What’s in a name? “A rose by any other name would smell as sweet,” is a famous quote attributed to Shakespeare. However, in the mutual fund world, names matter a great deal. Some of these names are in fact misnomers and have been around for historical reasons. A common example is ‘Monthly Income Plans.’ These are debt oriented hybrid schemes that do not guarantee or even attempt to provide income on a monthly basis.
As part of its drive to regulate fund classification and categories, markets regulator Securities Exchange Board of India (SEBI) has asked funds to remove names such as these.
‘Focussed’ and ‘Prudence’ no more
A Moneycontrol report notes that SEBI has taken issue with words such as ‘prudence’ in fund names. It wants ‘prudence’ and ‘balanced’ to be dropped from the names of funds with a 65% exposure to equity. In case of words like ‘focussed’, the regulator has asked funds to only name one of their schemes with this word. This has caused discomfiture among some funds who have had words such as these in their names for a long time.
Technical terms and their real meanings
Monthly Income Plans: These are funds which invest about 80% of their corpus in debt and the balance in equity. They do not guarantee or attempt to provide you with monthly income.
Balanced Funds: These usually invest 65% of their corpus in equities to be classified as equity funds for tax purposes. So they are not in effect ‘balanced.’
Balanced Advantage Funds: These funds invest 65% of their corpus in equities but use derivatives to effectively reduce this to 30-60%. When a fund uses derivatives such as futures to take short positions on equities while holding the underlying stocks, it ‘cancels’ out the equity exposure and converts that exposure to debt-like returns. These funds are more ‘balanced’ than ‘balanced funds.’
Dynamic Asset Allocation Funds: These funds move between equity, debt and alternative assets such as gold either using a predetermined formula or fund manager decisions or both. They typically take valuations of different assets into account while moving between them.
You can get more information on fund types and what these funds really are, here.
The RupeeIQ Take
This is a welcome move by the regulator in an industry where investors are susceptible to being led astray by marketing glitz and hype. It will also serve to reduce some of the complexity and confusion associated with mutual fund investing.