Concept Of A Mutual Fund :
- Definition & Structure:
A mutual fund is an investment vehicle (a trust) that pools money from investors to invest in various securities like stocks and bonds, offering professional fund management and diversification. - Role of Mutual Funds:
They help investors build wealth or generate income and indirectly contribute to economic development by financing businesses and creating jobs. - Investment Objectives:
Schemes vary based on objectives like income generation, capital appreciation, or liquidity; investors choose schemes aligning with their needs. - Investment Policy:
Every scheme follows a declared investment policy, detailing asset allocation (e.g., equity vs debt) and investment style (growth, value, etc.). - Key Concepts:
- Units represent investor ownership.
- NAV (Net Asset Value) is the unit’s value.
- AUM (Assets Under Management) reflects fund size.
- Recurring Expenses affect returns.
- Mark to Market ensures daily portfolio valuation.
- Advantages:
- Professional management
- Diversification even for small investors
- Economies of scale
- Transparency and liquidity
- Tax deferral and tax benefits (e.g., ELSS under Sec 80C)
- Convenience and regulatory protection
- Systematic investment options (SIP, SWP, STP)
- Limitations:
- No control over individual portfolio or costs
- Overload of scheme choices
- No guaranteed returns, as returns depend on market and fund manager performance
Classification Of Mutual Funds :
Mutual funds can be classified in various ways based on their objectives, structure, management style, and investment universe.
Based on Structure
- Open-ended Funds:
- Can be bought or sold any time after the New Fund Offer (NFO).
- No maturity period.
- Units can be created or redeemed based on investor actions.
- Unit capital changes daily.
- Close-ended Funds:
- Can be bought only during the NFO.
- Have a fixed maturity.
- Units are listed on stock exchanges for liquidity.
- Post-NFO, investors trade amongst themselves, not with the fund.
- Units may trade at a discount to NAV.
- Interval Funds:
- Hybrid of open- and close-ended funds.
- Transactions allowed only during specified ‘transaction periods’.
- Units are listed on stock exchanges between transaction windows.
- Exchange Traded Funds (ETFs):
- Traded like stocks on exchanges.
- Track indices or specific asset classes (e.g., gold, silver).
- Prices vary throughout the day, unlike mutual funds with a single daily NAV.
- Require a demat account to invest.
Based on Portfolio Management
- Actively Managed Funds:
- Fund managers actively select securities.
- Higher management cost.
- Aim to outperform the market.
- Passively Managed Funds (e.g., Index Funds, ETFs):
- Track a market index.
- Lower cost.
- Performance mirrors the index.
- SEBI’s MF Lite Framework (2024):
Simplifies rules for mutual funds that only offer passive products.
Based on Investment Universe
- Equity Funds – Invest in shares (subtypes: large-cap, mid-cap, small-cap).
- Debt Funds – Invest in fixed income instruments (e.g., bonds, T-bills).
- Money Market Funds – Invest in short-term instruments.
- Gold/Silver Funds – Invest in precious metals or related instruments.
- International Funds – Invest in overseas assets.
Based on SEBI Scheme Categorization (2017)
SEBI introduced a uniform classification system:
A. Equity Schemes (11 sub-categories)
Examples:
- Multi Cap Fund – Min 25% each in large, mid, and small-cap stocks.
- Large Cap Fund – Min 80% in large caps.
- Flexi Cap Fund – Min 65% in equities, no restriction on cap size.
- Sectoral/Thematic – At least 80% in a specific sector/theme.
B. Debt Schemes (16 sub-categories)
Examples:
- Liquid Fund – Instruments maturing in up to 91 days.
- Short Duration Fund – Portfolio duration 1–3 years.
- Gilt Fund – Min 80% in government securities.
C. Hybrid Schemes – Mix of equity and debt investments.
D. Solution-Oriented Schemes – Designed for retirement or children’s education.
E. Other Schemes – Includes ETFs, Index Funds, and Fund of Funds.
Hybrid Schemes
- Conservative Hybrid Fund: Invests 75–90% in debt and 10–25% in equity instruments.
- Balanced Hybrid Fund: Invests 40–60% in both debt and equity; arbitrage not allowed.
- Aggressive Hybrid Fund: Invests 65–80% in equity and 20–35% in debt.
- Dynamic Asset Allocation/Balanced Advantage: Manages equity/debt mix dynamically.
- Multi Asset Allocation: Invests in minimum three asset classes with at least 10% in each.
- Arbitrage Fund: Exploits arbitrage; at least 65% in equity instruments.
- Equity Savings: Mix of equity (≥65%), arbitrage, and debt (≥10%); SID must specify allocation.
Solution-Oriented Schemes
- Retirement Fund: Lock-in of 5 years or till retirement; long-term retirement planning.
- Children’s Fund: Lock-in of 5 years or till majority age; for child’s future needs.
Other Schemes
- Index Funds/ETFs: Track a specific index; minimum 95% invested in index securities.
- Fund of Funds: Invest in underlying funds; minimum 95% in those funds.
- Fixed Maturity Plans: Close-ended debt funds aligned with scheme maturity.
- Target Maturity Funds: Invest in bonds with fixed maturity; ideal for long-term goals.
- Capital Protection Funds: Closed-end; debt for capital protection and equity derivatives for returns.
- Infrastructure Debt Funds: Invest mainly in infrastructure debt; regulated by SEBI/RBI.
- Real Estate Mutual Funds: At least 75% in real estate-related assets; closed-end, listed.
- ESG Funds: Equity thematic funds based on ESG strategies like exclusion, integration, etc.
New Fund Variants
- REITs & InvITs: Listed trusts investing in real estate/infrastructure; reduced minimum investment limits.
- Smart Beta Funds: Index-based funds using alternative weighting strategies.
- Quant Funds: Data-driven model-based selection of securities; minimal human input.
- International REITs: Invest in global real estate via REITs; offers diversification.
- Specialized Investment Fund (SIF): New category under SEBI with minimum investment of ₹10 lakhs.
- Mutual fund AUM in India grew from ₹9.87 lakh crore (June 2014) to ₹58.97 lakh crore (June 2024), reflecting a 10-year CAGR of 19.57%.
- Investor folios increased significantly from 4.80 crore (March 2010) to 19.10 crore (June 2024).
- Mutual funds’ share in financial investments rose from 10% (March 2016) to 14% (March 2018), while bank deposits fell from 71% to 65%.
- India’s mutual fund industry expanded globally, with its share rising from 0.33% (2008) to 0.60% (2018).
- SIP accounts grew from over 1 crore (April 2016) to 6.65 crore (June 2023), highlighting the growing preference for systematic investment plans.