CHAPTER 2: CONCEPT AND ROLE OF A MUTUAL FUND
- The ownership is in the hands of the investors (Unit holders) who have pooled in their funds, so ownership is ‘Joint and Mutual’.
- In India, Mutual Funds are constituted as a TRUST.
- Mutual Funds are not allowed to invest in ‘Art’ and 'commodities except gold' in India.
- Mutual fund is a vehicle to mobilize money from investors, to invest in different markets and securities, in line with the investment objectives
- Primary role of a mutual fund is to assist investors in earning an income or building their wealth, by participating in the opportunities available in various securities and markets.
- The money that is raised from investors, ultimately benefits governments, companies and other entities, directly or indirectly, to raise money for investing in various projects or paying for various expenses.
- Every Mutual Fund scheme has a pre-announced or pre-defined investment objective.
- The investment that an investor makes in a scheme is translated into a certain number of ‘Units’ in the scheme. Thus, an investor in a scheme is issued units of the scheme.
- The number of units issued by a scheme multiplied by its face value (Rs. 10) is the capital of the scheme (Unit Capital).
- The unit holder earns through “interest income” or“dividend income” or through capital gains.
- The process of valuing each security in the investment portfolio of the scheme at its current market value is called Mark to Market (MTM).
- Advantages of Mutual Funds for Investors
Professional Management
Affordable Portfolio Diversification
Economies of Scale
Liquidity
Tax Deferral
Tax benefits
Convenient Options Investment Comfort Regulatory Comfort
Systematic Approach to Investments
- Limitations of a Mutual Fund
Lack of portfolio customization No control over costs
Choice overload
- SIP is an approach where the investor invests constant amounts at regular intervals. A benefit of such an approach is, it gives Rupee Cost Averaging.
- Mutual funds make it convenient for investors to manage their SWPs by indicating the amount, periodicity (generally monthly) and period for their SWP.
- In a STP, the amount that is withdrawn from a scheme is re-invested in some other scheme of the same mutual fund.
- Classification of Mutual Funds can also bedone on the basis of
Its Structure (Open Ended or Closed Ended or Interval Fund)
How the fund is managed (Active fund or Passive Fund)
Investment universe (Equity, Debt, Gold etc.)
SEBI CATEGORIZATION OF EQUITY SCHEMES
- Multi Cap Fund: Invests across large cap, mid cap, small cap stocks. The minimum investment in equity and equity related instruments shall be 65% of total assets.
- Large Cap Funds: Predominantly invests in large cap stocks. The minimum investment in equity and equity related instruments of large cap companies shall be80% of total assets.
- Large and Mid Cap Fund: Invests in both Large & Mid Cap stocks, The minimum investment in equity and equity related instruments of large cap and Mid Cap Companies shall be 35% and 35%
respectively of total assets.
- Mid Cap Fund: Predominantly invests in mid cap stocks. The minimum investment in equity and equity related instruments of mid cap companies shall be 65% of total assets.
- Small Cap Funds: Invest in Small Cap stocks The minimum investment in equity and equity related instruments of small cap companies shall be65% of total assets.
- Dividend Yield Fund: An open-ended equity scheme predominantly investing in dividend yielding stocks. The minimum investment in equity shall be 65 percent of total assets.
- Value Fund or Contra Fund: Follows a value investment strategy. Minimum investment in equity & equity related instruments shall be 65% of total assets. A contra fund follows contrarian investment strategy. Mutual Funds will be permitted to offer either Value fund or Contra fund.
- Focused Fund: Can invest in maximum 30 stocks (the scheme needs to mention where it intends to focus, viz., multi cap, large cap, mid cap, small cap). Minimum investment in equity & equity related instruments shall be 65% of total assets.
- Sectoral/Thematic: Invests in a specific sector/theme. The minimum investment in equity & equity related instruments of a particular sector/ particular theme shall be 80% of total assets.
- Equity Linked Savings Scheme (ELSS):
3 year lock-in period
The minimum investment in equity and equity related instruments shall be 80% oftotal assets (in accordance with Equity Linked Saving Scheme, 2005 notified by the Ministry of
Finance).
SEBI CATEGORIZATION OF OPEN ENDED DEBT SCHEMES
- Overnight Fund: The investment is in overnight securities having maturity of 1 day
- Liquid Fund: Liquid scheme whose investment is into debt and money market securities with maturity of upto 91 days only.
- Ultra Short Duration Fund: An ultra-short term debt scheme investing in debt and money market instruments with Macaulay duration between 3 months and 6 months.
- Low Duration Fund: A low duration debt scheme investing in debt and money market instruments with Macaulay duration between 6 months and 12months.
- Money Market Fund: Invests in money market instruments having maturity upto 1 year.
- Short Duration Fund: Invests in debt and money market instruments with Macaulay duration between 1 year and 3 years.
- Medium Duration Fund: Invests in debt and money market instruments with Macaulay duration of the portfolio being between 3 years and 4 years.
- Medium to Long Duration Fund: Invests in debt and money market instruments with Macaulay duration between 4 years and 7 years.
- Long Duration Fund: Invests in debt and money market instruments with Macaulay duration greater than 7 years.
- Dynamic Bond: An open ended dynamic debt scheme investing across duration.
- Corporate Bond Fund: Predominantly invests in AA+ and above rated corporate bonds. The minimum investment in corporate bonds shall be 80 percent of total assets (only in AA+ and above rated corporate bonds)
- Credit Risk Fund: Invests in below highest rated corporate bonds. The minimum investment in corporate bonds shall be 65% of total assets (only in AA (excludes AA+ rated corporate bonds) and below rated corporate bonds)
- Banking and PSU Fund: Predominantly investing in debt instruments of banks, Public Sector Undertakings, Public Financial Institutions and Municipal Bonds. The minimum investment in such instruments should be 80 percent of total assets.
- Gilt Fund: Invests in government securities across maturity. The minimum investment in G-secs is defined to be 80 percent of total assets (across maturity).
- Gilt Fund with 10-year constant duration: An open-ended debt scheme investing in government securities having a constant maturity of 10 years. Minimum investment in G-secs is 80 percent of total assets such that the Macaulay duration of the portfolio is equal to10 years.
- Floater Fund: Predominantly invests in floating rate instruments (including fixed-rate instruments converted to floating rate exposures using swaps/derivatives). Minimum investment in floating rate
instruments (including fixed-rate instruments converted to floating rate exposures using swaps/derivatives) shall be 65 percent of total assets.
SEBI CATEGORIZATION OF OPEN ENDED HYBRID SCHEMES
- Conservative Hybrid Fund: Predominantly invests in debt securities. Investment in debt instruments shall be between 75% and 90% of total assets while investment in equity and equity instruments shall be between 10% and 25% of total assets.
- Balanced Hybrid Fund: The investment in equity and equity related instruments shall be between 40% and 60% of total assets while investment in debt shall bebetween 40% and 60%.
- Aggressive Hybrid Fund: Predominantly invests in equity and equity related instruments. The investment in equity and equity related instruments shall be between 65% to 80% of total assets while investment in debt instruments shall be between 20% and 35%.
- Mutual funds in India are permitted to offer either Aggressive Hybrid Fund or Balanced Fund.
- Dynamic Asset Allocation or Balanced Advantage: Investment in equity/debt that is managed dynamically.
- Multi-Asset Allocation: Investing in at least three asset classes with a minimum allocation of at least 10% each in all three asset classes. Foreign securities are not treated as a separate asset class in this kind of scheme.
- Equity Savings Fund: Invests in a combination of equity, arbitrage and debt. The minimum investment in equity and equity related instruments shall be 65% (including arbitrage) and in debt 10% of total assets.
- Arbitrage Fund: An open-ended scheme investing in arbitrage opportunities. The minimum investment in equity and equity related instruments shall be65 percent of total assets.
SEBI CATEGORIZATION OF SOLUTION ORIENTED SCHEMES
- Retirement Fund: An open-ended retirement solution-oriented scheme having a lock-in of 5 years or till retirement age (whichever is earlier). Scheme having a lock-in for at least 5 years or till retirement age, whichever is earlier.
- Children’s Fund: An open-ended fund for investment for children having a lock-in for at least 5 years or till the child attains age of majority (whichever is earlier). Scheme having a lock-in for at least 5 years or till the child attains age of majority whichever is earlier.
SEBI CATEGORIZATION OF OTHER SCHEMES
- Index Funds/Exchange Traded Fund: An open-ended scheme replicating/tracking a specific index. This minimum investment in securities of a particular index (which is being replicated/ tracked) shall be 95 percent of total assets.
- Fund of Funds (Overseas/Domestic): An open-ended fund of fund scheme investing in an underlying fund. The minimum investment in the underlying fund shall be 95 percent of total assets.
OTHER FUNDS
- Floating Rate Funds: Floating Rate Funds invest largely in floating rate debt securities i.e. debt securities where the interest rate payable by the issuer changes in line with the market.
- Capital Protected Schemes: Capital Protected Schemes are close-ended schemes, which are structured to ensure that investors get their principal back, irrespective of what happens to the
market.
- Infrastructure Debt Funds: Infrastructure Debt Funds (IDFs) can be set up either as a “Trust” or as a “Company”.
A trust-based IDF would normally be a Mutual Fund (MF), regulated by SEBI, while a company-based IDF would normally be an NBFC regulated by the Reserve Bank.
IDF offered by MFs are generally sponsored by banks and NBFCs, while IDF offered by NBFCs are sponsored by banks and Infrastructure Finance companies.
- Assets Under Management (AUM) of Indian Mutual Fund Industry as of August 31, 2020, stood at Rs. 27,49,389 crore. The 10-year growth stands at 14.5% p.a. compounded annually.