MUTUAL FUNDS

Mutual Funds (Part 1)

• Definition: A mutual fund is an investment product that allows investors to invest in a portfolio of securities or assets, providing exposure to various asset classes such as equity, debt, gold, or real estate.
• Features: Mutual funds are set up by a sponsor, and trustees are appointed to protect investor interests. An asset management company (AMC) manages the fund's activities, including launching schemes, marketing, and investing funds.
• Key Concepts:
  • Investment Objective: The primary goal of a mutual fund scheme, which determines the asset class, security selection, and management style.
  • Units: Represent an investor's holding in a mutual fund, calculated by dividing the investment amount by the price per unit.
  • Net Assets: The total value of a mutual fund's portfolio, including current assets and securities, minus fees and expenses.
  • Net Asset Value (NAV): The net asset value per unit, calculated by dividing the net assets by the number of outstanding units.
  • Cut-off Timings: The time when a request for a purchase or redemption is received, determining the applicable NAV.
  • Mark to Market: The process of valuing a portfolio at its current market price, reflecting the securities' current value.
• Types of Schemes:
  • Open-ended Schemes: Allow investors to invest and redeem units continuously at the current NAV.
  • Close-ended Schemes: Offer units only during the new fund offer (NFO) period and are closed for transactions afterward.
  • Interval Funds: A variant of close-ended funds that become open-ended during specified periods, allowing investors to purchase and redeem units.
  • Exchange Traded Funds (ETFs): Not discussed in this part, but will be covered in subsequent sections.

Mutual Funds (Part 2)

• Introduction to Mutual Funds: Mutual funds are investment vehicles that pool money from various investors to invest in a diversified portfolio of securities.
• Types of Mutual Funds: Mutual funds can be classified into different types, including open-ended funds, closed-ended funds, and exchange-traded funds (ETFs).
• Exchange Traded Funds (ETFs): ETFs are mutual funds that can be traded on a stock exchange, allowing investors to buy and sell units throughout the day.
• Regulatory Framework: The Securities and Exchange Board of India (SEBI) is the primary regulator of mutual funds in India, and its regulations govern the setting up, structure, and operation of mutual funds.

Key Concepts

• SEBI (Mutual Funds) Regulations, 1996: These regulations, along with amendments, govern the mutual fund industry in India.
• Association of Mutual Funds in India (AMFI): AMFI is the industry body that oversees the functioning of the mutual fund industry and recommends best practices.
• Investor Service Standards: SEBI has prescribed turnaround times for services provided to investors, including allotment of units, scheme opening, and confirmation of unit allotment.

Mutual Fund Products

• Equity Funds: Invest in a portfolio of equity shares and equity-related instruments, with returns similar to directly investing in equity markets.
• Debt Funds: Invest in debt securities, such as bonds and debentures, with returns in the form of interest income.
• Hybrid Funds: Invest in a combination of equity and debt securities, with the aim of providing a balanced portfolio.
• Solution-Oriented Schemes: Invest in a specific theme or sector, such as retirement or children's education.

Equity Funds

• Passive Funds: Invest in companies represented in an index, such as Nifty or Sensex, in the same proportion as the company's representation in the index.
• Active Funds: Select stocks for the portfolio based on a strategy intended to generate higher returns than the index.
• Diversified Equity Funds: Invest across segments, sectors, and sizes of companies, with a lower risk of poor performance.
• Sector Funds: Invest in companies that belong to a particular sector, such as technology or banking, with higher risk due to lesser diversification.
• Theme-Based Funds: Invest in multiple sectors and stocks that form part of a theme, such as infrastructure or logistics.

Investment Styles

• Value Funds: Seek to identify companies trading at prices below their inherent value, with the expectation of benefiting from an increase in price.
• Contra Funds: Adopt a contrarian investment strategy, seeking to identify under-valued stocks and stocks that are under-performing due to transitory factors.
• Dividend Yield Funds: Invest in stocks that have a high dividend yield, appealing to investors looking for income from their equity investments.

MUTUAL FUNDS (Part 3)

• Equity Funds: At least 65% of the total assets of the dividend yield fund should be invested in equity and equity-related instruments.
• Focussed Funds: Hold a concentrated portfolio of securities, with SEBI's regulation limiting the number of stocks in the portfolio to 30, resulting in higher risk due to lower diversification.
• Equity Linked Savings Schemes (ELSS): A special type of open-end equity fund scheme that provides tax deduction benefits under section 80C of the Income Tax Act, with at least 80% of the portfolio in equity securities and a 3-year lock-in period.

Debt Funds

• Definition: Invest in government bonds, corporate bonds, and money market securities to earn predefined coupon income.
• Types:
  • Overnight Funds: Invest in securities with a maturity of one day.
  • Liquid Funds: Invest in debt securities with less than 91 days to maturity.
  • Ultra Short Duration Funds: Invest in debt and money market instruments with a Macaulay duration of 3-6 months.
  • Low Duration Fund: Invest in debt and money markets instruments with a Macaulay duration of 6-12 months.
  • Money Market Fund: Invest in money market instruments with maturity up to one year.
  • Short Duration Funds: Invest in debt and money market instruments with a Macaulay duration of 1-3 years.
  • Medium Duration Fund: Invest in debt and money market instruments with a Macaulay duration of 3-4 years.
  • Medium to Long Duration Fund: Invest in debt and money market instruments with a Macaulay duration of 4-7 years.

Long Term Debt Funds

• Definition: Structured to generate total returns made up of both interest income and capital appreciation from the securities held.
• Characteristics: More volatile than short-term debt funds, with returns affected by changes in interest rates.
• Types:
  • Long Duration Fund: Invests in debt and money market securities with a Macaulay duration greater than 7 years.
  • Corporate Bond Fund: Invests at least 80% of total assets in corporate debt instruments with a rating of AA+ and above.
  • Credit Risk Funds: Invest a minimum of 65% of total assets in corporate debt instruments rated AA and below.
  • Banking and PSU Fund: Invests a minimum of 80% of total assets in debt instruments of banks, Public Financial Institutions, and Public Sector Undertakings.
  • Open-ended Gilt Funds: Invest at least 80% of the total assets in government securities across maturities.

Hybrid Funds

• Definition: Invest in a combination of debt and equity securities, with allocation depending on the investment objective of the scheme.
• Types:
  • Conservative Hybrid Funds: Invest 75-90% in debt and 10-25% in equity and equity-related instruments.
  • Balanced Hybrid Fund: Invests 40-60% in debt and 40-60% in equity and equity-related investments.
  • Aggressive Hybrid Funds: Invest 65-80% in equity and 20-35% in debt.

Mutual Funds (Part 4)

• Definition: Mutual funds are investment vehicles that pool money from various investors to invest in a diversified portfolio of securities, generating returns and providing stability.
• Details: Some key concepts related to mutual funds include:
  • Aggressive Hybrid fund and Balanced Hybrid fund: These funds are permitted to offer a mix of equity and debt investments, providing a balance between risk and return.
  • Dynamic Asset Allocation or Balanced Advantage fund: These funds dynamically manage investments in equity and debt instruments to reduce net equity exposure while maintaining a minimum of 65% long equity for taxation purposes.
  • Multi Asset Allocation Funds: These funds invest in at least three asset classes, with a minimum of 10% of total assets invested in each class, and the fund manager takes a view on which type of investment is expected to perform well.
  • Arbitrage funds: These funds aim to take advantage of price differentials between the cash and derivatives markets, earning interest rate differentials.
  • Equity Savings fund: These funds invest in equity, debt, and arbitrage opportunities to generate returns, with a minimum of 65% of total assets invested in equity and equity-related instruments and a minimum of 10% in debt investments.

Close-end Hybrid Funds

• Capital Protection Funds: These are closed-end hybrid funds that invest in debt instruments to grow the principal amount over the term of the fund, providing capital protection, while the remaining portion is invested in equity derivatives to earn higher returns.

Solution Oriented Schemes

• Retirement Fund: These schemes are oriented towards saving for retirement, with a lock-in period of at least 5 years or till retirement age, whichever is earlier.
• Children’s Fund: These schemes are oriented towards saving for children’s needs, with a lock-in period of 5 years or till the age of majority, whichever is earlier.

Other Funds

• Fund of Funds (FoF): A FoF is a mutual fund that invests in other mutual funds, with 95% of total assets invested in the underlying fund, and can be either debt or equity-based.
• Exchange Traded Funds (ETFs): ETFs hold a portfolio of securities that replicate an index and are listed and traded on the stock exchange, with at least 95% of total assets invested in securities represented in the index being tracked.
• Gold/Silver ETFs: These ETFs have gold or silver as the underlying asset, providing investment returns that track the performance of domestic prices of gold or silver.
• Real Estate Mutual Funds: These funds invest in real estate, either in the form of physical property or securities of companies engaged in the real estate business, with at least 35% of the portfolio held in physical assets.
• Infrastructure Debt Schemes: These are closed-ended schemes that invest in debt securities and securitized debt of infrastructure companies, with 90% of the fund’s portfolio invested in specified securities.

Specialized Investment Funds

• New Asset Class: SEBI has introduced a new asset class with a minimum investment threshold of Rs 10 lakh, providing investors with new investment avenues and ideas not available in existing MF products.

Mutual Fund Investment Options

• Income Distribution cum Capital Withdrawal option: This option implies that the funds will pay out the returns generated in the form of periodic dividends.
• Growth option: In this option, the returns generated are retained in the scheme, translating into an appreciation in the NAV and the value of the investment.

Triggers in Mutual Fund Investment

• Trigger options: These options ensure that on achieving a particular situation, the redemption of units is automatically triggered, allowing investors to achieve their aims without continuous tracking.

Process associated with Investment in Mutual Funds

• Fresh Purchase of Mutual Fund Units: An investor can make an initial investment in a mutual fund either in the new fund offer (NFO) or subsequently when the open-ended fund opens for transactions.
• Purchase of Units in an NFO: An investor can buy units in an NFO by submitting the application form along with the payment at the AMCs office or designated collection centers during the NFO period.
• Purchase of Units in the Continuous Offer Period: Once the scheme opens for transactions, investors can buy units of the scheme or redeem investment or conduct other financial and non-financial transactions with the fund.

Mutual Funds (Part 5)

• Definition: Mutual funds offer various facilities to investors, including additional purchases, redemptions, switches, and systematic transactions.
• Details: The applicable NAV for transactions depends on the type of scheme, day of transaction, time of making the application, and availability of clear funds.

Key Concepts

• Additional Purchases: Investors can make additional investments in an open-ended scheme after the fresh purchase made in the NFO or continuous offer period.
• Redemptions: Investments in open-ended schemes can be realized at any time by redeeming the units, with the applicable NAV calculated for the day of the redemption request.
• Switch: A switch is a single transfer from one scheme or option of a scheme to another mutual fund scheme, or option of the same scheme, with the applicable NAV depending on the type of schemes.
• Dividend Reinvestment: Dividend reinvestment is a process where the dividend declared by a mutual fund scheme is used to purchase more units of the scheme instead of being received as a pay-out.

Systematic Transactions

• Systematic Investment Plans (SIP): SIPs allow investors to commit to invest a fixed sum of money at regular intervals over a period of time in a mutual fund scheme.
• Systematic Withdrawal Plan (SWP): SWP enables recurring redemptions from a scheme over a period of time at the applicable NAV on the date of each redemption.
• Key Features:
  • SIPs and SWPs require investors to commit to a set of transactions in advance.
  • The value of each investment, the periodicity of the transaction, and the day of execution will be decided at the time of commitment.
  • Systematic transactions can be cancelled at any time by the investor after giving due notice.

Important Terms

• NAV (Net Asset Value): The market value of the scheme's assets minus its liabilities, divided by the number of units outstanding.
• Folio Number: A unique identity of the investor with the mutual fund, under which all personal information is recorded.
• Exit Load: A fee charged by the mutual fund when an investor redeems units, typically expressed as a percentage of the redemption amount.
• ECS (Electronic Clearing Service): A facility that allows for electronic transfer of funds from one bank account to another.
• NEFT (National Electronic Funds Transfer): A facility that allows for electronic transfer of funds from one bank account to another.
• NRO (Non-Resident Ordinary) Account: A type of bank account held by a non-resident Indian, where the account is held in Indian rupees.
• NRE (Non-Resident External) Account: A type of bank account held by a non-resident Indian, where the account is held in foreign currency.
• IFSC (Indian Financial System Code): A unique code assigned to each bank branch in India, used for electronic fund transfers.

MUTUAL FUNDS (Part 6)

• Systematic Withdrawal Plan (SWP): Allows investors to withdraw a fixed amount from their mutual fund investment at regular intervals. The redemption amount is credited to the investor's bank account, and the SWP ceases if the balance falls below a specified amount.
• Variations of SWP: Some mutual funds offer variations, such as withdrawing only the appreciation in a folio between instalments.
• Cancellation of SWP: Investors can cancel an SWP by notifying the mutual fund.

Key Concepts

• Systematic Transfer Plan (STP): Combines redemption from one scheme and investment in another scheme of the same mutual fund for a defined period. The source scheme is the one from which units are redeemed, and the target scheme is the one into which investments are made.
• Dividend Transfer Plan (DTP): Involves investing in a scheme with an Income Distribution cum Capital Withdrawal option and transferring the dividend to a target fund.
• Value Averaging Investment Plan: A systematic investment plan that invests more when the market is down and less when the market is high, aiming to reduce the impact of market volatility.

Investment Modes

• Direct Plan: Investors can invest directly in a mutual fund scheme without using a distributor, resulting in a lower expense ratio.
• Regular Plan: Investors invest through a distributor, who assists with the investment and provides advice and service.
• Key differences: The direct plan has a lower expense ratio, while the regular plan offers assistance from a distributor.

Role of Investment Adviser

• Clarifying plan differences: The investment adviser must explain the differences between direct and regular plans, including the cost aspect and the level of assistance provided.
• Assessing investor suitability: The adviser must assess the investor's ability to handle the direct plan, considering factors such as knowledge, time, and space to complete requirements.
• Providing guidance: The investment adviser should provide guidance on how to transact through direct plans, including the required details and potential technical issues.