Portfolio Classification

Funds are classified into (i) Equity Funds, (ii) Debt Funds, and (iii) Special Funds.

Equity funds invest primarily in stocks. A share hold by an investor represents a certain percentage of ownership in the company. If a corporation is successful, shareholders can profit in two ways:

• the stock may increase in value, or

• the corporate can pass its profits to shareholders in the type of dividends.

If a corporation fails, a shareholder can lose the whole value of his or her shares; however, a shareholder is not responsible for the debts of the corporate.

1.1 Equity Funds

Equity Funds are of the following types viz.

(a) Growth Funds

 They seek to supply long-run capital appreciation to the investor and are best to future investors.

(b) Aggressive Funds

They appear for super-normal returns that investment is formed in start-ups, IPOs, and speculative shares. They are best for investors willing to require risks.

(c) Income Funds

They seek to maximize the present income of investors by investing in safe stocks paying high cash dividends and in high yield market instruments. They are best for investors seeking current income.

1.2 Debt Funds

Debt Funds are of two types viz.

(a) Bond Funds

They invest in fixed income securities which provide % return in specified period e.g. government bonds, corporate debentures, convertible debentures, money market. Investors seeking tax-free income enter for state bonds while those trying to find safe, steady income buy government bonds or

high-grade corporate bonds. Although there are past exceptions, bond funds tend to be less volatile than stock funds and sometimes produce regular income. Due to these reasons, investors often use bond funds to diversify the risk of the portfolio, provide a stream of income in an interval of the specified period, or invest for intermediate-term goals. However, like stock funds, bond funds also have the following risks and can lose money.

·         Interest Rate Risk: This risk relates to fluctuation in the market value of the Bond consequent upon the change in interest rate (YTM). There is an inverse relationship between the market value of bonds and interest rate. As the interest rate goes upmarket demand for previously issued bond fall due to which the ''value of Bond falls'' and vice versa.

·         Credit Risk: This risk is similar to the risk of default in repayment of loans or payment of interest or both by the borrowers of the funds. Thus, this risk takes place when a Mutual Fund which invested money in the Bonds of a company defaulted in the payment of Interest or Principal.

This risk is higher in the case of companies with lower Credit Ratings.

·         Prepayment Risk: This risk is related to the early refund of money by the issuer of Bonds before the date of maturity. This generally happens in case of falling interest rates when a company who already issued Bond at higher interest rate issues fresh Bonds at a lower rate of interest exercising its right of early redemption of Callable Bonds and refunding the money raised out of the fresh issue.

(b) Gilt Funds 

They're mainly invested in Government securities.

1.3 Special Funds

Special Funds are of four types viz.

(a) Index Funds

Every stock exchange features a stock exchange index that measures the upward and downward sentiment of the stock market. Index Funds are low-cost funds and influence the stock exchange. The investor will receive whatever the market delivers.

(b) International Funds

A Mutual Fund(MF) located in India to boost money in India for investing globally.

(c) Offshore Funds

A Mutual Fund(MF) located in India to boost money globally for investing in India.

(d) Sector Funds

They invest their entire fund during a particular industry e.g. utility fund for utility industry like power, gas, structure.

(e) money market funds

These are predominantly debt-oriented schemes and the main objective of which is the preservation of capital, easy liquidity, and moderate-income. To achieve the above objective, liquid funds invest predominantly in safer short-term instruments that provide less return in comparison to the instrument. Examples of safer liquid funds are Commercial Papers, Certificate of Deposits, Treasury Bills, G-Secs, etc.

These schemes are used mainly by institutions and individuals to park their surplus funds for brief periods of your time. These funds are more or less insulated from changes within the rate of interest within the economy and capture the present yields prevailing within the market.

(f) Fund of Funds

Fund of Funds (FoF) because the name suggests are schemes which invest in other Mutual Fund(MF) schemes. The concept is popular in markets where there are several mutual fund offerings and selecting an appropriate scheme consistent with one’s objective is hard. Just as a mutual fund scheme invests during a portfolio of securities like equity, debt, etc, the underlying investments for an FoF are that the units of other mutual fund schemes, either from an equivalent fund family or from other fund houses.

(g) Capital Protection Oriented Fund

The term ‘capital protection oriented scheme’ means a Mutual Fund(MF) scheme which is designated intrinsically and which endeavors to guard the capital invested therein through suitable orientation of its portfolio structure. These funds protect capital originates from the portfolio structure of the scheme and not from any bank guarantee, insurance cover, etc. SEBI stipulations require these kinds of schemes to be close-ended in nature, listed on the stock exchange and thus the intended portfolio structure would wish to be mandatory rated by a credit rating agency. A typical portfolio structure might be to line aside a major portion of the assets for capital safety and will be invested in highly rated debt instruments. The remaining portion would be invested in equity or equity-related instruments to supply capital appreciation. Capital Protection Oriented schemes are a recent entrant within the national capital markets and will not be confused with ‘capital guaranteed’ schemes.

(h) Gold Funds

The target of those funds is to trace the performance of Gold. The units represent the value of gold or gold-related instruments held in the scheme. Gold Funds which are generally in the form of an Exchange Traded Fund (ETF) are listed on the stock exchange and offer investors an opportunity to participate in the bullion market without having to take physical delivery of gold.