As per the powers granted to SEBI under Section 11(1) of the SEBI Act 1992, read with provision...
Nowadays, mutual funds are amongst the most popular investing alternatives. A mutual fund is an investment mechanism formed when an asset management company (AMC) or fund house combines investments from a number of investors with similar financial goals to invest in securities such as equities, bonds, money market instruments, and other assets. A fund manager oversees the management of mutual funds, also known as a money manager, who is a financial expert who allocates the fund’s assets and tries to generate capital gains or income for the fund’s investors. The mutual fund portfolio is constructed and managed to meet the investment strategies indicated in the prospectus. The fund manager engages in stock and bond transactions that are in compliance with the investing mandate.
Individual investors can obtain exposure to a professionally managed portfolio by investing in mutual funds. It provides access to expert managed portfolios of equities, bonds, and other assets to small & individual investors. As a result, each investor shares in the fund’s profits and losses proportionately. The fund manager’s primary goal is to maximise returns for investors by investing in assets that are aligned with the fund’s goals. Mutual funds invest in diverse variety of assets, and their success is often measured by the change in the entire market capitalization of the fund, which is determined by combining the performance of the underlying investments.
Unlike stocks, a mutual fund doesn’t invest in a single stock. A mutual fund plan, on the other hand, would invest in a variety of investment alternatives in order to give investors with the highest potential returns. Furthermore, investors are not needed to conduct their own research in order to select the best-performing equities; instead, the fund manager and his team of analysts and market researchers conduct the study and determine the top-performing instruments with the greatest potential for high returns.
Investors in mutual funds are given fund units in proportion to the amount they have invested. The returns that an investor receives are determined by the amount of fund units that they own. Every fund unit is exposed to the whole portfolio of securities that the fund manager has decided to include. Investors who purchase holding fund units do not have voting rights in the firm.
Investors who invest in mutual funds doesn’t have to worry about concentration risk since the money manager mitigates it by investing in a variety of instruments. As a result, mutual funds are a fantastic approach to diversify your investment portfolio. A mutual fund’s net asset value is the price of the fund unit (NAV). It is the price at which a mutual fund scheme’s fund units are purchased or sold. The NAV of a mutual fund is derived by dividing the total value of the portfolio’s assets by the total value of the portfolio’s liabilities. All mutual fund units are sold and acquired at the mutual fund’s current NAV.
A mutual fund is both a financial investment and a corporate person. This dual nature may appear unusual, but it’s no different than how an AAPL share represents Apple Inc. When an investor purchases Apple shares, he is acquiring a portion of the firm and its assets. Likewise, a mutual fund investor purchases a portion of the mutual fund business and its assets. The distinction is that Apple is in the business of creating smart gadgets and tablets, whereas a mutual fund companies is in the investment industry.
A mutual fund generally provides a return to investors in three ways:-
If a mutual fund is considered as a virtual business, then the CEO is the fund manager, also known as the investment adviser. The fund manager is hired by a BOD, who is legally required to act in the best interests of mutual fund shareholders. The majority of fund managers are also fund owners. A mutual fund firm has relatively few additional employees. The investment adviser or fund manager may engage analysts to assist in investment selection or market research. A fund accountant is retained to compute the fund’s NAV, which is the daily worth of the portfolio that determines whether share prices rise or fall.
Most mutual funds are subsidiaries of a much bigger investing firm; the largest have hundreds of distinct mutual funds. A few of these fund organisations are household names, such as Fidelity Investments, The Vanguard Group, T. Rowe Price, and Oppenheimer.
Investing in mutual funds has a number of advantages for investors. Mutual funds are an excellent investment option due to factors such as flexibility, diversification, and professional money management, to mention a few.
The mutual fund business is growing at a rapid pace. Various kinds of mutual fund categories are created to allow investors to select a scheme based on the degree of risk they are prepared to accept, the amount of money they can invest, their goals, the investment period, and so on.
One of the most crucial aspects of the circular is that mutual fund schemes should have unique investment strategies and asset allocations. The schemes will be categorised into the following subcategories:-
The current scheme type would be replaced with the new scheme type. Let’s take a closer look at each sort of plan.
SEBI has established 11 categories for equity schemes, but a mutual fund provider can only have 10 and must pick between Value and Contra. Yet, 10 categories seem excessive, but I believe it is reasonable given the various changes in the strategy. SEBI has also established the terms as Large Cap, Mid Cap, and Small Cap to make things easier.
Large Cap: Top 100 businesses by market capitalization;
Mid Cap: 101st to 250th companies by market capitalization;
Small Cap: 251st company and above in terms of market capitalization
|1.||Multi Cap||65% of total assets must be invested in stock and equity-related securities as a minimum.||Multi Cap Fund – An equity mutual fund that invests in equities from large, mid, and small cap stocks.|
|2.||Large Cap Funds||Large-cap businesses must invest at least 80% of their total assets in stock and equity-related securities.||Large Cap Fund — A mutual fund that invests primarily in large-cap equities.|
|3.||Large & Mid Cap Funds||Large-cap businesses must invest at least 35% of their total assets in equity and equity-related securities; While mid-cap stocks must invest at least 35% of their total assets in equity and equity-related vehicles.||Large and Mid Cap Fund — This is an open-ended equity mutual fund that invests in both large and mid-cap equities.|
|4.||Mid Cap Funds||Mid-cap businesses must invest at least 65% of their total assets in stock and equity-related securities.||Mid Cap Fund — A mutual fund that invests primarily in mid-cap equities.|
|5.||Small Cap Funds||Small size businesses must invest at least 65% of their total assets in stock and equity-related securities.||Small Cap Fund — A mutual fund that invests primarily in small-cap equities.|
|6.||Dividend Yield Funds||Dividend-paying equities should be the majority of the scheme’s holdings. A minimum equity commitment of 65% of total assets is required.||An equity mutual fund that invests primarily in dividend-paying stocks.|
|7a.||Value Funds*||A value investing strategy should be followed by the scheme. 65% of total assets must be invested in stock and equity-related securities.||A value-oriented mutual fund that invests in stocks.|
|7b.||Contra Funds*||The scheme should use a contrarian investing approach. 65% of total assets must be invested in stock and equity-related instruments.||An equity mutual fund uses a contrarian investment approach.|
|8.||Focused Funds||A plan with a limited number of stocks (maximum 30) and a minimum investment of 65% of total assets in equities & equity-related instruments.||A mutual fund that invests in a maximum of 30 companies (mention where the scheme intends to focus, viz., large cap, mid cap, small cap, multi cap)|
|9.||Sectoral Funds or Thematic||80% of total assets must be invested in equity and equity-related securities in a certain sector or theme.||An open-ended equity plan based on the aforementioned idea.|
|10.||ELSS Funds||80% of total assets must be invested in stock and equity-related securities as a minimum (in line with the Ministry of Finance’s notification of the Equity Linked Savings Scheme, 2005)||An open-ended equity linked savings plan with a three-year statutory lock-in period and a tax advantage.|
*Mutual funds would be able to provide either a Value or a Contra fund.
SEBI has established a total of 16 debt scheme types. From the standpoint of a retail investor, 16 categories is a relatively large number for debt funds, given their comparable risk and return profiles. Overnight Fund and Liquid Fund are two comparable categories. The same may be said for money market and ultra-short term debt funds.
|1.||Overnight Funds||Investing in overnight assets with a one-day maturity||A debt plan that invests in overnight securities.|
|2.||Liquid Funds||Debt and money market securities with a maturity of up to 91 days are the only investments available.||A flexible plan/ liquid scheme|
|3.||Ultra Short Duration Funds||Investment in debt & money market securities with a Macaulay term of 3 to 6 months.||An ultra-short-term debt fund that invests in securities having a Macaulay duration of 3-6 months.|
|4.||Low Duration Funds||Investment in debt & money market securities with a Macaulay term of 6 to 12 months.||A low-term debt strategy that invests in securities having a Macaulay duration of 6 to 12 months.|
|5.||Money Market Funds||Investment in money market instruments with a 1 year maturity||A debt investment strategy that uses money market instruments.|
|6.||Short Duration Funds||Investment in debt & money market securities with a Macaulay term of between 1-3 years.||A short-term debt strategy that invests in securities having a Macaulay duration of 1-3 years.|
|7.||Medium Duration Funds||Investment in debt & money market securities with a Macaulay term of 3 to 4 years.||A medium-term debt strategy that invests in securities having a Macaulay duration of 3-4 years.|
|8.||Medium to Long Duration Funds||Investment in debt & money market securities with a Macaulay term of 4–7 years.||A medium-term debt strategy that invests in securities having a Macaulay duration of 4 to 7 years.|
|9.||Long Duration Funds||Investment in debt & money market instruments with a Macaulay term of greater than 7 years.||A debt strategy that invests in securities having a Macaulay term of more than 7 years.|
|10.||Dynamic Bond Funds||Investing for the long haul||A flexible debt strategy that invests over time.|
|11.||Corporate Bond Funds||Corporate bonds must account for at least 80% of total assets (only in highest rated instruments)||A debt vehicle that primarily invests in the highest-rated corporate bonds.|
|12.||Credit Risk Funds||Corporate bonds must account for at least 65% of total assets ( investment in below highest rated instruments)||A debt strategy that invests in corporate bonds with ratings that are lower than the highest.|
|13.||Banking and PSU Funds||Minimum investment in bank debt instruments, public sector undertakings, and public financial institutions – 80% of total assets||A debt plan that invests primarily in debt instruments issued by banks, public sector undertakings, and public financial institutions.|
|14.||Gilt Funds||The minimum investment in Gsecs is 80% of total assets (across maturity)||A debt programme that invests in government assets over time.|
|15.||Gilt Funds with 10 year constant Duration||Minimum investment in Gsecs – 80% of total assets, such that the portfolio’s Macaulay duration is equal to 10 years.||A debt plan that invests in government securities and has a fixed term of 10 years.|
|16.||Floater Funds||Minimum investment in floating-rate instruments: 65% of total assets||A debt plan that primarily invests in floating-rate securities.|
SEBI has established a total of 7 categories under Hybrid Schemes, however, a mutual fund firm can only have 6, and they must select between Balanced Hybrid Fund and Aggressive Hybrid Fund. Finally, SEBI has classified Arbitrage Fund as a Hybrid Fund.
|1.||Conservative Hybrid Funds||Investment in equity and equity-related instruments – between 10% and 25% of total assets; Investment in debt instruments – between 75% and 90% of total assets||A hybrid mutual fund that primarily invests in debt instruments.|
|2A.||Balanced Hybrid Funds||Equity and equity-related instruments account for between 40% and 60% of total assets; debt instruments account for between 40% and 60% of total assets. Arbitrage would be prohibited under this approach.||A 50-50 balanced plan that invests in both equity and debt securities.|
|2B.||Aggressive Hybrid Funds||Equity and equity-related instruments account for between 65% – 80% of total assets; debt instruments account for between 20% – 35% of total assets. The majority of balanced funds will fall into this group.||A hybrid plan that invests primarily in equities and equity-related securities.|
|3||Dynamic Asset Allocation Funds or Balanced Advantage||Dynamic management of equity/debt investments This category includes all well-known balanced advantage or dynamic funds.||A hybrid mutual fund that adjusts its equity exposure in response to market conditions.|
|4||Multi-Asset Allocation Funds||Invests in at least 3 asset classes, with a minimum allocation of 10% in each of the 3 asset classes. Foreign investment will be treated as a distinct asset type.||A plan that invests in three separate asset types.|
|5||Arbitrage Funds||Scheme based on the arbitrage approach. Minimum equity and equity-related instrument investment – 65% of total assets||A strategy that invests in arbitrage opportunity.|
|6||Equity Savings||The minimum investment in equity and equity-related instruments is 65% of total assets, while the minimum investment in debt is 10% of total assets. The minimum hedged and unhedged amounts must be specified in the SID. Asset Allocation for defensive purposes may also be mentioned in the Offer Document.||A method that invests in equity, arbitrage, and debt.|
*Mutual funds will be able to offer amongst an aggressive hybrid fund and a balanced fund.
|1.||Retirement Fund||A scheme with a lock-in period of at least 5 years, or until retirement age, whichever comes first.||A retirement solution-oriented plan with a 5-year lock-in period or till retirement age (whichever is earlier)|
|2.||Children’s Fund||A scheme that is locked in for at least 5 years, or until the child reaches the age of majority, whichever comes first.||A children’s investment fund with a 5-year lock-in period or until the child reaches the age of majority (whichever is earlier)|
|1.||Index Funds/ ETF’s||95% of total assets must be invested in securities of a certain index (which is being replicated/ tracked).||A mutual fund that tracks/replicates any index.|
|2.||FoF’s (Overseas/ Domestic)||The underlying fund’s minimum investment is 95% of its total assets.||A mutual fund that invests in other mutual funds is known as a fund of funds.|
Due to their simplicity, flexibility, and diversification, mutual funds are popular investments. The big benefit of mutual funds is that they cater to all different types of investors. In India, there are presently around 44 registered mutual funds that offer various plans to meet the various demands of investors. Understanding the various mutual fund types might help you align one’s financial goals more easily. As an investor, one may match their requirements to the fund’s goal and invest accordingly to get the most out of your money.
Read our article:How to start a mutual fund company in India?