Investment policy
How a scheme will achieve its investment objective, disclosed in the SID through exactly two aspects: its asset allocation and its investment style.
In plain language
Every scheme starts with an investment objective — what it wants to achieve. The investment policy is the next step: how it will get there.
The workbook is precise. Once the investment objective is finalised, the scheme's investment policy is arrived at. And the scheme's investment policy would disclose two aspects — asset allocation and investment style.
The objective tells the investor where the scheme wants to go. The policy tells them which road it will take.
How it works
Asset allocation follows from the objective. A scheme whose objective is liquidity invests in money market instruments or very short-term debt; one aiming at long-term capital appreciation invests in equity shares. The allocation is disclosed in the Scheme Information Document, and the KIM repeats the asset allocation pattern.
Investment style is the choice within the same asset class. The workbook gives two kinds: growth style or value style, and different levels of portfolio concentration — a focused fund or a diversified fund.
The policy then binds the AMC in several places:
- AMFI Code of Ethics 3.1 — members must disseminate simple, accurate information about investment objectives, investment policies, financial position and general affairs.
- AMFI Code of Ethics 5.1 — members must manage schemes in accordance with the fundamental investment objectives and investment policies stated in the SID.
- The Code defines fundamental investment policies as the objectives, policies and terms that are fundamental attributes of the scheme, on the basis of which unit-holders invested. Changing a fundamental attribute needs an addendum, an exit option of not less than 30 days and a public notice.
- A scheme's benchmark must align with its investment objective, asset allocation pattern and investment strategy.
A worked example
Two equity schemes carry the same one-line objective: long-term capital appreciation from a portfolio predominantly of equity. Their investment policies are what separate them.
| Scheme A — Value Fund | Scheme B — Focused Fund | |
|---|---|---|
| Asset allocation | Minimum 80% equity | Minimum 80% equity |
| Style | Value investment strategy | Concentration: maximum 30 stocks |
Neha puts Rs 2,00,000 into each. After a year Scheme A is up 9 percent (Rs 18,000) and Scheme B 16 percent (Rs 32,000) — figures illustrative. Nothing about the objectives explains the gap; the policies do. Scheme B took concentrated positions; Scheme A bought what it considered cheap.
Style also keeps one fund house's schemes apart. Chapter 2 caps the portfolio overlap between a value fund and a contra fund at 50 percent where both are offered — though the next sentence of the same workbook passage says a mutual fund may offer either a value fund or a contra fund. Learn both statements; the 50 percent overlap cap is the number most likely to be asked.
Why NISM asks about it
Chapter 2.1.3 (Investment Policy of Mutual Funds) defines it, directly after 2.1.2 on investment objectives — and a question asking which two aspects the investment policy discloses (asset allocation and investment style) is the natural test. Chapter 5 puts the asset allocation pattern in the KIM, Chapter 7 requires the benchmark to fit it, and Chapter 10's AMFI Code of Ethics requires schemes to be managed in line with the policies stated in the SID.
Common exam traps
- Objective is what; policy is how. A question swapping them is testing exactly this.
- The policy discloses two aspects only — asset allocation and investment style.
- Concentration (focused versus diversified) counts as style, alongside growth versus value.
- The asset allocation is disclosed in the SID, and summarised in the KIM.
- Investors cannot influence the policy after investing — the lack of portfolio customisation is listed as a limitation of mutual funds.
Where this is taught
- Series V-A · Chapter 2: Concept & Role of a Mutual Fundintroduced here
- Series V-D · Chapter 2: Concept & Role of a Mutual Fundintroduced here
- Series V-B · Chapter 2: Concept and Role of a mutual fundintroduced here
Related terms
- Key Information MemorandumThe short summary of the SID and SAI that SEBI requires to accompany every mutual fund application form — the one scheme document an investor is guaranteed to be handed.
- Scheme Information DocumentThe offer document setting out everything about a particular scheme that a prospective investor ought to know before investing — prepared in SEBI's format, vetted but not approved by SEBI.
- Asset allocationThe decision on how to distribute a client's wealth across asset classes — the first decision in building a portfolio, and the one that explains most of what the portfolio then does.
- AMFI Code of EthicsAMFI's code of good practice for AMCs and trustees, drawn up to supplement the SEBI code of conduct in the Fourth Schedule and set more explicit standards, from integrity to enforcement.
- BenchmarkThe independently published index a scheme's performance is measured against, chosen to match its investment objective, asset allocation and strategy, and disclosed in the Scheme Information Document.
- Fundamental attributesThe core features of a scheme — its investment objectives, policies and terms — on which investors relied when they invested. Changing them requires notice to every unit-holder and a no-load exit at NAV.
- Investment ObjectivesAn investor's goals expressed in terms of risk, return and liquidity preferences — such as capital preservation, capital appreciation, current income or tax saving.