This blog will explain you how categorized Hybrid Funds, Solution Oriented funds etc..
Here we going to continue blog of "CATEGORIZATION OF MUTUAL FUND SCHEMES Part-2"
HYBRID FUNDS
CATEGORIZATION OF MUTUAL FUND SCHEMES
Hybrid funds Invest in a mix of equities and debt securities.
SEBI has classified Hybrid funds into 7 sub-categories as follows:
Conservative Hybrid Fund | 10% to 25% investment in equity & equity related instruments; and 75% to 90% in Debt instruments |
Balanced Hybrid Fund | 40% to 60% investment in equity & equity related instruments; and 40% to 60% in Debt instruments |
Aggressive Hybrid Fund | 65% to 80% investment in equity & equity related instruments; and 20% to 35% in Debt instruments |
Dynamic Asset Allocation or Balanced Advantage Fund | Investment in equity/ debt that is managed dynamically (0% to 100% in equity & equity related instruments; and 0% to 100% in Debt instruments) |
Multi Asset Allocation Fund | Investment in at least 3 asset classes with a minimum allocation of at least 10% in each asset class |
Arbitrage Fund | Scheme following arbitrage strategy, with minimum 65% investment in equity & equity related instruments |
Equity Savings | Equity and equity related instruments (min.65%); debt instruments (min.10%) and derivatives (min. for hedging to be specified in the SID) |
Solution-oriented & Other funds
Retirement Fund | Lock-in for at least 5 years or till retirement age whichever is earlier |
Children’s Fund | Lock-in for at least 5 years or till the child attains age of majority whichever is earlier |
Index Funds/ ETFs | Minimum 95% investment in securities of a particular index |
Fund of Funds (Overseas/ Domestic) | Minimum 95% investment in the underlying fund(s) |
Hybrid funds
Invest in a mix of equities and debt securities. They seek to find a ‘balance’ between growth and income by investing in both equity and debt.
– The regular income earned from the debt instruments provide greater stability to the
returns from such funds.
– The proportion of equity and debt that will be held in the portfolio is indicated in the
Scheme Information Document
– Equity oriented hybrid funds (Aggressive Hybrid Funds) are ideal for investors looking
for growth in their investment with some stability.
– Debt-oriented hybrid funds (Conservative Hybrid Fund) are suitable for conservative
investors looking for a boost in returns with a small exposure to equity.
– The risk and return of the fund will depend upon the equity exposure taken by the
portfolio - Higher the allocation to equity, greater is the risk
Multi Asset Funds
A multi-asset fund offers exposure to a broad number of asset classes, often offering a level of diversification typically associated with institutional investing.
Multi-asset funds may invest in a number of traditional equity and fixed income strategies, index-tracking funds, financial derivatives as well as commodity like gold.
This diversity allows portfolio managers to potentially balance risk with reward and deliver steady, long-term returns for investors, particularly in volatile markets.
Arbitrage Funds
“Arbitrage” is the simultaneous purchase and sale of an asset to take advantage of the price differential in the two markets and profit from price difference of the asset on different markets or in different forms.
– Arbitrage fund buys a stock in the cash market and simultaneously sells it in the
Futures market at a higher price to generate returns from the difference in the price of the security in the two markets.
– The fund takes equal but opposite positions in both the markets, thereby locking in
the difference.
– The positions have to be held until expiry of the derivative cycle and both positions
need to be closed at the same price to realize the difference.
– The cash market price converges with the Futures market price at the end of the
contract period. Thus it delivers risk-free profit for the investor/trader.
– Price movements do not affect initial price differential because the profit in one
market is set-off by the loss in the other market.
– Since mutual funds invest own funds, the difference is fully the return.
Hence, Arbitrage funds are considered to be a good choice for cautious investors who want to benefit from a volatile market without taking on too much risk.
Index Funds
Index funds create a portfolio that mirrors a market index.
– The securities included in the portfolio and their weights are the same as that in the
index
– The fund manager does not rebalance the portfolio based on their view of the market
or sector
– Index funds are passively managed, which means that the fund manager makes only
minor, periodic adjustments to keep the fund in line with its index. Hence, Index fund
offers the same return and risk represented by the index it tracks.
– The fees that an index fund can charge is capped at 1.5%
Investors have the comfort of knowing the stocks that will form part of the portfolio, since the composition of the index is known.
Exchange Traded Funds (ETFs)
An ETF is a marketable security that tracks an index, a commodity, bonds, or a basket of assets like an index fund.
ETFs are listed on stock exchanges.
Unlike regular mutual funds, an ETF trades like a common stock on a stock exchange. The traded price of an ETF changes throughout the day like any other stock, as it is bought and sold on the stock exchange.
ETF Units are compulsorily held in Demat mode
ETFs are passively managed, which means that the fund manager makes only minor, periodic adjustments to keep the fund in line with its index
Because an ETF tracks an index without trying to outperform it, it incurs lower administrative costs than actively managed portfolios.
Rather than investing in an ‘active’ fund managed by a fund manager, when one buy units of an ETF one is harnessing the power of the market itself.
Suitable for investors seeking returns similar to index and liquidity similar to stocks
Fund of Funds (FoF)
Fund of funds are mutual fund schemes that invest in the units of other schemes of the same mutual fund or other mutual funds.
The schemes selected for investment will be based on the investment objective of the FoF
The FoF have two levels of expenses: that of the scheme whose units the FoF invests in and the expense of the FoF itself. Regulations limit the total expenses that can be charged across both levels as follows:
– TER in respect of FoF investing liquid schemes, index funds & ETFs has been capped @ 1% – TER of FoF investing in equity-oriented schemes has been capped @ 2.25% – TER of FoF investing in other schemes than mentioned above has been capped @2%.
Gold Exchange Traded Funds (FoF)
Gold ETFs are ETFs with gold as the underlying asset– The scheme will issue units against gold held. Each unit will represent a defined weight in gold, typically one gram. – The scheme will hold gold in form of physical gold or gold related instruments approved by SEBI. – Schemes can invest up to 20% of net assets in Gold Deposit Scheme of banks
The price of ETF units moves in line with the price of gold on metal exchange.
After the NFO, units are issued to intermediaries called authorized participants against gold or funds submitted. They can also redeem the units for the underlying gold
Benefits of Gold ETFs
Convenience --> option of holding gold electronically instead of physical gold.
– Safer option to hold gold since there are no risks of theft or purity. – Provides easy liquidity and ease of transaction.
Gold ETFs are treated as non-equity oriented mutual funds for the purpose of taxation.
– Eligible for long-term capital gains benefits if held for three years. – No wealth tax is applicable on Gold ETFs
International Funds
International funds enable investments in markets outside India, by holding in their portfolio one or more of the following:
– Equity of companies listed abroad.
– ADRs and GDRs of Indian companies.
– Debt of companies listed abroad.
– ETFs of other countries.
– Units of passive index funds in other countries.
– Units of actively managed mutual funds in other countries.
International equity funds may also hold some of their portfolios in Indian equity or debt.
– They can hold some portion of the portfolio in money market instruments to manage liquidity.
International funds gives the investor additional benefits of
– Diversification, since global markets may have a low correlation with domestic markets.
– Investment options that may not be available domestically.
– Access to companies that are global leaders in their field.
There are risks associated with investing in such funds, such as –
– Political events and macro economic factors that are less familiar and therefore difficult to interpret
– Movements in foreign exchange rate may affect the return on redemption
– Countries may change their investment policy towards global investors.
For the purpose of taxation, these funds are considered as non-equity oriented mutual fund schemes.
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