What are Mutual Funds : Their Types and Recent Policy Changes

Mutual Funds

Mutual fund is an amalgamation of funds from various small and big investors. It is a pool of money that gets invested into stocks and bonds as per the nature of the fund. The investor gets a percentage part as per his investment and receives units of such fund. Like stocks every fund has its own price per unit. In stocks the increase or decrease in value of share is decided by stock price. While in mutual funds such price is known as NAV (Net asset Value). Also when NAV is multiplied by no. of units held it gives the amount of investment. Based on such calculations one can determine the increase or decrease in investment value. NAV date determination method has been updated by SEBI in the recent circular for New changes in mutual fund policy.

Why People Invest in Mutual Funds ?

Mutual funds are risky as well because their investment is majorly in equities only (Based on the nature of funds). But people prefer mutual funds because it is an amalgamation of various stocks of companies. In simple words, by investing 5000 Rs. in a mutual fund a person can hold shares of Reliance, TCS, Wipro, HUL etc. all together as every unit of mutual fund comprises such shares in appropriate percentage . This is the most prominent feature of a mutual fund.

Example :- If I invest 400 RS. in a fund that has net capitalization of 4 crore Rs. and owns 25% stakes in Reliance, TCS, Infosys and HUL each. My ownership would be 0.0001% stake per company. Hence I will be owning all the shares in the appropriate percentage of my investment.

Another reason is diversification of risk. Due to large amounts of funding and multiple ownership across various sectors diversification of risk is possible which avoids the chances of big losses. Also it is a liquidated market now on a daily basis with the onset of online availability of placing orders to buy them. Some Famous platforms for buying mutual funds are Zerodha Coin, Groww, Upstox Pro, etc.

Types of Mutual Funds

  1. Money market funds – Invests in financial tools related to short term debt.
  2. Hybrid funds (MIP) – They have equity and debt investments in their funds. As compared to equity, debt holds more proportion in it.
  3. Balanced funds – Similar as hybrid funds but the investment in equity and debt is more or less balanced.
  4. Equity funds – Invests in the stock market or equity market.
  5. Fixed income funds – Invests in debt instruments with fixed interest rates like bonds or government securities.
  6. Gilt funds – Invests only in government bonds and securities

Changes in Mutual Fund Rules

There have been changes in five elements in the new rule list given by SEBI. They are :-

  • Riskometer tool
  • Portfolio allotment for multi cap funds
  • NAV calculations
  • Inter scheme security transfer
  • Renaming of dividend

Riskometer Tool

Till now the fund houses had a simple and easy process for addressing risk to various schemes. All the schemes were given risk based on the category level and not individual risk. Also debt and equity categories were given risk reading on basis of the category they fall into. But as per the facts the risk in individuals of any schemes in any category individually is different and this was not addressed before. As per the new circular of SEBI all fund houses are required to give risk reading on basis of individual assessment and not categorically.

From Jan 1 such law is applicable and fund houses will give updates on risk percentage to their fund holders.

Portfolio Allotment for Multi Cap Funds

There was a change in portfolio allocation previously in this year. It was made mandatory to increase the investment in equity upto 75% from 66%. All the fund houses were required to follow this rule. Within this rule the condition was to invest a minimum 25% of portion each in large cap, small cap and mid cap funds. Such changes were supposed to be made in all funds and the only exception was the multi cap fund category. Multi cap funds had no such provision imposed on them before. Now the regulator has given a time period of one month i.e. till 31st Jan to comply with the rules.

This classification created a lot of problems for fund houses. Hence they asked SEBI for some alternative. SEBI launched a new fund type called Flexi cap fund where the investment in equity would be limited to 65%. This would give relief to fund houses who are not able to comply with the new rules and hence give them the right to stay afloat without any change in their portfolios.

Nav Calculation

The NAV calculation technique has changed from before. NAV means net asset value. It determines a very important role in knowing the return from the invested amount.

In the new rule NAV of purchase day will be applied given the amount reach to the AMC. i.e. As per the rule teh day when money reaches the AMC that day’s NAV will be considered for the invested amount. This rule is compulsory irrespective of the amount of investment.

Previously such rule was applicable upto the amount of Rs. 2 lakh of investment and even if money doesn’t reach the company’s funds were given on running NAV (which is stopped from now).

Only exceptions to such rule are Overnight funds and Liquid Funds.

Inter-Scheme Security Transfer

From 1 Jan the IST are compulsory to be done in 3 business days. Previously the only rule was such transactions be in accordance with investment value but now the time frame for such transfer is set. Also no transfer will be allowed if there is any negative market sentiment going on or the fund’s risk has generated an alert in the last 4 months.

Renaming of Dividend

All the dividend funds will be renamed as income distribution / capital withdrawal option from April 1, 2021.

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