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Introduction to Mutual Funds – Types of mutual funds

Article number 4 in the mutual fund series (For the previous article – Disadvantages of mutual funds)

Classifying mutual funds is always a nightmare. There are tens of thousands of mutual funds out there and trying to classify them into a fund type would be very difficult. However broadly and conceptually we can classify any mutual fund by asking ourselves the following five questions

Question 1 – Does the mutual fund invest exclusively in one asset class (like stocks only fund, bonds only fund, money market instruments only fund, Gold/commodity only fund?) or does it diversify across asset classes (say 60% stocks, 20% bonds, 10% gold, 10% money market funds or something like that)?

Depending on which we have
1) Equity/Stocks mutual funds (Note that real estate mutual funds are also a type of equity fund)
2) Bond mutual funds
3) Money market mutual funds
4) Commodity mutual funds
5) Hybrid mutual funds (A combination of two or more of the above)

Depending on which we have
1) Actively managed mutual funds
2) Passively managed mutual funds

Question 3 – Am I investing my money at one go into the mutual fund or at regular intervals (Say, once a month)?

Question 4 – Is the fund focused on giving me regular dividends or does it reinvest the dividends for me or are my profits based on the appreciation of the funds NAV (growth)?

Depending on which we have
1) Growth funds
2) Dividend payout funds
3) Dividend reinvestment funds

Question 5 – Once I invest in a mutual fund do I exit by selling shares of the fund to other investors on the stock exchange (close ended mutual fund) or do I sell them to the mutual fund itself (open ended mutual fund)?

We have
1) Open ended fund
2) Close ended fund

* More on open ended and close ended mutual funds in the next article.

* Note that I have not included exchange traded funds (ETFs) and unit investment trusts (UITs) here as they are generally considered different from traditional mutual funds. We will be dealing with them in subsequent articles.

These are the five questions you need to ask if you would like to classify the mutual fund in which you are interested in. Now that we know what questions to ask, it becomes pretty easy to understand under which category a given mutual fund comes under.

For someone living in the US for example, lets consider PTTRX, one of the the largest mutual fund in the US.

1) It can be classified as a (intermediate term) bond mutual fund as it has 103% of its assets in bonds and around 4% in others like equities. 103% of bond holdings basically means its a bit leveraged. [1]
2) The fund is actively managed currently by William H. Gross.
3) It doesn’t require any SIP but does require a minimum initial investment of $1,000,000 which you can invest at one go.
4) It is an open-ended mutual fund.[2]

As for someone living in India, Lets consider for example, the HDFC Top 200 Fund.

1) It can be classified as a equity mutual fund. (It can invest upto 100% of its portfolio in equities) [3]
2) It is passively managed (with a turnover ratio of around 30%). [4]
3) It has both SIP and lump-sum investment options.
4) There are both growth and dividend plans available.
5) It is an open-ended mutual fund.

With this introduction, we will be in a position to take an in-depth look at the types of stock and bond mutual funds in the next article.

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Image credit – André-Pierre