Financial Awareness Level
How Do Mutual Funds Invest In Equities?
Mutual funds schemes invest in equities via primary or secondary markets, with the help of experienced fund managers supported by a team of research analysts, risk management professionals, and traders. The investment process includes several important activities, such as finding the right stocks, buying and selling at the right time, rebalancing portfolios, and managing risk etc.
Investment in Listed Shares
Mutual funds are allowed to invest only in listed shares, which are equity instruments (also called stocks or shares) traded on a recognized stock exchange. As per the Securities and Exchange Board of India (SEBI), mutual funds can no longer invest in unlisted equities.
Initial Public Offers (IPOs)
Mutual funds can also invest in equities through IPOs.
Regulatory Restrictions
Mutual funds have several investment restrictions and compliance requirements while investing in equities, as per various SEBI circulars.
Some of the key investment restrictions include:
- Investment in shares should align with the fund's investment objectives. For example, large-cap funds should predominantly invest in large-cap shares. These are the top 100 shares by market capitalization.
- Transactions should be made through recognized stock exchanges.
- No mutual fund scheme shall invest more than 10 per cent of its NAV in the equity shares or equity related instruments of any company. As an example, if the total value of the portfolio is Rs. 100 crores, the maximum that can be invested in a share “X” is Rs. 10 crores.
- Mutual funds should follow SEBI provisions on scheme categorization and rationalization. For example, large-cap funds need to invest at least 80% of the portfolio value in large-cap companies, and Multi-cap funds need to invest at least 25% each in large, mid, and small-cap companies.
However, for further details, please refer to the Scheme Information Documents and SEBI Mutual Funds Regulations.
International Equities
Mutual funds can also invest in international equities through international feeder funds, fund of funds, or ETFs. However, they need to comply with the overall and fund-wise limits prescribed by SEBI/RBI for investing in international equities.
Mutual fund schemes need to adhere to SEBI regulations and have an experienced investment team that follows ethical investing practices and includes asset allocation, research, portfolio optimization, and risk management.
The information contained in this document is for general purposes only and not an investment advice. Readers should seek professional advice before taking any investment related decisions.
MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY
FAQ Section
How do mutual funds invest in equities?
Mutual funds invest in equities through the primary or secondary markets. They have experienced fund managers who are supported by a team of research analysts, risk management professionals, and traders. The investment process includes finding the right stocks, buying and selling at the right time, rebalancing portfolios, and managing risk.
What types of equities can mutual funds invest in?
Mutual funds can invest only in listed shares, which are equity instruments traded on a recognized stock exchange. As per the SEBI regulations, mutual funds can no longer invest in unlisted equities.
Can mutual funds invest in Initial Public Offers (IPOs)?
Yes, mutual funds can invest in equities through IPOs, where companies reserve a portion of their shares for mutual funds during the IPO process. However, the number of shares allotted per fund is not guaranteed and depends on the level of oversubscription.
What are the regulatory restrictions for mutual funds investing in equities?
Mutual funds have several investment restrictions and compliance requirements while investing in equities, as per various SEBI circular. Some of the key restrictions include aligning the investment in shares with the fund's investment objectives, transactions being made through recognized stock exchanges, no single share can make up over 10% of the portfolio value, and complying with SEBI provisions on scheme categorization and rationalization of Schemes.
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Disclaimer
An Investor Education And Awareness Initiative Visit https://www.hdfcfund.com/information/key-know-how to know more about the process to complete a one-time Know Your Customer (KYC) requirement to invest in Mutual Funds. Investors should only deal with registered Mutual Funds, details of which can be verified on the SEBI website (www.sebi.gov.in/intermediaries.html). For any queries, complaints & grievance redressal, investors may reach out to the AMCs and / or Investor Relations Officers. Additionally, investors may also lodge complaints directly with the AMCs. if they are not satisfied with the resolutions given by AMCs, they may raise complaint through the SCORES portal on https://scores.gov.in. SCORES portal facilitates investors to lodge complaint online with SEBI and subsequently view its status. In case the investor is not satisfied with the resolution of the complaints raised directly with the AMCs or through the SCORES portal, they may file any complaint on the Smart ODR on https://smartodr.in/login.
