MUTUAL FUND – SCHEMES & RATIOS
SOURCE: SEBI
WHAT IS MUTUAL FUND?
A mutual fund is a professionally-managed investment scheme, made up of a pool of money collected from many investors to invest in securities like stocks, bonds, money market instruments, and other assets. Mutual funds are operated by professional money managers, who allocate the fund’s assets and attempt to produce capital gains or income for the fund’s investors. A mutual fund’s portfolio is structured and maintained to match the investment objectives stated in its prospectus.
DIFFERENT TYPES OF MUTUAL FUND SCHEMES
EQUITY SCHEMES
| S.NO. | CATEGORY | SCHEME CHARACTERISTICS/MINIMUM CONDITIONS |
| 1 | Multi-Cap Fund | Invest across large-cap, mid-cap, small-cap stocks Min. equity component – 65% |
| 2 | Large Cap Fund | Predominantly invest in large-cap stocks Min. equity component – 80% |
| 3 | Large and Mid-Cap Fund | Invest in both large-cap and mid-cap stocks Min. equity component (large-cap stocks) – 35% Min. equity component (mid-cap stocks) – 35% |
| 4 | Mid Cap Fund | Predominantly invest in mid-cap stocks Min. equity component (mid-cap stocks) – 65% |
| 5 | Small Cap Fund | Predominantly invest in small-cap stocks Min. equity component (small-cap stocks) – 65% |
| 6 | Dividend Yield Fund | Predominantly invest in dividend-yielding stocks Min. equity component – 65% |
| 7 | Value Fund | The scheme should follow a value investment strategy Min. equity component – 65% |
| 8 | Contra Fund | The scheme should follow a contrarian investment strategy. Min. equity component – 65% |
| 9 | Focused Fund | Maximum 30 stocks Min. equity component – 65%AMC to mention where the scheme intends to focus, viz., (multi-cap, large-cap, mid-cap, small-cap) |
| 10 | Sectoral/Thematic Fund | AMC to clearly mention the sector/theme that the scheme shall focus on Min. equity component (for stocks belonging to that sector/theme) – 80% |
| 11 | Equity Linked Savings Schemes (ELSS) | The statutory lock-in period of 3 years Min. equity component – 80% (per Equity Linked Saving Scheme, 2005, as notified by the Ministry of Finance) |
DEBT SCHEMES
| S.NO. | CATEGORY | SCHEME CHARACTERISTICS/MINIMUM CONDITIONS |
| 1 | Overnight Fund | Invest in overnight securities – Maturity of 1 day |
| 2 | Liquid Fund | Invest in debt and money market instruments – Maturity of up to 91 days |
| 3 | Ultra-short Duration Fund | Invest in Debt & Money Market instruments – Macaulay duration of the portfolio to be between 3 – 6 months |
| 4 | Low Duration Fund | Invest in Debt & Money Market instruments – Macaulay duration of the portfolio to be between 6 – 12 months |
| 5 | Money Market Fund | Invest in Money Market instruments – Maturity up to 1 year |
| 6 | Short Duration Fund | Invest in Debt & Money Market instruments – Macaulay duration of the portfolio to be between 1-3 years |
| 7 | Medium Duration Fund | Invest in Debt & Money Market instruments – Macaulay duration of the portfolio to be between 3 – 4 years |
| 8 | Medium to Long Duration Fund | Invest in Debt & Money Market instruments – Macaulay duration of the portfolio to be between 4-7 years |
| 9 | Long Duration Fund | Invest in Debt & Money Market instruments – Macaulay duration of the portfolio to be more than 7 years |
| 10 | Dynamic Bond | Investment across duration |
| 11 | Corporate Bond Fund | Minimum 80% investment in corporate bonds (only in highest rated instruments |
| 12 | Credit Risk Fund | Minimum 65% investment in corporate bonds (below highest rated instruments) |
| 13 | Banking and PSU Fund | Minimum 80% investment in Debt instruments of banks, Public Sector Undertakings, Public Financial Institutions |
| 14 | Gilt Fund | Minimum 80% investment in Government Securities (across maturity) |
| 15 | Gilt Fund with 10-year constant duration | Minimum 80% investment in Government Securities (so that the Macaulay duration of the portfolio is equal to 10 years) |
HYBRID SCHEMES
| S.NO. | CATEGORY | SCHEME CHARACTERISTICS/MINIMUM CONDITIONS |
| 1 | Conservative Hybrid Fund | Minimum equity component – Between 10% and 25% Minimum debt component – Between 75% and 90% |
| 2 | Balanced Hybrid Fund | Minimum equity component – Between 40% and 60% Minimum debt component – Between 40% and 60% The AMC cannot do any arbitrage in this scheme |
| 3 | Aggressive Hybrid Fund | Minimum equity component – Between 65% and 80% Minimum debt component – Between 20% and 35% |
| 4 | Dynamic Asset Allocation (or Balanced Advantage) | Invest in equity or debt – AMC to manage it dynamically |
| 5 | Multi-Asset Allocation | Invests in at least three asset classes with a minimum allocation of at least 10% each in all three asset classes Note: AMC cannot offer foreign securities as a foreign asset class |
| 6 | Arbitrage Fund | The scheme should follow an arbitrage strategy. Minimum equity component – 65% |
| 7 | Equity Savings | Minimum equity component – 65% Minimum debt component – 10% AMC to state minimum hedged & unhedged in the Scheme Information Document (SID) AMC to state Asset Allocation under defensive considerations in the Offer Document |
SOLUTION ORIENTED SCHEMES
| S.NO. | CATEGORY | SCHEME CHARACTERISTICS/MINIMUM CONDITIONS |
| 1 | Retirement Fund | Lock-in: At least 5 years or till retirement age, whichever is earlier |
| 2 | Children’s Fund | Lock-in: At least 5 years or till the child attains the age of majority, whichever is earlier |
OTHER SCHEMES
| S.NO. | CATEGORY | SCHEME CHARACTERISTICS/MINIMUM CONDITIONS |
| 1 | Index Funds/ Exchange Traded Funds | Minimum 95% investment in securities of a particular index (which is being replicated/ tracked) AMC to mention the name of the index |
| 2 | Fund of Funds (Overseas/ Domestic) | Minimum 95% investment in the underlying fund AMC to mention the name of the underlying fund |
KEY MUTUAL FUND RATIO
1. Standard Deviation:
Standard Deviation value gives an idea about how volatile fund returns has been in the past 3 years. Lower value indicates more predictable performance.
So, if you are comparing 2 funds (let’s say Fund A and Fund B) in the same category. If Fund A and Fund B has given 9% returns in last 3 years, but Fund A standard deviation value is lower than Fund B. So, you can say that there is a higher chance that Fund A will continue giving similar returns in future also whereas Fund B returns may vary.
2. Beta
Beta value gives idea about how volatile fund performance has been compared to similar funds in the market. Lower beta implies the fund gives more predictable performance compared to similar funds in the market.
So, if you are comparing 2 funds (let’s say Fund A and Fund B) in the same category. If Fund A and Fund B has given 9% returns in last 3 years, but Fund A beta value is lower than Fund B. So, you can say that there is a higher chance that Fund A will continue giving similar returns in future also whereas Fund B returns may vary.
3. Sharpe Ratio
Sharpe ratio indicates how much risk was taken to generate the returns. Higher the value means, fund has been able to give better returns for the amount of risk taken. It is calculated by subtracting the risk-free return, defined as an Indian Government Bond, from the fund’s returns, and then dividing by the standard deviation of returns.
For example, if fund A and fund B both have 3-year returns of 15%, and fund A has a Sharpe ratio of 1.40 and fund B has a Sharpe ratio of 1.25, you can choose fund A, as it has given higher risk-adjusted return.
4. Treynor’s Ratio
Treynor’s ratio indicates how much excess return was generated for each unit of risk taken. Higher the value means, fund has been able to give better returns for the amount of risk taken. It is calculated by subtracting the risk-free return, defined as an Indian Government Bond, from the fund’s returns, and then dividing by the beta of returns.
For example, if fund A and fund B both have 3-year returns of 15%, and fund A has a Treynor’s ratio of 1.40 and fund B has a Treynor’s ratio of 1.25, then you can choose fund A, as it has given higher risk-adjusted return.
5. Jension’s Alpha
Alpha indicates how fund generated additional returns compared to a benchmark.
Let’s say if a fund A benchmarks its returns with Nifty50 returns then alpha equal to 1.0 indicates the fund has beaten the nifty returns by 1%, so the higher the alpha, the better.
6. Sortino Ratio
The Sortino ratio is a variation of the Sharpe ratio that differentiates harmful volatility from total overall volatility by using the asset’s standard deviation of negative portfolio returns—downside deviation—instead of the total standard deviation of portfolio returns. The Sortino ratio takes an asset or portfolio’s return and subtracts the risk-free rate, and then divides that amount by the asset’s downside deviation.
Just like the Sharpe ratio, a higher Sortino ratio result is better. When looking at two similar investments, a rational investor would prefer the one with the higher Sortino ratio because it means that the investment is earning more return per unit of the bad risk that it takes on.
For example, assume Mutual Fund X has an annualized return of 12% and a downside deviation of 10%. Mutual Fund Z has an annualized return of 10% and a downside deviation of 7%. The risk-free rate is 2.5%. The Sortino ratios for both funds would be calculated as:
Mutual Fund X Sortino = (12%−2.5%)/10% = 0.95
Mutual Fund Z Sortino = (10%−2.5%)/7% = 1.07
Even though Mutual Fund X is returning 2% more on an annualized basis, it is not earning that return as efficiently as Mutual Fund Z, given their downside deviations. Based on this metric, Mutual Fund Z is the better investment choice.
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