How mutual funds are grouped

By now you have met one way to sort funds, open-ended versus closed-ended. That is only the first of three lenses, and holding all three in mind makes the whole product range easy to read.

The first lens is structure, how you get in and out: open-ended funds trade any business day at that day’s NAV, closed-ended funds raise money once and list on an exchange for exits, and interval funds open only in set windows. The second lens is management style, and it is the one the exam increasingly leans on. An actively managed fund employs a manager and research team who pick holdings to try to beat a benchmark; a passively managed fund, an index fund or ETF, gives up on beating the market and simply tracks an index. Because a passive fund does no stock-picking, its running cost is far lower, which is the whole point of it. (An ETF is just a passive fund whose units trade on the exchange through the day, like a share.)

The third lens is the investment universe, what the fund actually holds: broadly equity, debt, hybrid (a deliberate mix of the two), or other baskets such as gold or a fund-of-funds. The elegant part is that these lenses stack. A single scheme can be open-ended, passive and equity all at once, that is exactly what a Nifty 50 index fund is. We will drill into the specific equity, debt and hybrid categories, and how to pick among them, in a later module; for now, being able to place any fund on these three lenses is the skill to lock in.