left;">Mutual funds also offer investment plans, such as Growth and Dividend options, to help tailor the investment to the investor's needs.</p> <h4 style="text-align: left;">Growth Funds</h4> <ul> <li>Growth Funds are schemes designed to provide capital appreciation.</li> <li>They primarily invest in growth-oriented assets, such as equity.</li> <li>Investment in growth-oriented funds requires a medium to long-term investment horizon.</li> <li>Historically, equity as an asset class has outperformed most other kinds of investments held over the long term. However, returns from Growth funds tend to be volatile over the short term, since the prices of the underlying equity shares may change.</li> <li>Hence, investors must be able to take volatility in the returns in the short term.</li> </ul> <h4 style="text-align: left;">Income Funds</h4> <ul> <li>The objective of Income Funds is to provide regular and steady income to investors.</li> <li>Income funds invest in fixed income securities such as corporate bonds, debentures and government securities.</li> <li>The fund's return is from the interest income earned on these investments, as well as capital gains from any change in the value of the securities.</li> <li>The fund will distribute the income provided the portfolio generates the required returns. There is no guarantee of income.</li> <li>The returns depend upon the tenor and credit quality of the securities held.</li> </ul> <h4 style="text-align: left;">Liquid / Overnight / Money Market Mutual Funds</h4> <ul> <li>Liquid Schemes, Overnight Funds and Money Market Mutual Funds are investment options for investors seeking liquidity and principal protection, with commensurate returns.</li> <li>The funds invest in money market instruments* with maturities not exceeding 91 days.</li> <li>The return from the funds depends upon the short-term interest rate prevalent in the market.</li> <li>These are ideal for investors who wish to park their surplus funds for short periods.</li> <li>Investors who use these funds for longer holding periods may be sacrificing better returns possible from products suitable for a longer holding period.</li> </ul> <p style="text-align: left;">* Money market instruments include commercial papers, commercial bills, treasury bills, Government securities having an unexpired maturity of up to one year, call or notice money, certificates of deposit, usance bills, and any other like instruments as specified by the Reserve Bank of India from time to time.</p> <h3 style="text-align: left;">Classification by Investment Portfolio</h3> <p style="text-align: left;">Mutual fund products can be classified based on their underlying portfolio composition:</p> <ul> <li>The first level of categorisation is on the basis of the asset class the fund invests in, such as equity, debt, money market instruments or gold.</li> <li>The second level of categorisation is on the basis of the strategies and styles used to create the portfolio, such as Income fund, Dynamic Bond Fund, Infrastructure fund, Large-cap / Mid-cap / Small-cap Equity fund, Value fund, etc.</li> <li>The portfolio composition flows out of the investment objectives of the scheme.</li> </ul> <h3 style="text-align: left;">Categorisation of Mutual Fund Schemes by SEBI</h3> <p style="text-align: left;">As per the SEBI guidelines on Categorization and Rationalization of schemes issued in October 2017, mutual fund schemes are classified as:</p> <ul> <li>Equity Schemes</li> <li>Debt Schemes</li> <li>Hybrid Schemes</li> <li>Solution Oriented Schemes, for Retirement and Children</li> <li>Other Schemes, i.e., Index Funds and ETFs, and Fund of Funds</li> </ul> <p style="text-align: left;">Other key points of the categorisation:</p> <ul> <li>Under the Equity category, Large, Mid and Small cap stocks have now been defined.</li> <li>The naming convention of the schemes, especially debt schemes, is as per the risk level of the underlying portfolio. For example, the erstwhile "Credit Opportunity Fund" is now called "Credit Risk Fund".</li> <li>Balanced / Hybrid funds are further categorised into conservative hybrid fund, balanced hybrid fund and aggressive hybrid fund.</li> </ul> <h3 style="text-align: left;">Equity Schemes</h3> <p style="text-align: left;">An equity scheme is a fund that:</p> <ul> <li>Primarily invests in equities and equity-related instruments</li> <li>Seeks long-term growth but could be volatile in the short term</li> <li>Is suitable for investors with a higher risk appetite and a longer investment horizon</li> </ul> <p style="text-align: left;">The objective of an equity fund is generally to seek long-term capital appreciation. Equity funds may focus on certain sectors of the market or may have a specific investment style, such as investing in value or growth stocks.</p> <h4 style="text-align: left;">Equity Fund Categories as per SEBI guidelines</h4> <table style="border-collapse: collapse; width: 100%;" border="1"> <tbody> <tr> <td style="width: 30%;"><strong>Scheme category</strong></td> <td style="width: 70%;"><strong>Investment requirement</strong></td> </tr> <tr> <td>Multi Cap Fund*</td> <td>At least 75% investment in equity and equity-related instruments</td> </tr> <tr> <td>Flexi Cap Fund</td> <td>At least 65% investment in equity and equity-related instruments</td> </tr> <tr> <td>Large Cap Fund</td> <td>At least 80% investment in large cap stocks</td> </tr> <tr> <td>Large & Mid Cap Fund</td> <td>At least 35% investment in large cap stocks and 35% in mid cap stocks</td> </tr> <tr> <td>Mid Cap Fund</td> <td>At least 65% investment in mid cap stocks</td> </tr> <tr> <td>Small Cap Fund</td> <td>At least 65% investment in small cap stocks</td> </tr> <tr> <td>Dividend Yield Fund</td> <td>Predominantly invests in dividend-yielding stocks, with at least 65% in stocks</td> </tr> <tr> <td>Value Fund</td> <td>Value investment strategy, with at least 65% in stocks</td> </tr> <tr> <td>Contra Fund</td> <td>Scheme follows a contrarian investment strategy with at least 65% in stocks</td> </tr> <tr> <td>Focused Fund</td> <td>Focused on the number of stocks (maximum 30), with at least 65% in equity and equity-related instruments</td> </tr> <tr> <td>Sectoral / Thematic Fund</td> <td>At least 80% investment in stocks of a particular sector / theme</td> </tr> <tr> <td>ELSS</td> <td>At least 80% in stocks in accordance with the Equity Linked Saving Scheme, 2005, notified by the Ministry of Finance</td> </tr> </tbody> </table> <p style="text-align: left;">* Also referred to as Diversified Equity Funds, as they invest across stocks of different sectors and segments of the market. Diversification minimises the risk of high exposure to a few stocks, sectors or segments.</p> <h4 style="text-align: left;">Sector Specific Funds</h4> <p style="text-align: left;">Sectoral funds invest in a particular sector of the economy such as infrastructure, banking, technology or pharmaceuticals.</p> <ul> <li>Since these funds focus on just one sector of the economy, they limit diversification and are thus riskier.</li> <li>The timing of investment into such funds is important, because the performance of sectors tends to be cyclical.</li> </ul> <p style="text-align: left;">Examples of sector specific funds, i.e., equity mutual funds with an investment objective to invest in:</p> <ul> <li>Pharma and Healthcare sector</li> <li>Banking and Finance sector</li> <li>FMCG (fast moving consumer goods) and related sectors</li> <li>Technology and related sectors</li> </ul> <h4 style="text-align: left;">Thematic Funds</h4> <ul> <li>Thematic funds select stocks of companies in industries that belong to a particular theme, for example Infrastructure, Service industries, PSUs or MNCs.</li> <li>They are more diversified than Sectoral Funds and hence have lower risk than Sectoral funds.</li> </ul> <h4 style="text-align: left;">Value Funds (Strategy and Style Based Funds)</h4> <p style="text-align: left;">Equity funds may be categorised based on the valuation parameters adopted in stock selection, such as:</p> <ul> <li><strong>Growth funds:</strong> Identify momentum stocks that are expected to perform better than the market.</li> <li><strong>Value funds:</strong> Identify stocks that are currently undervalued but are expected to perform well over time as the value is unlocked.</li> </ul> <p style="text-align: left;">Equity funds may hold a concentrated portfolio to benefit from stock selection. These funds will have a higher risk, since the effect of a wrong selection can be substantial on the portfolio's return.</p> <h4 style="text-align: left;">Contra Funds</h4> <ul> <li>Contra funds are equity mutual funds that take a contrarian view on the market.</li> <li>Underperforming stocks and sectors are picked at low price points, with a view that they will perform in the long run.</li> <li>The portfolios of contra funds have defensive and beaten-down stocks that have given negative returns during bear markets.</li> <li>These funds carry the risk of getting calls wrong, as catching a trend before the herd is not possible in every market cycle, and these funds typically underperform in a bull market.</li> <li>As per the SEBI guidelines on scheme categorisation of mutual funds, a fund house can offer either a Contra Fund or a Value Fund, not both.</li> </ul> <h4 style="text-align: left;">Equity Linked Savings Scheme (ELSS)</h4> <ul> <li>ELSS invests at least 80% in stocks in accordance with the Equity Linked Saving Scheme, 2005, notified by the Ministry of Finance.</li> <li>It has a lock-in period of 3 years, which is the shortest among all other tax saving options.</li> <li>It is currently eligible for deduction under Section 80C of the Income Tax Act up to ₹1,50,000.</li> </ul> <h3 style="text-align: left;">Debt Schemes</h3> <ul> <li>A debt fund (also known as an income fund) is a fund that invests primarily in bonds or other debt securities.</li> <li>Debt funds invest in short and long-term securities issued by the government, public financial institutions and companies, such as Treasury bills, Government Securities, Debentures, Commercial paper, Certificates of Deposit and others.</li> <li>Debt funds can be categorised based on the tenor of the securities held in the portfolio and / or on the basis of the issuers of the securities or their fund management strategies, such as: <ul> <li>Short-term funds, Medium-term funds, Long-term funds</li> <li>Gilt fund, Treasury fund, Corporate bond fund, Infrastructure debt fund</li> <li>Floating rate funds, Dynamic Bond funds, Fixed Maturity Plans</li> </ul> </li> <li>Debt funds have potential for income generation and capital preservation.</li> </ul> <h4 style="text-align: left;">Debt Fund Categories as per SEBI guidelines</h4> <table style="border-collapse: collapse; width: 100%;" border="1"> <tbody> <tr> <td style="width: 30%;"><strong>Scheme category</strong></td> <td style="width: 70%;"><strong>Investment requirement</strong></td> </tr> <tr> <td>Overnight Fund</td> <td>Overnight securities having maturity of 1 day</td> </tr> <tr> <td>Liquid Fund</td> <td>Debt and money market securities with maturity of up to 91 days only</td> </tr> <tr> <td>Ultra Short Duration Fund</td> <td>Debt and money market instruments with Macaulay duration of the portfolio between 3 months and 6 months</td> </tr> <tr> <td>Low Duration Fund</td> <td>Investment in debt and money market instruments with Macaulay duration of the portfolio between 6 months and 12 months</td> </tr> <tr> <td>Money Market Fund</td> <td>Investment in money market instruments having maturity up to 1 year</td> </tr> <tr> <td>Short Duration Fund</td> <td>Investment in debt and money market instruments with Macaulay duration of the portfolio between 1 year and 3 years</td> </tr> <tr> <td>Medium Duration Fund</td> <td>Investment in debt and money market instruments with Macaulay duration of the portfolio between 3 years and 4 years</td> </tr> <tr> <td>Medium to Long Duration Fund</td> <td>Investment in debt and money market instruments with Macaulay duration of the portfolio between 4 and 7 years</td> </tr> <tr> <td>Long Duration Fund</td> <td>Investment in debt and money market instruments with Macaulay duration of the portfolio greater than 7 years</td> </tr> <tr> <td>Dynamic Bond</td> <td>Investment across duration</td> </tr> <tr> <td>Corporate Bond Fund</td> <td>Minimum 80% investment in corporate bonds, only in AA+ and above rated corporate bonds</td> </tr> <tr> <td>Credit Risk Fund</td> <td>Minimum 65% investment in corporate bonds, only in AA and below rated corporate bonds</td> </tr> <tr> <td>Banking and PSU Fund</td> <td>Minimum 80% in debt instruments of banks, Public Sector Undertakings, Public Financial Institutions and Municipal Bonds</td> </tr> <tr> <td>Gilt Fund</td> <td>Minimum 80% in G-secs, across maturity</td> </tr> <tr> <td>Gilt Fund with 10 year constant Duration</td> <td>Minimum 80% in G-secs, such that the Macaulay duration of the portfolio is equal to 10 years</td> </tr> <tr> <td>Floater Fund</td> <td>Minimum 65% in floating rate instruments (including fixed rate instruments converted to floating rate exposures using swaps / derivatives)</td> </tr> </tbody> </table> <ul> <li><strong>Dynamic Bond funds</strong> alter the tenor of the securities in the portfolio in line with expectations on interest rates. The tenor is increased if interest rates are expected to go down, and vice versa.</li> <li><strong>Floating rate funds</strong> invest in bonds whose interest is reset periodically, so that the fund earns coupon income that is in line with current market rates. This eliminates interest rate risk to a large extent.</li> </ul> <h4 style="text-align: left;">Short-Term Debt Funds</h4> <p style="text-align: left;">The primary focus of short-term debt funds is coupon income. Short-term debt funds also have to be evaluated for the credit risk they may take to earn higher coupon income. The tenor of the securities defines the return and risk of the fund.</p> <ul> <li>Funds holding securities with lower tenors have lower risk and lower return.</li> <li>Liquid funds invest in securities with not more than 91 days to maturity.</li> <li>Ultra Short-Term Debt Funds hold a portfolio with a slightly higher tenor to earn higher coupon income.</li> <li>Short-Term Funds combine coupon income earned from a predominantly short-term debt portfolio with some exposure to longer-term securities to benefit from appreciation in price.</li> </ul> <h4 style="text-align: left;">Fixed Maturity Plans (FMPs)</h4> <ul> <li>FMPs are closed-ended funds which eliminate interest rate risk and lock in a yield by investing only in securities whose maturity matches the maturity of the fund.</li> <li>FMPs create an investment portfolio whose maturity profile matches that of the FMP tenor.</li> <li>They have the potential to provide better returns than liquid funds and Ultra Short-Term Funds, since investments are locked in.</li> <li>They have low mark-to-market risk, as investments are liquidated at maturity.</li> <li>Investors commit money for a fixed period and cannot prematurely redeem the units from the fund.</li> <li>FMPs, being close-ended schemes, are mandatorily listed. Investors can buy or sell units of FMPs only on the stock exchange after the NFO.</li> <li>Only units held in dematerialised mode can be traded. Therefore, investors seeking liquidity in such schemes need to have a demat account.</li> </ul> <h4 style="text-align: left;">Capital Protection Oriented Funds</h4> <p style="text-align: left;">Capital Protection Oriented Funds are close-ended hybrid funds that create a portfolio of debt instruments and equity derivatives.</p> <ul> <li>The portfolio is structured to provide capital protection and is rated by a credit rating agency on its ability to do so. The rating is reviewed every quarter.</li> <li>The debt component of the portfolio has to be invested in instruments with the highest investment grade rating.</li> <li>A portion of the amount brought in by the investors is invested in debt instruments that are expected to mature to the par value of the capital invested by investors in the fund. The capital is thus protected.</li> <li>The remaining portion of the funds is used to invest in equity derivatives to generate higher returns.</li> </ul> <h3 style="text-align: left;">Hybrid Funds</h3> <p style="text-align: left;">Hybrid funds invest in a mix of equities and debt securities. SEBI has classified Hybrid funds into 7 sub-categories as follows:</p> <table style="border-collapse: collapse; width: 100%;" border="1"> <tbody> <tr> <td style="width: 30%;"><strong>Scheme category</strong></td> <td style="width: 70%;"><strong>Investment requirement</strong></td> </tr> <tr> <td>Conservative Hybrid Fund</td> <td>10% to 25% investment in equity and equity-related instruments; and 75% to 90% in debt instruments</td> </tr> <tr> <td>Balanced Hybrid Fund</td> <td>40% to 60% investment in equity and equity-related instruments; and 40% to 60% in debt instruments</td> </tr> <tr> <td>Aggressive Hybrid Fund</td> <td>65% to 80% investment in equity and equity-related instruments; and 20% to 35% in debt instruments</td> </tr> <tr> <td>Dynamic Asset Allocation or Balanced Advantage Fund</td> <td>Investment in equity / debt that is managed dynamically (0% to 100% in equity and equity-related instruments; and 0% to 100% in debt instruments)</td> </tr> <tr> <td>Multi Asset Allocation Fund</td> <td>Investment in at least 3 asset classes with a minimum allocation of at least 10% in each asset class</td> </tr> <tr> <td>Arbitrage Fund</td> <td>Scheme following an arbitrage strategy, with minimum 65% investment in equity and equity-related instruments</td> </tr> <tr> <td>Equity Savings</td> <td>Equity and equity-related instruments (min. 65%); debt instruments (min. 10%) and derivatives (min. for hedging to be specified in the SID)</td> </tr> </tbody> </table> <p style="text-align: left;">Hybrid funds seek to find a "balance" between growth and income by investing in both equity and debt.</p> <ul> <li>The regular income earned from the debt instruments provides greater stability to the returns from such funds.</li> <li>The proportion of equity and debt that will be held in the portfolio is indicated in the Scheme Information Document.</li> <li>Equity-oriented hybrid funds (Aggressive Hybrid Funds) are ideal for investors looking for growth in their investment with some stability.</li> <li>Debt-oriented hybrid funds (Conservative Hybrid Funds) are suitable for conservative investors looking for a boost in returns with a small exposure to equity.</li> <li>The risk and return of the fund depend upon the equity exposure taken by the portfolio. The higher the allocation to equity, the greater the risk.</li> </ul> <h4 style="text-align: left;">Multi Asset Funds</h4> <ul> <li>A multi-asset fund offers exposure to a broad number of asset classes, often offering a level of diversification typically associated with institutional investing.</li> <li>Multi-asset funds may invest in a number of traditional equity and fixed income strategies, index-tracking funds, financial derivatives as well as commodities like gold.</li> <li>This diversity allows portfolio managers to potentially balance risk with reward and deliver steady, long-term returns for investors, particularly in volatile markets.</li> </ul> <h4 style="text-align: left;">Arbitrage Funds</h4> <p style="text-align: left;">"Arbitrage" is the simultaneous purchase and sale of an asset to take advantage of the price differential in two markets, and profit from the price difference of the asset in different markets or in different forms.</p> <ul> <li>An arbitrage fund buys a stock in the cash market and simultaneously sells it in the Futures market at a higher price, to generate returns from the difference in the price of the security in the two markets.</li> <li>The fund takes equal but opposite positions in both markets, thereby locking in the difference.</li> <li>The positions have to be held until the expiry of the derivative cycle, and both positions need to be closed at the same price to realise the difference.</li> <li>The cash market price converges with the Futures market price at the end of the contract period. Thus, it delivers a risk-free profit for the investor / trader.</li> <li>Price movements do not affect the initial price differential, because the profit in one market is set off by the loss in the other market.</li> <li>Since mutual funds invest their own funds, the difference is fully the return.</li> </ul> <p style="text-align: left;">Hence, Arbitrage funds are considered a good choice for cautious investors who want to benefit from a volatile market without taking on too much risk.</p> <h3 style="text-align: left;">Solution-Oriented and Other Funds</h3> <table style="border-collapse: collapse; width: 100%;" border="1"> <tbody> <tr> <td style="width: 35%;"><strong>Scheme category</strong></td> <td style="width: 65%;"><strong>Investment requirement</strong></td> </tr> <tr> <td>Retirement Fund</td> <td>Lock-in for at least 5 years or till retirement age, whichever is earlier</td> </tr> <tr> <td>Children's Fund</td> <td>Lock-in for at least 5 years or till the child attains the age of majority, whichever is earlier</td> </tr> <tr> <td>Index Funds / ETFs</td> <td>Minimum 95% investment in securities of a particular index</td> </tr> <tr> <td>Fund of Funds (Overseas / Domestic)</td> <td>Minimum 95% investment in the underlying fund(s)</td> </tr> </tbody> </table> <h3 style="text-align: left;">Index Funds</h3> <p style="text-align: left;">Index funds create a portfolio that mirrors a market index.</p> <ul> <li>The securities included in the portfolio and their weights are the same as those in the index.</li> <li>The fund manager does not rebalance the portfolio based on their view of the market or sector.</li> <li>Index funds are passively managed, which means that the fund manager makes only minor, periodic adjustments to keep the fund in line with its index. Hence, an index fund offers the same return and risk represented by the index it tracks.</li> <li>The fees that an index fund can charge are capped at 1.5%.</li> </ul> <p style="text-align: left;">Investors have the comfort of knowing the stocks that will form part of the portfolio, since the composition of the index is known.</p> <h3 style="text-align: left;">Exchange Traded Funds (ETFs)</h3> <p style="text-align: left;">An ETF is a marketable security that tracks an index, a commodity, bonds, or a basket of assets, like an index fund. ETFs are listed on stock exchanges.</p> <ul> <li>Unlike regular mutual funds, an ETF trades like a common stock on a stock exchange. The traded price of an ETF changes throughout the day like any other stock, as it is bought and sold on the stock exchange.</li> <li>ETF units are compulsorily held in demat mode.</li> <li>ETFs are passively managed, which means that the fund manager makes only minor, periodic adjustments to keep the fund in line with its index.</li> <li>Because an ETF tracks an index without trying to outperform it, it incurs lower administrative costs than actively managed portfolios.</li> <li>Rather than investing in an "active" fund managed by a fund manager, when one buys units of an ETF, one is harnessing the power of the market itself.</li> <li>ETFs are suitable for investors seeking returns similar to the index and liquidity similar to stocks.</li> </ul> <h3 style="text-align: left;">Fund of Funds (FoF)</h3> <ul> <li>Fund of funds are mutual fund schemes that invest in the units of other schemes of the same mutual fund or of other mutual funds.</li> <li>The schemes selected for investment are based on the investment objective of the FoF.</li> <li>The FoF has two levels of expenses: that of the scheme whose units the FoF invests in, and the expense of the FoF itself. Regulations limit the total expenses that can be charged across both levels as follows: <ul> <li>TER in respect of FoF investing in liquid schemes, index funds and ETFs has been capped at 1%.</li> <li>TER of FoF investing in equity-oriented schemes has been capped at 2.25%.</li> <li>TER of FoF investing in schemes other than those mentioned above has been capped at 2%.</li> </ul> </li> </ul> <h3 style="text-align: left;">Gold Exchange Traded Funds (Gold ETFs)</h3> <ul> <li>Gold ETFs are ETFs with gold as the underlying asset.</li> <li>The scheme issues units against gold held. Each unit represents a defined weight in gold, typically one gram.</li> <li>The scheme holds gold in the form of physical gold or gold-related instruments approved by SEBI.</li> <li>Schemes can invest up to 20% of net assets in the Gold Deposit Scheme of banks.</li> <li>The price of ETF units moves in line with the price of gold on the metal exchange.</li> <li>After the NFO, units are issued to intermediaries called authorised participants against gold or funds submitted. They can also redeem the units for the underlying gold.</li> </ul> <h4 style="text-align: left;">Benefits of Gold ETFs</h4> <ul> <li><strong>Convenience:</strong> Option of holding gold electronically instead of physical gold.</li> <li>A safer option to hold gold, since there are no risks of theft or purity.</li> <li>Provides easy liquidity and ease of transaction.</li> <li>For the purpose of capital gains taxation, Gold ETFs are considered "Specified Mutual Funds" (i.e., non-equity oriented mutual funds).</li> <li>No wealth tax is applicable on Gold ETFs.</li> </ul> <h3 style="text-align: left;">International Funds</h3> <p style="text-align: left;">International funds enable investments in markets outside India, by holding in their portfolio one or more of the following:</p> <ul> <li>Equity of companies listed abroad</li> <li>ADRs and GDRs of Indian companies</li> <li>Debt of companies listed abroad</li> <li>ETFs of other countries</li> <li>Units of passive index funds in other countries</li> <li>Units of actively managed mutual funds in other countries</li> </ul> <p style="text-align: left;">International equity funds may also hold some of their portfolios in Indian equity or debt. They can hold some portion of the portfolio in money market instruments to manage liquidity.</p> <p style="text-align: left;">International funds give the investor additional benefits of:</p> <ul> <li>Diversification, since global markets may have a low correlation with domestic markets</li> <li>Investment options that may not be available domestically</li> <li>Access to companies that are global leaders in their field</li> </ul> <p style="text-align: left;">There are risks associated with investing in such funds, such as:</p> <ul> <li>Political events and macroeconomic factors that are less familiar and therefore difficult to interpret</li> <li>Movements in the foreign exchange rate, which may affect the return on redemption</li> <li>Countries may change their investment policy towards global investors</li> </ul> <p style="text-align: left;">For the purpose of taxation, these funds are considered non-equity oriented mutual fund schemes.</p>