Investment Orientation of Mutual Fund Schemes

Mutual funds invest in three broad categories of financial assets:

Stocks: Equity and equity-related instruments.
Bonds: Debt instruments that have maturity of more than one year (treasury bonds, quasi-government bonds, corporate debentures and asset based securities)
Cash: Debt instruments have a maturity of less than one year (treasury bills, commercial paper certificates of deposit, reverse repos, and call money) and bank deposits.

Depending on the asset-mix mutual fund schemes are classified into three broad categories: equity schemes, hybrid schemes and debt schemes. Within each of these broad categories, there are several variants.

Equity Schemes:

Equity schemes invest the bulk of their corpus – 85 percent to 95 percent or even more in equity shares or equity linked instruments and the balance in cash. Equity schemes offered by mutual funds in India may be classified broadly into the following sub-types:
(1) diversified equity schemes, (2) index schemes, (3) sectoral schemes , and (4) tax planning schemes.

Diversified Equity Schemes: As the name suggests these schemes invest in a broadly diversified portfolio of equity stocks. Typically such schemes have 20 to 50 or even more equity stocks from a wide range of industries. Examples of such schemes are HDFC Equity schemes and UTI Master share scheme.

Index Schemes: An index scheme is an equity scheme that invest its corpus in a basket of equity stocks that comprise a given stock market index such as the S&P Nifty index or the Sensex, with each stock being assigned a weightage equal to what it has in the index. Thus an index scheme appreciates or depreciates (subject to tracking error) the same way as the index. The principal objective of an index scheme is to give a return in line with the index. Example of such index schemes UTI master Index and Franklin India NSE Nifty.
Sectoral Schemes: A sectoral scheme invests its corpus in the equity stocks of a given sector such as pharmaceuticals information technology, tele-communications, power, and so on. These schemes appeal to investors interested in taking a bet on specific sectors. Examples of such schemes are UTI Petro and Franklin Infotech.

Tax planning Schemes: Tax planning schemes or equity linked savings schemes (ELSS) are open to only individuals and HUFs. Subject to such conditions and limitations as prescribed under Section 80 C of the incomes Tax Act, subscriptions to such scheme can be deducted before computing the taxable income. Franklin India Tax shield and HDFC Tax Plan 2000 are examples of such schemes.

Hybrid Schemes:

Hybrid schemes, also referred to as balanced schemes, invest in a mix of equity and debt instruments. A hybrid scheme may be equity oriented or debt-oriented or have a variable asset allocation.

Equity oriented Schemes: An equity oriented hybrid scheme is tilted in favor of equities which may account for about 60 percent of the portfolio, the balance being invested in debt instruments (Bonds and cash). Examples of equity oriented schemes are HDFC prudence and Unit Scheme 95.

Debt oriented Schemes: A debt oriented hybrid scheme is tilted in favor of debt instruments. The most popular debt oriented schemes in India are Monthly Income Plans which typically have a debt component of 85-90 percent (dominated by bonds) and an equity components of 10-15 percent. Examples of such schemes are Birla MIP and FT India MIP.

Debt Schemes: Debt schemes invest in debt instruments viz., bonds and cash. The wide range of debt schemes currently offered by Mutual funds in India may be divided into the following sub-categories: gilt schemes, mixed debt schemes floating rate schemes cash schemes (money market schemes).

Floating Rate Debt Schemes: Floating the debt scheme invests in a portfolio comprising substantially of floating rate debt bonds fixed bonds swapped for floating the returns and cash. Examples of floating rate debt schemes are Grindlays Floating rate Scheme and prudential ICICI Floating Rte Scheme.

  • I am really appericiate your post, this would really provide the great information .Thanks for sharing