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
