Course Code and Title : FINE-4 –Mutual fund

Lesson Number : 5
Topic : Various Types of Mutual Fund Products
Professor : Prof. Romualdo S. Del Agua

INTRODUCTION:

LEARNING OBJECTIVES:

1.Identify the different types of mutual funds

2.Illustrate how mutual funds operate.
3.Evaluate how to find information about mutual funds has performed by the investor.

PRE-ASSESSMENT:
Direction: Write your answer on a whole sheet of paper.

There are three distinct types of investors.

1. Pre-Investor
2. Passive Investor
3. Active Investor

So what type of investor are you and why should you care?

LESSON:
A mutual fund is a type of investment in which investors pool their money have a specific
investment style, such as investing in value or growth stocks, best products and ideas, our
investment teams are supported by global institutions.
Types or Classification of Mutual Funds

A mutual fund is a trust that is managed by the professionals, whose main task is to gather funds
from different investors & further invest them in various securities such as bonds, stocks, precious
metals, etc. The funds are invested in such a way that the losses can be easily compensated with the
profits.

Mutual funds are classified based on Investment objectives & maturity period

Based on the maturity period

Open-ended funds are the funds in

which the maturity date is not fixed. The
investors have the opportunity to buy
&sell units at any time at NAV. These
Open-Ended Fund
are the liquid funds & investors can
invest at any time during the year &
redemption can also be done
continuously.

Close-ended funds are the funds where

the maturity period is fixed. These funds
are not available for subscription all the
Close-ended fund time like open-ended funds rather they
are available for investment during a
specified time i.e. when they are
launched initially.

Interval funds are the combined version

of Open-ended as well as closed-ended
Interval Funds
funds. These funds are available for
trading in the stock exchange at

Based on Investment objectives
Equity or Growth funds
Debt or Income Funds
Balanced funds
predetermined intervals.
Equity funds are the funds in which the
majority of the investment is made in
the equity shares. Therefore it carries a
high risk but also the potential of high
returns. The investment goal under
such kind of funds is to achieve long
term growth. There may be funds that
focus mainly on a single market sector
for eg Banking sector equity fund.
The investment under such kind of
funds is made in securities such as
bonds, debentures, government
securities, etc. Since investment is
made in debt instruments, the risk factor
is low & income is stable & regular.
Debt or income funds are less volatile
as compared to equity funds. The
investment goal under such type of
funds is safety and to achieve moderate
growth of funds.
Underbalanced funds, the money is
invested in both equity & debt
 instruments. The investment goal is to
achieve both profits & moderate growth.
They ensure stable returns &
appreciation in capital to the individuals
who have invested money in balanced
funds.

Such kind of funds goes for short term

Money Market or Liquid funds
investments such as Treasury bills,
commercial papers, etc. under which
period is less than 91 days. The
investment objective under liquid funds
is to attain liquidity, increase in capital &
moderate return on funds.

These are the government securities

Gilt funds that carry no credit risk & are
considered as the safest kind of funds.

Schemes Based on Maturity Period of

Open-Ended Funds

Close Ended Funds

Interval Funds

Open-Ended Scheme

This scheme allows investors to buy or sell units at any point in time. It does not have a fixed maturity
date either. You deal directly with the Mutual Fund for your investment and redemption.
Close Ended Scheme

This type of scheme has a stipulated maturity period and investors can invest only during the initial
launch period known as the New Fund Offer (NFO).

Interval

It operates as a combination of open and closed-ended schemes, it allows investors to trade units at
predefined intervals. They may be traded on the stock exchange or they may even be open for sale
or redemption during pre-determined intervals at NAV related prices.

Based on Principal Investments

One of the most important points in the circular is that different Mutual Funds schemes should be
distinct in terms of investment strategy and asset allocation. The schemes will be broadly classified
into the following categories

Equity Schemes, Debt Schemes, Hybrid Schemes, Solution Oriented Schemes, Other Schemes

The existing type of scheme would be replaced with a new type of scheme. Let’s look at each type
of scheme

Equity Schemes

SEBI has decided a total of 11 categories under Equity Schemes but a mutual fund company can
only have 10 categories and it has to choose between Value or Contra. To make this easier SEBI has
also defined the meaning of Large Cap, Mid Cap, and Small Cap.

Large Cap: Top 100 companies in terms of market capitalization

Mid Cap: 101st- 250th companies in term of market capitalization

Multi-Cap Fund – An equity

The minimum investment in equity
Small Multi-Cap mutual fund investing across
& equity related instruments–65%
1 Funds Large Cap, Mid Cap, Small Cap
of total assets
stocks
 The minimum investment in equity
Large-Cap
2 & equity related instruments of large-
Funds
cap companies – 80% of total assets
The minimum investment in equity &
equity related instruments of large-cap
Large & Mid companies – 35% of total assets
3
Cap Funds The minimum investment in equity &
equity related instruments of mid-cap
stocks – 35% of total assets
The minimum investment in equity &
Mid-Cap
4 equity related instruments of mid-cap
Funds
companies – 65% of total assets
The minimum investment in equity &
Small-Cap
5 equity related instruments of small-cap
Funds
companies – 65% of total assets
The scheme should predominantly
Dividend invest in dividend-yielding stocks. The
6
Yield Funds minimum investment in equity – 65% of
total assets
The scheme should follow a value
Value investment strategy. The minimum
7a
Funds* investment in equity & equity related
instruments – 65% of total assets
7b Contra The scheme should follow a contrarian
Large Cap Fund – An equity
the mutual fund predominantly
investing in Large Cap stocks
Large & Mid-Cap Fund – An
open-ended equity mutual
fund investing in both large-cap
and mid-cap stocks
Mid Cap Fund – An equity
the mutual fund predominantly
investing in Mid Cap stocks
Small Cap Fund – An equity
the mutual fund predominantly
investing in Small Cap stocks
An equity
the mutual fund predominantly
investing in dividend-yielding
stocks
An equity
mutual fund following a value
investment strategy
An equity
 Funds* investment strategy. The minimum mutual fund following contrarian
investment in equity & equity related investment strategy
instruments – 65% of total assets

An equity scheme investing in

A scheme focused on the number of
maximum 30 stocks (mention
Focused stocks (maximum 30) Minimum
8 where the scheme intends to
Funds investment in equity & equity related
focus, viz., multi-cap, large-cap,
instruments – 65% of total assets
mid-cap, small-cap)

The minimum investment in equity &

Sectoral
equity related instruments of a An open-ended equity scheme
9 Funds or
particular sector/particular theme – following the theme as mentioned
Thematic
80% of total assets

The minimum investment in equity &

equity related instruments – 80% of An open ended equity linked
ELSS
10 total assets (following Equity Linked saving scheme with a statutory
Funds
Saving Scheme, 2005 notified by lock in of 3 years and tax benefit
Ministry of Finance)

Cap: 251st company onwards in terms of market capitalization

*Mutual Funds will be permitted to offer either Value fund or Contra fund.

Debt Schemes

SEBI has decided a total of 16 categories under Debit Schemes. 16 categories are very high for debt
funds considering their similarity in risk and returns from a retail investor perspective. Some
categories like Overnight Fund and Liquid Fund are similar. The same is the case with money market
funds and ultra-short-term debt fund categories.

Overnight Investment in overnight

1 A debt scheme investing in overnight securities
Funds securities having the
 maturity of 1 day

Investment in Debt
and money market
2 Liquid Funds securities with A liquid scheme
maturity of upto 91
days only

Investment in Debt &

Money Market
Ultra Short instruments such that
An ultra – short term debt scheme investing in instruments
3 Duration the Macaulay
with Macaulay duration between 3 months and 6 months
Funds duration of the
portfolio is between 3
months – 6 months

Investment in Debt &

Money Market
instruments such that
Low Duration A low duration debt scheme investing in instruments with
the Macaulay
Funds Macaulay duration between 6 months and 12 months
duration of the
portfolio is between 6
months – 12 months

Investment in Money
Money Market Market instruments
5 A debt scheme investing in money market instruments
Funds having maturity up to
1 year

Short Duration Investment in Debt & A short term debt scheme investing in instruments with
6
Fund Money Market Macaulay duration between 1 year and 3 years
 instruments such that
the Macaulay
duration of the
portfolio is between 1
year – 3 years

Investment in Debt &

Money Market
instruments such that
Medium A medium-term debt scheme investing in instruments with
7 the Macaulay
Duration Funds Macaulay duration between 3 years and 4 years
duration of the
portfolio is between 3
years – 4 years

Investment in Debt &

Money Market
instruments such that
Medium to Long A medium-term debt scheme investing in instruments with
8 the Macaulay
Duration Fund Macaulay duration between 4 years and 7 years
duration of the
portfolio is between 4
– 7 years

Investment in Debt &

Money Market
Instruments such that
Long Duration A debt scheme investing in instruments with Macaulay
9 the Macaulay
Fund duration greater than 7 years
duration of the
portfolio is greater
than 7 years

1 Dynamic Bond Investment across

A dynamic debt scheme investing across duration
0 Funds duration
 The minimum
investment in
1 Corporate Bond corporate bonds – A debt scheme predominantly investing in the highest-rated
1 Funds 80% of total assets corporate bonds
(only in highest rated
instruments)

The minimum
investment in
corporate bonds –
1 Credit Risk A debt scheme investing in below highest-rated corporate
65% of total assets (
2 Funds bonds
investment in below
highest rated
instruments)

The minimum
investment in Debt
instruments of banks, A debt scheme predominantly investing in Debt instruments
1 Banking and
Public Sector of banks, Public Sector Undertakings, Public Financial
3 PSU Fund
Undertakings, Public Institutions
Financial Institutions
– 80% of total assets

The minimum
1 investment in Gsecs A debt scheme investing in government securities across the
Gilt Fund
4 – 80% of total assets maturity
(across maturity)

Gilt Fund with The minimum

1 10-year investment in Gsecs A debt scheme investing in government securities having a
5 constant – 80% of total assets constant maturity of 10 years
duration such that the
 Macaulay duration of
the portfolio is equal
to 10 years

The minimum
1 investment in floating A debt scheme predominantly investing in floating rate
Floater Fund
6 rate instruments – instruments
65% of total assets
 Investment in equity & equity related A hybrid mutual fund
Conservative instruments – between 10% and 25% of total investing
1
Hybrid Funds assets; Investment in Debt instruments – predominantly in debt
between 75% and 90% of total assets instruments

Equity & Equity related instruments – between 50-50 balanced

Balanced Hybrid 40% and 60% of total assets; Debt instruments scheme investing in
2A
Funds@ – between 40% and 60% of total assets. No equity and debt
Arbitrage would be permitted in this scheme instruments

A hybrid scheme
Equity & Equity related instruments – between
investing
Aggressive Hybrid 65% and 80% of total assets; Debt instruments
2B predominantly in
Funds – between 20% – 35% of total assets. Most of
equity and equity-
the balanced funds will fall into this category.
related instruments

Dynamic Asset
A hybrid mutual fund
Allocation Investment in equity/ debt that is managed
which will change its
3 Funds or dynamically. All famous balanced advantage or
equity exposure based
Balanced dynamic funds will fall into this category.
on market conditions
Advantage

Invests in at least three asset classes with a

A scheme investing in
Multi-Asset minimum allocation of at least 10% each in all
4 3 different asset
Allocation Funds three asset classes. Foreign investment will be
classes.
considered as a separate asset class.

Scheme following arbitrage strategy. The

A scheme investing in
5 Arbitrage Funds minimum investment in equity & equity related
arbitrage opportunities
instruments – 65% of total assets

The minimum investment in equity & equity

A scheme investing in
6 Equity Savings related instruments – 65% of total assets and
equity, arbitrage, and
minimum investment in debt – 10% of total
 assets. Minimum hedged & unhedged to be debt
stated in the SID. Asset Allocation under
defensive considerations may also be stated in
the Offer Document

Hybrid Schemes

SEBI has decided a total of 7 categories under Hybrid Schemes but a mutual fund company can only
have 6 categories and they have to choose between Balanced Hybrid Fund or Aggressive Hybrid
Fund. Also, Finally, SEBI has made Arbitrage Fund under the Hybrid Fund category.

@Mutual Funds will be permitted to offer either an Aggressive Hybrid fund or Balanced fund

Solution-Oriented Schemes

Scheme having a lock-in for at least 5 A retirement solution-oriented scheme having a

Retirement
years or till retirement age whichever is lock-in of 5 years or till retirement age
Fund
earlier (whichever is earlier)

Scheme having a lock-in for at least 5
Children’s
years or till the child attains the age of
Fund
majority whichever is earlier
A fund for investment for children having a lock-
in for at least 5 years or till the child attains the
age of majority (whichever is earlier)

Other Schemes

The minimum investment in securities

A mutual fund
of a particular index (which is being
1 Index Funds/ ETFs replicating/ tracking any
replicated/ tracked) – 95% of total
index
assets

A fund of fund is a
Minimum investment in the underlying
2 FoF’s (Overseas/Domestic) mutual fund that invests
fund – 95% of total assets
in other mutual funds
 ➢ GENERALIZATION:At this point, the students should have learned about thefactors you need
to consider before choosing a fund to invest in Market Classroom, Market Calendar, Stock
Price Quotes Investments can also be diversified into different mutual fund Diversification
relies on the fact that non-performance of a few investment products can be obtained.

➢ ACITIVITY/EVALUATION:(use yellow pad)

Based onthe maturity period for about 2 to 3 sentences discuss briefly the comparison
between the closed-ended fund, open-ended fund, Interval fund.

➢ REINFORCEMENT:
Direction:Write your answer on the yellow sheet of paper.
For about 2 sentences discuss the three (3) types of investor
1. Pre-Investor
2. Passive Investor
3. Active Investor

➢ REFERENCES:
https://www.slideshare.net/indraja93/types-of-mutual-funds-70013328( advance reading,
assignment)
https://en.wikipedia.org/wiki/List_of_business_and_finance_abbreviations (list of finance
abbreviation)