NISM: Types of Mutual Funds, Part 3: Hybrid Funds, Index Funds, ETFs and Solution-Oriented Funds
Mutual fund scheme categorization and SEBI regulation
With a view to bringing in standardization in the classification of mutual funds and to ensure the schemes are clearly distinct from one another, SEBI issued a circular on Categorization and Rationalization of Mutual Fund Schemes in 2017.
The objective was to bring uniformity to the characteristics of similar type of schemes launched by different mutual fund houses so that investors could objectively evaluate the schemes chosen for investment.
Accordingly, there are five broad categories of mutual fund schemes. Within each category, there are many sub-categories.(Ref1)
A. EquitySchemes(11sub-categories)
B. Debt Schemes (16 sub-categories)
C. Hybrid Schemes (6 sub-categories)
D. SolutionOrientedSchemes(2sub-categories)
E. Other Schemes (2 sub-categories)
Below we discuss Hybrid Funds, Index Funds, ETFs and solution-oriented Funds
C. Hybrid Schemes
1. Conservative Hybrid Fund: An open-ended hybrid scheme investing predominantly in debt instruments. Investment in debt instruments shall be between 75 percent and 90 percent of total assets while investment in equity and equity instruments shall be between 10 percent and 25 percent of total assets.
2. Balanced Hybrid or Aggressive Hybrid Fund: Mutual funds in India are permitted to offer either Aggressive Hybrid Fund or Balanced Fund.
Balanced Hybrid Fund: An open-ended balanced scheme investing in equity and debt instruments. Investments in equity and equity related instruments shall be between 40 percent and 60 percent of total assets, while investments in debt instruments shall be between 40 percent and 60 percent. No arbitrage is permitted in this scheme.
Aggressive Hybrid Fund: An open-ended hybrid scheme investing predominantly in equity and equity related instruments. Investment in equity and equity related instruments shall be between 65 percent and 80 percent of total assets, while investment in debt instruments shall be between 20 percent and 35 percent of total assets.
3. Dynamic Asset Allocation or Balanced Advantage: It is an open-ended dynamic asset allocation fund with investments in equity/debt that is managed dynamically.
4. Multi Asset Allocation: An open-ended scheme investing in at least three asset classes with a minimum allocation of at least 10 percent each in all three asset classes. Foreign securities are not treated as a separate asset class in this kind of scheme.
5. Arbitrage Fund: An open-ended scheme investing in arbitrage opportunities. The minimum investment in equity and equity related instruments shall be 65 percent of totalassets.
6. Equity Savings: An open-ended scheme investing in equity, arbitrage and debt. The minimum investment in equity and equity related instruments shall be 65 percent of total assets and theminimum investment in a debt shall be 10 percent of total assets. The minimum hedged and unhedged investment needs to be stated in the SID. Asset Allocation under defensive considerations may also be stated in the SID.
D. Solution Oriented Schemes
1. Retirement Fund: An open-ended, solution-oriented retirement scheme with a lock-in period of 5 years or till retirement age (whichever is earlier). This is meant for long term planning related to acquiring a corpus for retirement.
2. Children’s Fund: An open-ended 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). This is meant to build a corpus for the child and their needs in the coming years.
E. Other Schemes
1. Index Funds/Exchange Traded Fund: An open-ended scheme replicating/tracking a specific index. This minimum investment in securities of a particular index (which is being replicated/ tracked) shall be 95 percent of total assets.
2. Fund of Funds (Overseas/Domestic): An open-ended fund of fund scheme investing in an underlying fund. The minimum investment in the underlying fund shall be 95 percent of total assets.
There can be only one scheme per category, except in the following cases:
1. Index funds and ETFs replicating or tracking different indices,
2. Fund of Funds having different underlying schemes, and
3. Sector funds or thematic funds investing in different sectors or themes.