An investor can invest in any categories of funds in accordance with his requirements and risk index. For example, those who want to earn high returns over a longer period can invest in Equity Funds whereas those who want to invest for short term with reasonable return can invest in Money Market Fund. A mutual fund is categorized according to its investment objective and risk profile. Currently, following categories of mutual funds have been approved by the SECP.
Money Market Fund
These funds invest in short-term fixed income securities for instance, government bonds and certificates of deposits, commercial paper and reverse repos. The aim of a money market fund is to maintain high liquidity by investing in low risk short term instrument and is generally a safer investment. Returns generated by a money market fund are likely to fluctuate much less versus other types of mutual funds.
These funds generally invest in money market securities, term finance certificates/sukuks, commercial paper, and spread transactions. The aim of an income fund is to generate regular stream of income. An income fund is commonly deemed less risky vis-a-vis an equity fund and is not likely to be affected by volatility in the equity markets. Prospects of capital appreciation however are also limited. Income funds are required to sustain at least 25% of net assets in cash and/or near cash instruments to meet liquidity requirements.
These funds invest in stocks and develop faster than money market or fixed income funds. So there is usually a higher risk of losing money. The aim of an equity fund is primarily to provide exposure of listed equity securities, and capital appreciation over the medium to long term. An equity fund, as per the categorization, must invest at least 70% of its net assets in listed equity securities. The remaining corpus of an equity mutual fund may be invested in cash or near cash instruments.
A balanced fund provides growth in investment as well as regular income by investing in equities and fixed income securities. The regulatory framework dictates that balanced funds keep their investments within 30% to 70% of their net assets in listed equity securities. The other remaining may be invested in other certified investments. Balanced funds may be exposed to the risk of fluctuations in equity markets as well as change in interest rates. Balanced funds, like equity funds, can be risky likewise depending on the asset allocation, however, they are deemed to be steadier compared to pure equity funds.
Asset Allocation Fund
This category of fund can invest its assets in any type of securities at any time with a provision to diversify its assets across multiple types of securities and investment styles as specified in its offering document. Asset allocation funds are generally considered high risk funds due to their potential to be fully invested in equities at any point in time.
Capital Protected Fund
A capital protected fund makes investments in a way that the original amount of investment is kept safe in order to harvest positive returns. This fund places a major portion of the net amount in a bank in the form of a term deposit while the remaining is invested in accordance with the authorized investments stated in the offering document. Capital protected fund, unlike other funds, has a fixed maturity period*.
(* the mutually agreed upon investment tenure)
Index Tracker Fund
This type of fund is programmed to carry out the activities of a certain specific index and reveal the probable tracking slip in the offering document. Investment of at least 85% of net assets is required in the securities that constitute the selected index or its subset.
Fund of Funds
This type of fund follows an investment strategy of holding other mutual funds in its portfolio rather than investing directly in shares, bonds or other securities. However, every fund of funds shall have its own category, for instance, equity fund of funds, income fund of funds, etc.