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Different Types of Mutual Funds

Posted on: 24 Dec, 2023

Structure-wise, broadly all mutual funds fall into two categories:

• Open-ended fund
• Closed-end fund

Open-ended fund: Units in an open-ended fund can be bought from the fund’s asset manager and sold to them at any time. The units are bought or sold at their latest price—which is commonly referred to as the Net Asset Value (NAV). However, there could be some deviations from the NAV depending on the fund manager.
Here, all transactions happen exclusively between the asset manager and the investor throughout the operation of the fund—which is essentially perpetually running. Vast majority of mutual funds around the world are open-ended as this structure offers better investor protection. All mutual funds offered by EDGE AMC Limited are also open-ended.

Closed-end fund: Units in a closed-end fund can be bought from the fund’s asset manager only once when they launch the fund, and the purchased units can be sold directly to the asset manager once as well, only when the fund’s predetermined lifetime (period of operation) comes to an end.
However, before the fund’s lifetime ends, an investor can buy or sell units of the fund on an exchange like the Dhaka Stock Exchange (DSE), where investors can trade the units among themselves at whatever price the units fetch.

In the case of closed-end funds, all transactions—after their launch and before their lifetime ends—can happen only on exchanges between private investors.

From a portfolio perspective, all mutual funds can again be categorized into different types based on asset class:

1. Equity fund: Equity funds invest only or mostly in equities or stocks. Furthermore, there are different types of equity funds based on specialization, such as growth stocks, value stocks, large-cap stocks, mid-cap stocks, small-cap stocks, or a combination of these stocks.
2. Fixed-income fund: Fixed-income funds invest only or mostly in debt securities that pay a fixed rate of return. The return of the fund is not fixed but the underlying securities owned by the mutual fund usually have fixed rates of return. Fixed income funds have lower risk and return compared to equity funds.
3. Money market fund: Like fixed-income funds, money market funds also invest in debt securities but short-term debt securities such as Treasury bills, short-tenor government bonds, etc. Money market funds are more liquid than fixed-income fund but also give lower returns.
4. Balanced fund: Balanced funds, as the name suggests, invest in a mix of equities and fixed-income securities to maintain a desired risk-return profile (typically, 60% equity and 40% fixed-income ratio).
5. Index fund: An index fund follows a specific index or group of securities and performs mirroring it.
6. Specialty fund: A specialty fund focuses on a specific industry or market such as automobile, artificial intelligence, energy, etc.

In Bangladesh, however, most mutual funds are structured as personalized variations of these categories of funds. The most prevalent types of mutual funds in Bangladesh are the following:

1. Growth fund: It’s an equity fund variant with majority exposure to equities.
   1. EDGE AMC Growth Fund is a growth mutual fund.
2. Balanced fund: Balanced funds in Bangladesh follow the same almost equally split portfolio of equities and fixed-income securities as seen globally.
   1. EDGE Bangladesh Mutual Fund is a balanced mutual fund.
3. Fixed-Income fund: In Bangladesh, fixed-income funds are mostly structured as a combination of the money market fund and the fixed-income fund as defined globally.
   1. EDGE High Quality Income Fund is a fixed-income fund. It is also considered a great alternative with attractive returns to Savings Account.
4. Shariah-Compliant fund: Shariah-Compliant funds can be both equity and fixed-income focused funds based on the primary criteria of investing in shariah-compliant securities.
   1. EDGE Al-Amin Shariah Consumer Fund is a shariah-compliant mutual fund geared towards consumer sector equities.

To learn about the process of investing in mutual funds, you may read this post.

You may read our guide on mutual fund investing to learn more about mutual funds.