Chapter 10: Mutual Fund Products

Learning Objectives

After studying this chapter, you should understand:

Structural classification: Open-Ended, Close-Ended, and Interval Schemes.
Comprehensive categorization framework under SEBI’s Rationalization Circular.
Equity Scheme categories (Large Cap, Mid Cap, Small Cap, Flexi Cap, ELSS).
Debt Scheme categories classified by Macaulay Duration and credit profile.
Hybrid Scheme structures (Balanced Advantage, Aggressive, Conservative, Arbitrage).
Solution-Oriented Schemes and Passive Funds (Index Funds, ETFs, and Fund of Funds).
Direct Plans vs. Regular Plans and Growth vs. IDCW (Dividend) payout options.

10.1 Structural Classification of Mutual Funds

                            MUTUAL FUND SCHEME TYPES
                                       │
         ┌───────────────────┬─────────┴─────────┬───────────────────┐
         ▼                   ▼                   ▼                   ▼
    OPEN-ENDED          CLOSE-ENDED          INTERVAL            EXCHANGE-TRADED
      SCHEMES             SCHEMES             SCHEMES              FUNDS (ETFs)
  Continuous sale &   Fixed maturity;     Open during        Traded continuously
  redemption at NAV;  listed on stock     pre-specified      on stock exchanges
  variable capital.   exchanges.          periodic windows.  like equity shares.

Open-Ended Schemes: Available for continuous purchase and redemption at daily NAV. Capital expands when fresh units are sold and shrinks when units are redeemed.
Close-Ended Schemes: Fixed maturity period (e.g., 3–5 years). Units cannot be redeemed directly with the AMC until maturity, but are compulsorily listed on stock exchanges to provide liquidity.
Interval Schemes: Trade as close-ended funds but open for purchase and redemption during pre-agreed transaction intervals.

10.2 Equity Schemes (SEBI Categorization)

Category	Investment Mandate (% of Total Assets)	Risk & Investment Profile
Large Cap Fund	Minimum 80% in Large Cap stocks (Top 100 stocks by market cap).	Lowest volatility among pure equities; blue-chip stability.
Mid Cap Fund	Minimum 65% in Mid Cap stocks (101st to 250th stocks by market cap).	Higher growth potential with moderate to high volatility.
Small Cap Fund	Minimum 65% in Small Cap stocks (251st stock onwards by market cap).	High growth potential; subject to severe liquidity and price volatility.
Large & Mid Cap	Minimum 35% in Large Caps AND minimum 35% in Mid Caps.	Blended strategy combining stability and capital growth.
Multi Cap Fund	Minimum 25% in Large Caps, 25% in Mid Caps, AND 25% in Small Caps.	Structured diversification across all market capitalization tiers.
Flexi Cap Fund	Minimum 65% in equity and equity-related instruments; dynamic.	Fund manager has complete freedom to allocate across large, mid, or small caps.
Focused Fund	Minimum 65% in equity; portfolio restricted to a maximum of 30 stocks.	High-conviction, concentrated portfolio strategy.
Sectoral / Thematic	Minimum 80% in a single sector (e.g., Pharma, Banking, Technology) or theme.	High unsystematic risk; concentrated in sector-specific business cycles.
ELSS (Tax Saving)	Minimum 80% in equity; carries a mandatory 3-year statutory lock-in.	Qualifies for tax deductions under Section 80C of the Income Tax Act.

10.3 Debt Schemes (SEBI Categorization by Duration & Credit)

Overnight Fund: Debt securities with maturity of 1 day only (Zero interest rate and credit risk).
Liquid Fund: Debt and money market securities with maturity up to 91 days only.
Ultra Short Duration Fund: Macaulay duration between 3 months and 6 months.
Low Duration Fund: Macaulay duration between 6 months and 12 months.
Money Market Fund: Money market instruments with maturity up to 1 year.
Short Duration Fund: Macaulay duration between 1 year and 3 years.
Medium Duration Fund: Macaulay duration between 3 years and 4 years.
Long Duration Fund: Macaulay duration greater than 7 years.
Dynamic Bond Fund: Flexible investment across all durations based on interest rate outlook.
Corporate Bond Fund: Minimum 80% in highest-rated corporate bonds (AA+ and above).
Credit Risk Fund: Minimum 65% in lower-rated corporate bonds (AA and below) to capture credit spread.
Banking and PSU Fund: Minimum 80% in debt of Banks, PSUs, and Public Financial Institutions.
Gilt Fund: Minimum 80% in Government Securities (G-Secs) across maturities (Zero credit risk).

10.4 Hybrid & Passive Schemes

1. Hybrid Schemes

Conservative Hybrid: 10%–25% in equity; 75%–90% in debt (debt-oriented).
Aggressive Hybrid: 65%–80% in equity; 20%–35% in debt (equity-oriented).
Balanced Advantage / Dynamic Asset Allocation: 0%–100% dynamic allocation between equity and debt using quantitative valuation models.
Arbitrage Fund: Minimum 65% in equity arbitrage (exploiting cash-futures basis spreads; zero directional equity market risk).

2. Solution-Oriented & Passive Schemes

Retirement / Children's Funds: Mandatory lock-in of 5 years or until retirement/adulthood.
Index Funds & ETFs: Passively replicate benchmark indices (e.g., Nifty 50, Sensex) with low expense ratios.
Fund of Funds (FoF): Invests minimum 95% of total assets in other mutual fund schemes.

10.5 Plan and Option Structures

┌───────────────────────────────────────┬────────────────────────────────────────────────────────┐
│ PLAN / OPTION                         │ STRUCTURAL MECHANICS & INVESTOR SUITABILITY            │
├───────────────────────────────────────┼────────────────────────────────────────────────────────┤
│ Direct Plan                           │ Invested directly with AMC without an intermediary     │
│                                       │ (broker/distributor); zero commission deducted $\implies$│
│                                       │ lower Total Expense Ratio (TER) and higher NAV.        │
├───────────────────────────────────────┼────────────────────────────────────────────────────────┤
│ Regular Plan                          │ Invested through a distributor/broker; distributor     │
│                                       │ trail commission is paid out of the scheme $\implies$  │
│                                       │ higher TER and lower NAV.                              │
├───────────────────────────────────────┼────────────────────────────────────────────────────────┤
│ Growth Option                         │ All profits, dividends, and interest are ploughed back │
│                                       │ into the scheme; unit count remains constant; NAV      │
│                                       │ increases over time; ideal for compounding wealth.     │
├───────────────────────────────────────┼────────────────────────────────────────────────────────┤
│ IDCW Option (Payout / Reinvestment)   │ Income Distribution cum Capital Withdrawal; periodic   │
│                                       │ cash payout to investor or reinvestment into units.    │
│                                       │ **NAV falls immediately by the payout amount**!        │
└───────────────────────────────────────┴────────────────────────────────────────────────────────┘

Chapter Summary & Exam Cheat Sheet

Large Cap Definition: Top 100 stocks by market capitalization; min 80% allocation.
Mid Cap Definition: 101st to 250th stocks; min 65% allocation.
Small Cap Definition: 251st stock onwards; min 65% allocation.
Multi Cap Allocation: Minimum 25% Large + 25% Mid + 25% Small.
ELSS Lock-In: Mandatory 3-year statutory lock-in under Section 80C.
Liquid Fund Portfolio Ceiling: Debt securities maturing within 91 days only.
Corporate Bond Fund Rule: Minimum 80% in AA+ and above debt.
Arbitrage Fund Taxation: Minimum 65% in equity arbitrage; taxed as equity fund.
Direct Plan Advantage: Lower TER due to zero distributor commission $\implies$ higher NAV.
IDCW Payout Impact: Distributes income; NAV drops by the exact dividend payout amount.

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