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(Failed) Attempt To Categorize And Rationalize Mutual Funds

There are numerous types of mutual fund schemes, with no clear cut definition categorizing them. This makes it (extremely) difficult for the aam investors to make an informed choice.

With a view to resolve this problem, last week SEBI issued a circular on Categorization and Rationalization of Mutual Fund Schemes. The idea is to ensure that
a) different schemes launched by an AMC are clearly distinct in terms of asset allocation, investment strategy etc., and
b) there is uniformity in the characteristics of similar type of schemes launched by different AMCs.

Accordingly, there will be broadly five groups of schemes viz.
a. Equity Schemes : 10 types of schemes
b. Debt Schemes : 16 types of schemes
c. Hybrid Schemes : 6 types of schemes
d. Solution Oriented Schemes : 2 types of schemes
e. Other Schemes : 2 types of schemes

Key characteristics of each of the schemes are briefly explained below.

a. Equity Schemes

1. Multi Cap Fund : Minimum 65% of AUM to be invested in equity / equity-related instruments.

2. Large Cap Fund : Minimum 80% of AUM to be invested in equity / equity-related instruments of large cap companies.

3. Large & Mid Cap Fund : Minimum 35% of AUM to be invested in equity / equity-related instruments of large cap companies. Minimum 35% of AUM to be invested in equity / equity-related instruments of mid cap companies.

4. Mid Cap Fund : Minimum 65% of AUM to be invested in equity / equity-related instruments of mid cap companies.

5. Small cap Fund : Minimum 65% of AUM to be invested in equity / equity-related instruments of small cap companies.

6. Dividend Yield Fund : AUM to be mainly invested in dividend yielding stocks. Minimum 65% of AUM to be invested in equity / equity-related instruments.

7. Value Fund : Schemes following Value Investment Strategy OR
   Contra Fund : Schemes following Contratrian Strategy
Minimum 65% of AUM to be invested in equity / equity-related instruments.
(Note : AMCs can offer either Value or Contra Fund)

8. Focused Fund : Scheme with maximum 30 stocks in the portfolio. Minimum 65% of AUM to be invested in equity / equity-related instruments.

9. Sectoral / Thematic : Minimum 80% of AUM to be invested in equity / equity-related instruments related to particular sector or theme.

10. ELSS : Minimum 80% of AUM to be invested in equity / equity-related instruments and 3 years lock-in.

mutual-fund-categorization
New mutual fund schemes categorization continues to puzzle and confuse.

b. Debt Schemes

1. Overnight Fund : AUM to be invested in overnight securities having maturity of 1 day.

2. Liquid Fund : AUM to be invested in Money Market instruments having maturity of up to 91 days only.

3. Ultra Short Duration Fund : AUM to be invested in Debt and Money Market instruments such that the Macaulay duration of the portfolio is between 3 to 6 months.

4. Low Duration Fund : AUM to be invested in Debt and Money Market instruments such that the Macaulay duration of the portfolio is between 6 to 12 months.

5. Money Market Fund : AUM to be invested in Money Market instruments having maturity of up to 1 year.

6. Short Duration Fund : AUM to be invested in Debt and Money Market instruments such that the Macaulay duration of the portfolio is between 1 to 3 years.

7. Medium Duration Fund : AUM to be invested in Debt and Money Market instruments such that the Macaulay duration of the portfolio is between 3 to 4 years

8. Medium to Long Duration Fund : AUM to be invested in Debt and Money Market instruments such that the Macaulay duration of the portfolio is between 4 to 7 years

9. Long Duration Fund : AUM to be invested in Debt and Money Market instruments such that the Macaulay duration of the portfolio is more than 7 years.

10. Dynamic Bond : AUM invested across various durations.

11. Corporate Bond Fund : Minimum 80% of AUM to be invested in 'highest rated' Corporate Bonds only.

12. Credit Risk Fund : Minimum 65% of AUM to be invested in 'below highest rated' Corporate Bonds.

13. Banking and PSU Fund : Minimum 80% of AUM to be invested in instruments of banks, Public Sector Undertakings, Public Financial Institutions.

14. Gilt Fund : Minimum 80% of AUM to be invested in Govt. Securities across different maturities.

15. Gilt Fund with 10-year constant duration : Minimum 80% of AUM to be invested in Govt. Securities such that the Macaulay duration of the portfolio is equal to 10 years.

16. Floater Fund : Minimum 65% of AUM to be invested in floating rate products.

c. Hybrid Schemes

1. Conservative Hybrid Fund : 75-90% investment in debt products and the balance 10-25% in equity.

2. Balanced Hybrid Fund : 40-60% investment in debt and 40-60% in equity (Arbitrage not permitted) OR
   Aggressive Hybrid Fund : 65-80% investment in equity and 20-35% in debt
(Note : AMCs can offer either Aggressive Hybrid or Balanced Hybrid Fund.)

3. Dynamic Asset Allocation or Balanced Advantage : Investment in equity and debt is managed dynamically.

4. Multi Asset Allocation : Investment in at least THREE asset classes (minimum allocation per asset class - 10%)
(Note: Foreign securities will not be considered as a separate asset class.)

5. Arbitrage Fund : Schemes adopting the arbitrage strategy with minimum 65% investment in equity / equity-related instruments.

6. Equity Savings : Minimum 65% investment in equity / equity-related instruments and minimum 10% investment in debt (Minimum hedged and unhedged exposure to be declared in the Scheme Document).

d. Solution Oriented Schemes

1. Retirement Fund : Open-ended retirement solution oriented scheme having a lock-in of 5 years or till retirement age (whichever is earlier).

2. Children’s Fund : Open-ended fund for investment for children, having a lock-in for at least 5 years or till the child attains age of majority (whichever is earlier).

e. Other Schemes

1. Index Funds / ETFs : Minimum 95% of AUM to be invested in securities of the index being replicated or tracked.

2. Fund of Funds (FoF) : Minimum 95% of AUM to be invested in the underlying fund.

Other Key Points

1. Large cap companies : 1st -100th company in terms of full market capitalization.

2. Mid cap companies : 101st -250th company in terms of full market capitalization.

3. Small cap companies : 251st company onwards in terms of full market capitalization.

4. In this regards, the list of stocks would be prepared by AMFI and updated every six months at the end of June and December.

5. AMCs have to rebalance the portfolio, if necessary, within a period of one month.

6. These guidelines apply to all the existing and future open-ended schemes.

7. AMCs can offer only one scheme per category (except Index Funds / ETFs, Fund of Funds and Sector / Thematic Funds having different investment focus).

8. AMCs have to merge, wind-up or change the fundamental attributes of all existing schemes so as to align them in line with these guidelines.    

Well, given the plethora of schemes and definitions, I wonder if the stated objective  of making mutual fund scheme selection an easy process  would really be achieved.

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