A mutual fund is a professionally managed company that collects money from many investors and invests it in securities such as stocks, bonds and short-term debt, equity or bond funds and money market funds.
Mutual funds are a good investment for investors looking to diversify their portfolio. Instead of betting everything on one company or sector, a mutual fund invests in different stocks to try to minimize portfolio risk.
The term is typically used in the US, Canada and India, while similar structures around the world include the SICAV in Europe and the open-ended investment firm in the UK.
Can a mutual fund change asset allocation while distributing investor funds?
A mutual fund invests in various asset classes, according to the Scheme Information Document (SID). Typical examples of an asset allocation proposal for a schema might be:
- An equity fund can invest 80% to 100% in stocks; 0% to 20% in money market securities.
- A fund’s asset allocation breaks even can look like 65% to 80% in equities; 15% to 35% in debt securities; 0% to 20% in money market securities.
In most cases, allocation to an asset category is mentioned as a range. The fund manager may not change the allocation of assets beyond the limits set out in the CIS, but shall be entitled to change it within the limits indicated. For example, within equity, the allocation between large and mid-cap companies is not mentioned above, which allows the fund manager to maintain a different allocation between large and mid-cap at different times.
If a change needs to be made to the asset allocation of the scheme, the fund management company must take the approval of the fund’s trustees and existing unit-holders. The company must also announce the proposed change in public. All existing investors can exit the scheme for a period of 30 days, without paying exit charges, if any.