MUTUAL FUND PRODUCTS

Mutual Fund Products

Definition: A mutual fund is a fund established in the form of a trust to raise monies through the sale of units to the public or a section of the public under one or more schemes for investing in securities, money market instruments, gold or gold-related instruments, silver or silver-related instruments, real estate assets, and instruments as may be specified by SEBI from time to time.
Product Differentiation: Mutual funds offer a range of products to investors, designed to meet varying needs, such as equity, debt, and hybrid products, with different investment strategies to achieve investment objectives.

Types of Mutual Funds

Open-ended Funds: An open-ended fund has no maturity date and offers units to investors on a continuous basis, with the unit capital varying according to purchase and redemption transactions.
Close-ended Funds: A close-ended fund runs for a specific period, with units redeemed on the specified maturity date, and is listed on stock exchanges to provide liquidity.
Interval Funds: An interval fund is a hybrid product, largely close-ended but becoming open-ended at pre-specified intervals, with purchase and redemption transactions allowed at certain predefined dates.

Types of Mutual Fund Plans

Direct Plan: A direct plan is for investors who wish to invest directly in the mutual fund without routing their investment through a distributor, with a lower expense ratio.
Regular Plan: A regular plan involves investing through a distributor, with the mutual fund paying commissions to the distributor, resulting in higher expenses.

Features of Mutual Fund Products

Investment Categories: Funds can be classified based on investment category, such as equity, debt, money market, commodity, or real estate funds.
Investment Objectives: Funds can be classified based on investment objectives, such as growth, income, or monthly income plans.
Investment Risk: Funds can be grouped according to the risk associated with the investment objective and portfolio, with equity funds having a greater degree of risk compared to debt funds.

Product Labeling

Risk-o-meter: Mutual fund schemes are labeled based on parameters such as nature of the scheme, investment objective, and level of risk, with a pictorial meter known as the 'Risk-o-meter' categorizing risk into six levels: Low Risk, Low to Moderate Risk, Moderate Risk, Moderately High Risk, High Risk, and Very High Risk.

MUTUAL FUND PRODUCTS (Part 2)

Definition: A mutual fund may invest in equity or debt markets with a specific strategy to create differentiation.
Details: The portfolio may be managed for growth, income, or both, and may use specific strategies such as stock selection or thematic investing.

Key Concepts in Mutual Fund Products

Equity Funds: Invest in equity shares issued by companies, with varying levels of risk depending on the investment strategy.
Debt Funds: Invest in fixed income securities, with interest income and NAV fluctuations depending on the type of securities.
Index Funds: Select the same stocks as in a given index, in the same proportion, and can be issued as Exchange Traded Funds (ETFs).
Flexible or Dynamic Debt Funds: Balance short-term and long-term securities depending on the market view.
Product Creation Process: Involves describing the portfolio, creating an offer document, and filing it with SEBI for comments and approval.

Mutual Fund Product Features

Portfolio Features: Defined in terms of asset class, investment limits, niche investments, growth or income objectives, and specific strategies.
Operational Features: Relate to investor participation, including types of investors, unit prices, entry and exit rules, income streams, and tax implications.

Scheme Related Documents

Statement of Additional Information (SAI): Contains statutory information about the mutual fund or AMC, filed with SEBI as a one-time filing.
Scheme Information Document (SID): Provides information about the mutual fund scheme, including investment objective, asset allocation, and risk factors.
Key Information Memorandum (KIM): A synopsis of important information contained in the SID and SAI, updated at least once in half-year.

Types of Mutual Funds

Equity Funds: Classified by investment strategy, such as diversified, aggressive, growth, value, sectoral, and thematic funds.
Diversified Equity Funds: Invest in multiple sectors and companies, featuring lower risk.
Large Cap Funds: Focus on equity shares of large-sized companies, with lower risk due to established track record and history.
Mid Cap Funds: Focus on equity shares of medium-sized companies, with potential for growth but higher risk of failure.
Small Cap Funds: Focus on equity shares of small companies, with high risk of selection but potential for future growth.
Thematic & Sector Funds: Focus on companies in a particular theme or sector, appealing to investors who expect better performance than the broad market.

MUTUAL FUND PRODUCTS (Part 3)

Equity Funds: Invest in stocks of companies, aiming for long-term growth.
- Large and Mid Cap Fund: Invests in both large cap and mid cap stocks, with a minimum investment of 35% in each.
- Mid Cap Fund: Invests predominantly in mid cap stocks, with a minimum investment of 65%.
- Small Cap Fund: Invests predominantly in small cap stocks, with a minimum investment of 65%.
- Flexi Cap Fund: Invests across different market capitalizations, with a minimum investment of 65% in equity.
- Dividend Yield Fund: Invests in dividend-yielding stocks, with a minimum investment of 65% in equity.
- Value Fund: Follows a value investment strategy, with a minimum investment of 65% in equity.
- Contra Fund: Follows a contrarian investment strategy, with a minimum investment of 65% in equity.
- Focused Fund: Invests in a maximum of 30 stocks, with a minimum investment of 65% in equity.
- Sectoral/Thematic Fund: Invests in a specific sector or theme, with a minimum investment of 80% in equity.
- Equity Linked Savings Scheme (ELSS): An open-ended equity-linked saving scheme with a statutory lock-in of 3 years and tax benefits.
Debt Funds: Invest in debt securities, providing regular income and relatively low risk.
- Liquid and Money Market Funds: Invest in very short-term debt instruments, providing low risk and high liquidity.
- Short Term Debt Funds: Invest in securities with slightly longer terms, providing accrual income and some capital gains.
- Medium and Long Term Debt Funds: Invest in medium-term and long-term debt instruments, providing regular income and some capital appreciation.
- Gilt Funds: Invest in government securities, providing low credit risk and high interest rate risk.
- Floating Rate Funds: Invest in debt instruments with floating interest rates, providing protection against interest rate changes.
- Credit Risk Funds: Invest in below-highest-rated corporate debt instruments, providing higher interest income and higher credit risk.
Debt Fund Categories: As per SEBI circular, open-end debt mutual fund schemes are categorized into:
- Overnight Fund: Invests in overnight securities with a maturity of 1 day.
- Liquid Fund: Invests in debt and money market securities with a maturity of up to 91 days.
- Ultra Short Duration Fund: Invests in debt and money market instruments with a Macaulay duration of 3-6 months.
- Low Duration Fund: Invests in debt and money market instruments with a Macaulay duration of 6-12 months.
- Money Market Fund: Invests in money market instruments with a maturity of up to 1 year.
- Short Duration Fund: Invests in debt and money market instruments with a Macaulay duration of 1-3 years.
- Medium Duration Fund: Invests in debt and money market instruments with a Macaulay duration of 3-4 years.
- Medium to Long Duration Fund: Invests in debt and money market instruments with a Macaulay duration of 4-7 years.
- Long Duration Fund: Invests in debt and money market instruments with a Macaulay duration of more than 7 years.
- Dynamic Bond: Invests across different durations, providing flexibility and protection against interest rate changes.
- Corporate Bond Fund: Invests predominantly in AA+ and above-rated corporate bonds, providing regular income and relatively low credit risk.

MUTUAL FUND PRODUCTS (Part 4)

Definition: Mutual fund products are investment vehicles that pool money from multiple investors to invest in a variety of assets, such as stocks, bonds, and commodities.
Details: The section discusses various types of mutual fund products, including debt funds, hybrid funds, solution-oriented schemes, and other types of funds.

Debt Funds

Credit Risk Fund: An open-ended debt scheme that invests predominantly in AA and below rated corporate bonds, with a minimum investment of 65% of total assets.
Banking and PSU Fund: An open-ended debt scheme that invests predominantly in debt instruments of banks, Public Sector Undertakings, Public Financial Institutions, and Municipal Bonds, with a minimum investment of 80% of total assets.
Gilt Fund: An open-ended debt scheme that invests in government securities across maturity, with a minimum investment of 80% of total assets.
Gilt Fund with 10 year constant duration: An open-ended debt scheme that invests in government securities with a constant maturity of 10 years, with a minimum investment of 80% of total assets.
Floater Fund: An open-ended debt scheme that invests predominantly in floating rate instruments, with a minimum investment of 65% of total assets.

Hybrid Funds

Definition: Hybrid funds are mutual funds that invest in a combination of asset classes, such as debt and equity.
Types: There are three broad types of hybrid funds:
- Predominantly debt-oriented hybrids: Invest mostly in debt market, but invest 5% to 25% in equity.
- Predominantly equity-oriented hybrids: Invest in equity market, but invest up to 35% in debt.
- Dynamic asset allocation hybrids: Invest in a 0-100% range in equity or debt markets, with the flexibility to switch between the two.

Solution-Oriented Schemes

Definition: Solution-oriented schemes are mutual funds that are designed to help investors achieve specific goals, such as retirement or children's education.
Types: There are two types of solution-oriented schemes:
- Retirement Fund: An open-ended retirement solution-oriented scheme with a lock-in of 5 years or till retirement age.
- Children's Fund: An open-ended fund for investment for children with a lock-in for at least 5 years or till the child attains age of majority.

Other Types of Funds

Fixed Maturity Plans (FMPs): Closed-end funds that invest in debt instruments with maturities closely aligned to the maturity of the scheme.
Real Estate Mutual Funds (REMFs): Invest in real estate directly or lend to real estate developers or buy securities of housing companies and sectors related to housing and property.
Exchange Traded Funds (ETFs): Mutual fund products that are listed and traded on a stock exchange, and may be linked to an underlying index or commodity such as gold.
Capital Protection Funds: Closed-end funds that combine debt and equity investments in the portfolio, with the debt component invested to provide protection of capital.
ESG Funds: A new category of funds that invest in companies with comprehensive Business Responsibility and Sustainability Reporting (BRSR).
Infrastructure Debt Funds (IDFs): Invest in debt instruments of infrastructure projects, with the objective of providing financing for infrastructure development.

MUTUAL FUND PRODUCTS (Part 5)

Infrastructure Debt Funds: These funds mainly invest in debt securities or securitised debt instruments of infrastructure companies, infrastructure capital companies, or infrastructure projects, special purpose vehicles (SPVs), aiming to provide liquidity and refinance to infrastructure companies and banks.
SEBI Circular: As per SEBI/HO/IMD/DF2/CIR/P/2021/668, open-end other mutual fund schemes have been categorized under subheads such as Index Funds/Exchange Traded Funds and Fund of Funds (Overseas/Domestic).
Index Funds/Exchange Traded Funds: These are open-ended schemes that replicate/track a specific index, with a minimum investment of 95% of total assets in securities of a particular index.
Fund of Funds: An open-ended fund of fund scheme that invests in an underlying fund, with a minimum investment of 95% of total assets in the underlying fund.

Key Concepts

Passive Funds: Provide advantages such as transparency, lower costs, and diversification to investors over active funds. Examples include index funds and exchange-traded funds.
Equity Linked Savings Scheme (ELSS): Can be launched as Active ELSS under the 'Equity Schemes' category or Passive ELSS under the 'Other Schemes' category.
Specialized Investment Fund (SIF): Introduced by SEBI to bridge the gap between Mutual Funds and Portfolio Management Services, offering flexibility and distinct identification.

Specialized Investment Fund

Eligibility: Can be offered by mutual funds operating for at least three years with an average AUM of ₹10,000 crore over the past three years, or by their sponsors/AMCs with SEBI's approval.
Investment Strategies: Can be designed under different investment strategies, including:
- Equity Oriented Strategies
- Debt Oriented Strategies
- Hybrid Strategies
Measures to Ensure Safety of Investors' Money:
- Minimum Investment Threshold: ₹10 Lakhs
- Certification of Sales and Distribution Team: NISM Certificates (Mutual Fund Distributor) and NISM XIII (Common Derivatives)
- Listing: Compulsory listing of close and interval schemes
- Limits for Debt Exposure to Single Issuer: 20% for AAA, 16% for AA, and 12% for A and below
- Limits for Derivatives Exposure: 25% of Net Assets (exchange-traded derivatives only)
- Portfolio Disclosure: Every alternate month
- Disclaimer/Warning: All advertisements to carry a tagline highlighting the relatively higher risk involved

Sample Questions

Investors buy closed-end funds from the mutual fund during _______.
- a. New Fund Offer (NFO)
- b. Continuous Offer
- c. Any time of the life of the fund
Information in the __________ is common to all schemes of a mutual fund.
- a. Scheme Information Document (SID)
- b. Statement of Additional Information (SAI)
- c. Fund Fact Sheet
- d. Consolidated Account Statement (CAS)
Liquid funds invest in debt securities with maturity __________.
- a. Upto 91 days
- b. Upto 365 days
- c. Upto 7 days
As per SEBI categorisation, the minimum investment by an Index Fund in securities of the index that is being replicated shall be _______________ of total assets.
- a. 65 percent
- b. 80 percent
- c. 75 percent
- d. 95 percent
Sector funds are risky because ________.
- a. They diversify into new stocks
- b. They invest for longer term
- c. They invest in illiquid securities
- d. They hold a concentrated portfolio
Which of the following mutual fund schemes allows investment only during specified intervals and requires compulsory listing on a stock exchange for liquidity?
- a. Open-ended funds
- b. Interval funds
- c. Fund of funds
- d. Floating rate funds
What is the minimum investment in equity and equity-related instruments for a Large & Mid Cap fund?
- a. 65% in large cap, 65% in mid cap
- b. 35% in large cap and 35% in mid cap
- c. 80% in large and mid cap combined
- d. 50% in large cap, 50% in mid cap
A fund that invests exclusively in infrastructure companies would be classified under which SEBI mutual fund category?
- a. Multi cap fund
- b. Sectoral/thematic fund
- c. Equity Linked Savings Scheme (ELSS)
- d. Contra fund