CONCEPT AND ROLE

  1. Mutual Fund has to be formed as a trust and has an agreed objective of investment of money mobilised from investors.
  2. The investor is able to get professional fund management services and has the access to securities market without separately paying for the same.
  3. Mutual Fund has access to a substantial corpus of fund mobilised from a large number of investors and invests such money as per investment objective in securities to generate returns for investors.
  4. Main function of a mutual fund is to help investors earn income or build wealth by participating in opportunities offered by securities markets.
  5. All profits/losses in the Mutual Fund scheme portfolio belong to the Investors of that scheme.
  6. With enhanced investments, there is a rapid economic development in general which increases employment.

NET ASSETS VALUE (NAV)

  1. The true worth of units which is called NAV is ascertained by adding Interest/Dividend income, realised gains/losses, valuation gains /losses and reducing scheme expenses. If a Mutual Fund Scheme is profitable, the true worth of its units will increase.
  2. In New Fund Offer (NFO), Units are purchased at face value (Generally Rs. 10) and subsequently at NAV.
  3. Investors may be offered growth option, dividend pay-out option and dividend reinvestment   option within a particular scheme with different NAVs.

ASSETS UNDER MANAGEMENT (AUM)

  1. The relative size of various mutual fund Schemes/companies is assessed by their  assets under management (AUM) which may increase/decrease depending on further subscriptions, market value of the portfolio, redemption or income pay-outs.

BENEFITS AND LIMITATIONS OF MUTUAL FUND

  1. Investors gain from Mutual Funds because of professionalism, simplicity, affordability, diversification, economy of scale, liquidity and tax advantages.
  2. Mutual Funds also offer systematic approach to investment like SIP, STP and SWP.
  3. Mutual funds are not liable to pay taxes on their income. Moreover, Tax Deferral is achieved by investors by opting for growth option.
  4. Limitations of Mutual Funds are lack of investors’ individual control on cost (Fund running expenses), investment decisions and selection overload for investor.
  5. The investment management is left to the competence of the fund manager and the investor does not get a right to select the securities in the portfolio of scheme where he has invested.

OPEN ENDED AND CLOSED ENDED FUNDS

  1. Open ended funds are the funds with no specified time frame which are open for entry or exit any time even after the NFO period. Existing investor may acquire additional units or new investor can acquire units any time in an open ended fund at a price linked to NAV.
  2. In case of Close ended funds, there is a maturity and time frame, Investors can purchase units only during NFO period and can redeem only at the end of maturity or tenure.
  3. Close ended funds are compulsorily listed on stock exchanges and Post NFO, units of close ended schemes can be bought or sold on stock exchanges at a price which may be different from the NAV of the scheme.
  4. Interval funds are closed ended where during close ended period, units could be transacted only in stock exchanges but becomes open ended at pre specified interval known as transaction period, minimum duration of transaction period being 2 days and minimum duration of interval period being 15 days.

ACTIVELY AND PASSIVELY MANAGED FUNDS

  1. In actively managed funds, fund manager chooses investment portfolio, risks are higher, fund running expenses are higher and better returns than the market are expected.
  2. Passive funds invest on the basis of a specified index like BSE Sensex and expenses are low and the scheme portfolio is identical to the related Index.
  3. Exchange Traded Funds (ETFs) are passive funds since scheme portfolio is identical to the related Index or benchmark.

EQUITY, DEBT ,HYBRID & SOLUTION ORIENTED SCHEMES

  1. Equity schemes seek capital appreciation and growth by investing in equity.
  2. Debt Schemes earn regular income by  investing  in Debt securities.
  3. Hybrid Schemes make investment  both in equity and debt instruments.
  4. Solution oriented schemes invest with objective of achieving a particular  goal aimed in future like Children’s’ education or retirement.
  5. The Scheme of a Mutual Fund which is paying regular dividends  can not be used for Capital Appreciation.

CLASSIFICATION OF EQUITY SCHEMES AND SEBI CATEGORISATION

  1. Classification of Equity Funds can be done on the basis of market capitalisation (Large cap, Mid Cap, Small cap). Large Cap companies are the ones which are numbering from 1 to 100 in the list of companies in the descending order of market capitalisation. Mid-Caps are from 101 to 250 and small caps are from 251 and lower.
  2. Classification of Equity Funds can also be done on the basis of strategy adopted by fund manager like Diversified Equity fund, Thematic or Sector Fund, Dividend Yield scheme, Value Funds, Growth Fund, focussed fund and Equity linked savings scheme.
  3. For example, Value Funds are the funds which invest in stocks which are valued at a lower price based on the fundamental analysis:
  4. SEBI has categorised open ended mutual fund schemes to ensure uniformity of similar type of schemes launched by different mutual funds. This has been done in order to enable investor to evaluate various schemes and take an informed decision
  5. For open ended equity schemes, as per SEBI categorisation a minimum of 65% of total assets is required to be invested in equity for Multi Cap/Mid Cap/Small Cap/Dividend Yield/Value/Contra/Focussed funds whereas for Large Cap/Sector/Thematic/ELSS schemes, minimum 80% is required and for Large & Mid Cap schemes, a minimum of 35% each in Large cap and Mid Cap is required. For Focussed funds, a maximum of 30 stocks are allowed to invest in.

CLASSIFICATION OF DEBT SCHEMES AND SEBI CATEGORISATION

  1. Debt Funds are classified on the basis of type of debt securities in which they invest with main differentiation in Issuer of Securities, Duration of the security and investment strategy.
  2. On the basis of Issuer, Securities issued by Government( Gilt Funds) invest in Treasury bills/Government securities with low risk and low interest rates and by private /public sector corporates where interest rate is higher but risk is also higher.
  3. On the basis of duration, schemes are classified as Liquid/Ultra Short term/Short Term/Long Term depending on the duration of securities they invest in.
  4. Liquid Schemes are a kind of Debt Fund Scheme which invest only in short term Debt securities of a maturity of up to 91 days.
  5. On the basis of investment strategy, debt funds could be classified as Diversified or Income funds/High Yield or Junk Bonds(Credit Risk)/Dynamic Bond/Fixed Maturity Plans(FMPs)/Floating Rate Funds.
  6. Credit Risk Funds Schemes invest in securities with low credit ratings and higher interest rates
  7. SEBI has categorised the Debt Funds in the following manner
Fund CategoryInvestment inDuration of Portfolio
Overnight FundOvernight SecuritiesMaturity of 1 day
Liquid FundDebt & Money market InstrumentsMaturity of Up to 91 Days
Ultra-Short-DurationDebt & Money market Instruments Macaulay duration between 3-6 months
Low DurationDebt & Money market InstrumentsMacaulay duration Between 6-12 months
Money MarketMoney Market InstrumentsMaturity of Up To 1 year
Short DurationDebt & Money market InstrumentsMacaulay duration Between 1-3 years
Medium DurationDebt & Money market InstrumentsMacaulay duration Between 3-4 years
Medium To longDebt & Money market InstrumentsMacaulay duration Between 4-7 years
Long DurationDebt & Money market InstrumentsMacaulay duration Over 7 years
Dynamic BondDebt & Money market InstrumentsAcross Durations
Corporate BondMinimum 80 % of total assets to be invested in AA+ and above rated corporate bonds
Credit Risk FundMinimum 65% of total assets to be invested in AA & below rated corporate bonds
Banking & PSUMinimum 80% of total assets to be invested in Debt Instruments of Banks/PSU/Public Financial Institutions & Municipal bond
Gilt Funds80% of total assets to be invested in Govt. Securities across duration
Floater Funds65% of total assets to be invested in Floating rate Instruments

CLASSIFICATION OF HYBRID FUNDS AND SEBI CATEGORISATION

  1. Hybrid funds invest in a mixed combination of asset classes like equity, debt and Gold the proportion of which will depend on investment objective of the fund.
  2. Hybrid funds can be classified as Debt Oriented or Equity oriented/Capital protection oriented/Arbitrage funds. Debt oriented funds invest predominantly in debt securities with small proportion in equity or others whereas equity oriented funds invest predominantly in equities with small proportion in debt or others.
  3. Capital Protection Schemes are closed ended schemes with an objective of protecting the capital irrespective of market fluctuations.
  4. SEBI categorisation of Hybrid Funds is given below:
CategoryInvests inProportion
ConservativePredominantly DebtDebt 75-90% of Total asset
Equity 10-25% of Total asset
BalancedEquity & DebtEquity 40-60% of total assets
Debt-40-60% of total assets
AggressivePredominantly EquityEquity- 65-80% of total assets
Debt -20-35% of total assets
Dynamic Asset AllocationEquity & DebtTo be managed dynamically
Multi Asset AllocationAt least 3 asset classesAt least 10% in each asset class
Arbitrage FundArbitrage opportunitiesMinimum 65% in equity and Equity related
Equity SavingsEquity, Debt & ArbitrageMinimum 65% in Equity and Equity related.
Minimum 10% of total asset In Debt.

OTHER SCHEMES AND SEBI CATEGORISATION

  1. Solution Oriented Schemes have the investment objective of achieving a particular goal aimed in future like Children’s’ education or retirement.
  2. SEBI has categorised Retirement Fund as  the scheme which is open ended with a lock in period of 5 years or till retirement age , whichever is earlier and Children’s Fund as  the scheme which is open ended with a lock in period of at least 5 years or till the child attains the Majority, whichever is earlier.
  3. SEBI has categorised other mutual fund schemes in two sub heads i.e. Index Funds/ Exchange Traded Funds(ETF) (These track specific Index) and Fund of Funds (FoF) – Overseas or  Domestic (which invest in underlying funds) Which are both open ended .
  4. Exchange Traded Funds (ETFs) are passive funds since scheme portfolio is identical to the related Index or benchmark.
  5. Real Estate Mutual Fund schemes are closed ended but listed on stock exchanges and invest in real estate assets with at least 35% of total assets in physical assets and a minimum of 75% of net assets in Real Estate assets, Mortgage backed securities, Equity Shares or Debentures  of companies dealing in  Real Estate assets or in undertaking real estate development projects .
  6. Real Estate Investment Trusts (REITs) are registered with SEBI, listed on stock exchange and they invest in commercial Real Estate with minimum assets of Rs. 500 crores. Minimum offer size should be Rs  250 crores and the minimum subscription will be Rs 2 lacs in initial offer.
  7. Infrastructure Investment Trust  are registered with SEBI, Listed on stock exchanges and invest in Infrastructure sector with minimum value of asset owned or proposed to be owned worth Rs. 500 crores.  Minimum offer size should be Rs 250 crores and minimum subscription will be Rs 10 lacs in initial offer.

GROWTH STORY OF MF INDUSTRY

  • There has been phenomenal growth of Mutual Funds Industry in India since the times the first mutual fund was launched.
  • Growth started when Public Sector Mutual Funds were launched in 80s and then again in 90s when private sector mutual funds started operations.
  • Various factors like Technological developments, higher financial awareness, enhanced channels of distribution are driving the growth of the industry.
  • AUM of MF Industry has increased from Rs. 6 Trillion in 2012 to Rs. 23 Trillion in 2018
  • The number of Folios or accounts were 7 crores as of March’18
  • However, there is still tremendous scope since the Indian Mutual Funds market is less than 1 % of global market AUM of around USD 40 Trillion.

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