What Is a Mutual Fund ?
A mutual fund is a type of financial vehicle that pools money from many investors and invests the money in securities such as stocks, bonds, money market instruments and other assets. The combined holdings of the mutual fund are known as its portfolio. Investors buy units in mutual funds. Each unit represents an investor’s part ownership in the fund and the income it generates.
Mutual funds give small or individual investors access to professionally managed portfolios of equities, bonds, and other securities. Each shareholder, therefore, participates proportionally in the gains or losses of the fund. Mutual funds invest in a vast number of securities, and performance is usually tracked as the change in the total market cap of the fund—derived by the aggregating performance of the underlying investments. Mutual funds are divided into several kinds of categories, representing the kinds of securities they invest in, their investment objectives, and the type of returns they seek. Mutual funds charge annual fees (called expense ratios) and, in some cases, commissions, which can affect their overall returns.Unlike stock mutual fund unit holder does not get any voting rights. A unit of a mutual fund represents investments in many different stocks (or other securities) instead of just one holding.
The price of Mutual Fund Unit is referred to as Net Asset Value (NAV). Net Asset Value (NAV) is calculated as the current value of total assets minus the total value of all liabilities, divided by the total number of outstanding units. NAV allows an investor to track the performance of a fund.
How Mutual Fund Unit Holders Earn a Return from a Mutual Fund?
- Income is earned from dividends on stocks and interest on bonds held in the fund's portfolio.
- If the fund sells securities that have increased in price, the fund has a capital gain. Most funds also pass on these gains to investors in a distribution.
- If fund holdings increase in price but are not sold by the fund manager, the fund's shares increase in price. You can then sell your mutual fund shares for a profit in the market.
Types of Mutual Funds
There is a emerging market for mutual fund industries in India.India's millennials are keen on investing in mutual funds/SIPs and capital market.Mutual Funds are one of the most flexible, comprehensive and hassle-free modes of investments, that can accommodate various types of investment needs.
Various types of mutual fund categories are designed to allow investors to choose a scheme based on the risk they are willing to take, the investment size, their goals, the investment term, etc.
1. Based on Principal Investments
One of the most important points in the circular is that different Mutual Funds schemes should be clearly distinct in terms of investment strategy and asset allocation. The schemes will be broadly classified into following categories
- Equity Schemes
- Debt Schemes
- Hybrid Schemes
- Solution Oriented Schemes
- Other Schemes
Equity Schemes
SEBI has decided total 11 categories under Equity Schemes but a mutual fund company can only have 10 categories and it has to choose between Value or Contra.To make this easier SEBI has also defined meaning of Large Cap, Mid Cap and Small Cap.
- Large Cap: Top 100 companies in terms of market capitalization
- Mid Cap: 101st- 250th companies in term of market capitalization
- Small Cap: 251st company onwards in terms of market capitalization
| 1 | Multi Cap Funds | Minimum investment in equity & equity related instruments–65% of total assets |
Multi Cap Fund – An equity mutual fund investing across Large Cap, Mid Cap, Small Cap stocks |
| 2 | Large Cap Funds | Minimum investment in equity & equity related instruments of large cap companies – 80% of total assets |
Large Cap Fund – An equity mutual fund predominantly investing in Large Cap stocks |
| 3 | Large & Mid Cap Funds | Minimum investment in equity & equity related instruments of large cap companies – 35% of total assets
Minimum investment in equity & equity related instruments of mid cap stocks – 35% of total assets |
Large & Mid Cap Fund – An open ended equity mutual
fund investing in both large cap and mid cap stocks |
| 4 | Mid Cap Funds |
Minimum investment in equity & equity related instruments of mid cap companies – 65% of total assets |
Mid Cap Fund – An equity mutual fund predominantly investing in Mid Cap stocks |
| 5 | Small Cap Funds |
Minimum investment in equity & equity related instruments of small cap companies – 65% of total assets |
Small Cap Fund – An equity mutual fund predominantly investing in Small Cap stocks |
| 6 | Dividend Yield Funds |
Scheme should predominantly invest in dividend yielding stocks. Minimum investment in equity – 65% of total assets |
An equity mutual fund predominantly investing in dividend yielding stocks |
| 7a | Value Funds* |
Scheme should follow a value investment strategy. Minimum investment in equity & equity related instruments – 65% of total assets |
An equity mutual fund following a value investment strategy |
| 7b | Contra Funds* |
Scheme should follow a contrarian investment strategy. Minimum investment in equity & equity related instruments – 65% of total assets |
An equity mutual fund following contrarian investment strategy |
| 8 | Focused Funds |
A scheme focused on the number of stocks (maximum 30) Minimum investment in equity & equity related instruments – 65% of total assets |
An equity scheme investing in maximum 30 stocks (mention where the scheme intends to focus, viz., multi cap, large cap, mid cap, small cap) |
| 9 | Sectoral Funds or Thematic |
Minimum investment in equity & equity related instruments of a particular sector/particular theme – 80% of total assets |
An open ended equity scheme following the theme as mentioned |
| 10 | Equity Linked Saving Scheme (ELSS Funds) |
Minimum investment in equity & equity related instruments – 80% of total assets (in accordance with Equity Linked Saving Scheme, 2005 notified by Ministry of Finance) |
An open ended equity linked saving scheme with a statutory lock in of 3 years and tax benefit |
*Mutual Funds will be permitted to offer either Value fund or Contra fund.
Debt Schemes
SEBI has decided total 16 categories under Debt Schemes. 16 categories are very high for debt funds considering their similarity in risk and returns from a retail investor perspective. Some categories like Overnight Fund and Liquid Fund are similar. Same is the case with money market fund and ultra-short term debt fund categories.
| 1 |
Overnight Funds |
Investment in overnight securities having maturity of 1 day |
A debt scheme investing in overnight securities |
| 2 |
Liquid Funds |
Investment in Debt and money market securities with maturity of upto 91 days only |
A liquid scheme |
| 3 |
Ultra Short Duration Funds |
Investment in Debt & Money Market instruments such that the Macaulay duration of the portfolio is between 3 months – 6 months |
An ultra – short term debt scheme investing in instruments with Macaulay duration between 3 months and 6 months |
| 4 |
Low Duration Funds |
Investment in Debt & Money Market instruments such that the Macaulay duration of the portfolio is between 6 months – 12 months |
A low duration debt scheme investing in instruments with Macaulay duration between 6 months and 12 months |
| 5 |
Money Market Funds |
Investment in Money Market instruments having maturity up to 1 year |
A debt scheme investing in money market instruments |
| 6 |
Short Duration Fund |
Investment in Debt & Money Market instruments such that the Macaulay duration of the portfolio is between 1 year – 3 years |
A short term debt scheme investing in instruments with Macaulay duration between 1 year and 3 years |
| 7 |
Medium Duration Funds |
Investment in Debt & Money Market instruments such that the Macaulay duration of the portfolio is between 3 years – 4 years | A medium term debt scheme investing in instruments with Macaulay duration between 3 years and 4 years |
| 8 |
Medium to Long Duration Fund |
Investment in Debt & Money Market instruments such that the Macaulay duration of the portfolio is between 4 – 7 years |
A medium term debt scheme investing in instruments with Macaulay duration between 4 years and 7 years |
| 9 |
Long Duration Fund |
Investment in Debt & Money Market Instruments such that the Macaulay duration of the portfolio is greater than 7 years |
A debt scheme investing in instruments with Macaulay duration greater than 7 years |
| 10 | Dynamic Bond Funds |
Investment across duration |
A dynamic debt scheme investing across duration |
| 11 |
Corporate Bond Funds |
Minimum investment in corporate bonds – 80% of total assets (only in highest rated instruments) |
A debt scheme predominantly investing in highest rated corporate bonds |
| 12 |
Credit Risk Funds |
Minimum investment in corporate bonds – 65% of total assets ( investment in below highest rated instruments) |
A debt scheme investing in below highest rated corporate bonds |
| 13 |
Banking and PSU Fund |
Minimum investment in Debt instruments of banks, Public Sector Undertakings, Public Financial Institutions – 80% of total assets |
A debt scheme predominantly investing in Debt instruments of banks, Public Sector Undertakings, Public Financial Institutions |
| 14 | Gilt Fund |
Minimum investment in Gsecs – 80% of total assets (across maturity) |
A debt scheme investing in government securities across maturity |
| 15 |
Gilt Fund with 10 year constant duration |
Minimum investment in Gsecs – 80% of total assets such that the Macaulay duration of the portfolio is equal to 10 years |
A debt scheme investing in government securities having a constant maturity of 10 years |
| 16 | Floater Fund |
Minimum investment in floating rate instruments – 65% of total assets |
A debt scheme predominantly investing in floating rate instruments |
Hybrid Schemes
SEBI has decided total 7 categories under Hybrid Schemes but a mutual fund company can only have 6 categories and they have to choose between Balanced Hybrid Fund or Aggressive Hybrid Fund. Also, Finally SEBI has made Arbitrage Fund under Hybrid Fund category.
| 1 |
Conservative Hybrid Funds |
Investment in equity & 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 investing predominantly in debt instruments |
| 2A |
Balanced Hybrid Funds@ |
Equity & Equity related instruments – between 40% and 60% of total assets; Debt instruments – between 40% and 60% of total assets. No Arbitrage would be permitted in this scheme |
50-50 balanced scheme investing in equity and debt instruments |
| 2B |
Aggressive Hybrid Funds |
Equity & Equity related instruments – between 65% and 80% of total assets; Debt instruments – between 20% – 35% of total assets. Most of the balanced funds will fall into this category. |
A hybrid scheme investing predominantly in equity and equity related instruments |
| 3 |
Dynamic Asset Allocation Funds or Balanced Advantage |
Investment in equity/ debt that is managed dynamically. All famous balanced advantage or dynamic funds will fall into this category. |
A hybrid mutual fund which will change its equity exposure based on market conditions |
| 4 |
Multi-Asset Allocation Funds |
Invests in at least three asset classes with a minimum allocation of at least 10% each in all three asset classes. Foreign investment will be considered as a separate asset class. |
A scheme investing in 3 different asset classes. |
| 5 | Arbitrage Funds |
Scheme following arbitrage strategy. Minimum investment in equity & equity related instruments – 65% of total assets |
A scheme investing in arbitrage opportunities |
| 6 | Equity Savings | Minimum investment in equity & equity related instruments – 65% of total assets and minimum investment in debt – 10% of total assets. Minimum hedged & unhedged to be stated in the SID. Asset Allocation under defensive considerations may also be stated in the Offer Document |
A scheme investing in equity, arbitrage, and debt |
@Mutual Funds will be permitted to offer either an Aggressive Hybrid fund or Balanced fund
Solution Oriented Schemes
| 1 |
Retirement Fund |
Scheme having a lock – in for at least 5 years or till retirement age whichever is earlier |
A retirement solution oriented scheme having a lock-in of 5 years or till retirement age (whichever is earlier) |
| 2 |
Children’s Fund |
Scheme having a lock – in for at least 5 years or till the child attains age of majority whichever is earlier |
A 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) |
Other Schemes
| 1 |
Index Funds/ ETFs |
Minimum investment in securities of a particular index e.g S&P BSE 500 (which is being replicated/ tracked) – 95% of total assets |
A mutual fund replicating/ tracking any index |
| 2 |
FoF’s (Overseas/Domestic) |
Minimum investment in the underlying fund – 95% of total assets |
A fund of fund is a mutual fund that invests in other mutual funds |
2. Based on Maturity Period
- Open Ended Funds
- Close Ended Funds
- Interval Funds
Open Ended Scheme
This scheme allows investors to buy or sell units at any point in time. It does not have a fixed maturity date either. You deal directly with the Mutual Fund for your investment and redemption.
The key feature is liquidity. You can conveniently buy or sell your units at net asset value (“NAV”) related prices. The majority of mutual funds, 59% approximately are open-end funds.
Close Ended Scheme
This type of scheme has a stipulated maturity period and investors can invest only during the initial launch period known as the New Fund Offer (NFO).
Once the offer closes, no new investments are permitted. The market price at the stock exchange could vary from the scheme’s Net Asset Value (NAV), because of the demand and supply situation, unit holder’s expectations and other market factors.
Some close ended schemes will give you an additional option of selling your units directly to the mutual funds through periodic repurchase at NAV related prices.
SEBI Regulations ensure that at least one of the two exit routes are provided to the investor.
Read about the difference between open-ended and close-ended scheme
Interval
It operates as a combination of open and closed ended scheme, it allows investors to trade units at predefined intervals. They may be traded on the stock exchange or they may even be open for sale or redemption during pre-determined intervals at NAV related prices.
When it comes to selecting a scheme to invest in, one should look for customized advice. Choose the scheme that provides the right combination of growth, stability and income, keeping your risk appetite in mind.
Take the time to review your investment decisions and contact one of our helpful Financial Advisors to answer your questions or get advice. A little knowledge can make a big difference when it comes to Investing in Mutual Funds.
Happy Investing!!
