Equity, Debt and Hybrid Schemes: What Each Holds

The contents of the scheme separate these three, and the contents decide how the figure a holder's rupees are divided by moves from one dealing day to the next. The instruction given never changes. Which conditions earn a scheme any of these three names is settled by the Securities and Exchange Board of India (SEBI) and read at source, on sebi.gov.in. Behaviour is compared here, ranking never.

A reader who has already worked through how a purchase turns into units has learned the whole apparatus for all three of these at once. Nothing in the processing is rebuilt for a different kind of scheme. The forms are the same forms, the timing rule is the same timing rule, the rounding of units is the same rounding. The only thing that changes across the three is the number the rupees get divided by, and that number comes out of the cupboard rather than out of the paperwork.

Three questions follow: what sits in each cupboard, what makes the figure per unit move once it does, and what a holder actually meets on the day an instruction is sent. Which conditions a scheme has to satisfy before it may print the word equity or the word debt or the word hybrid on its own cover is covered separately.

One asset manager carries every worked figure below. The Girnar Large Cap Equity Fund, an invented scheme, is an open ended equity schemeA pooled scheme that puts its money into shares, so the figure struck per unit follows whatever those shares are currently fetching., run by the invented Girnar Asset Management Limited. Its net assets stand at Rs 4,200 crore against 120.00 crore units in issue. Divide and one unit stands at Rs 35.00 exactly. The scheme sits across 3,80,000 folios, so the average holding works out at roughly Rs 1,10,526/-, and it carries an expense ratioThe yearly cost of running a scheme, quoted against its net assets rather than billed to anybody. of 1.65 per cent. Kalyani Bhagat manages that portfolio and Sohail Merchant heads operations.

What is already settled elsewhere?

Three things, and none is rebuilt here. First, the value per unitThe scheme's assets after deducting what it owes, shared out across every unit in issue, struck once for a dealing day. as a figure the scheme strikes once for a dealing dayA day on which a scheme strikes one figure per unit and processes the instructions attaching to it. out of its own books. Second, the whole run of a transaction: the rupees going in, the division that follows, everything between an instruction and an allotment, the pair of legs a switch is made of, and the standing instruction that repeats one of these on a schedule. Third, the invented record above.

One idea joins those three: the contents of the scheme are the source of the movement. Everything a reader finds strange about how a holding behaves traces back to what is inside it, never to how the instruction was processed. The habit is worth keeping. When a figure per unit does something unexpected the instinct is to suspect the paperwork, and the paperwork is almost never the answer.

What is being compared here, and what is being refused?

Behaviour is compared. Contents, then the movement those contents produce, then what a holder's instruction runs into. The comparison stops there.

Definition is a separate matter. There is a set of conditions a scheme has to meet before it may carry any of these three names, and those conditions include how much of what it must hold. SEBI writes them and SEBI revises them. Reading them off a summary is not the same as reading them at source, and the difference matters more than it sounds: a stale condition is not merely old, it is incorrect, and a reader acting on it acts wrongly. Describing how something behaves and stating the rule that names it are two separate jobs done by two separate authorities, and an account that quietly slides from the first into the second has started teaching a rule it was never entitled to state.

A household thinks about a shop sign the same way. The board outside says sweet shop. The board states what the owner registered under and what the licence permits. The sign says nothing about how many trays of what are behind the counter this morning, and anybody wanting to know whether they have anything left looks through the glass rather than at the board. The scheme name is the board. The disclosed holdings are the glass.

What sits inside an equity scheme, and what shifts its value per unit?

An equity scheme holds shares in companies. Shares are the whole of it, and everything else about how an equity scheme behaves comes out of that one fact.

A share does not carry a stated amount due on a stated date. A share is worth, at any moment, whatever a large number of unrelated parties, transacting continuously and for their own separate reasons, are currently willing to exchange it for. Nobody is under an obligation to any figure. So when the scheme reprices its holdings for the day, it is not updating an accrual, it is taking a fresh reading of a number that many hands moved while nobody was watching any single one of them.

Run that through to the transaction and the consequence lands. By the time the rupees are actually split, the divisor may have travelled a long way from wherever it stood when the holder made up their mind, and no part of the transaction apparatus was ever built to cushion that. The processing is not a shock absorber. The clerk applies a rule about which struck figure the instruction attaches to, and once that figure is settled the arithmetic is mechanical.

Take the Girnar Large Cap Equity Fund as the worked case. Rs 4,200 crore of net assets, spread over 120.00 crore units, puts one unit at Rs 35.00. Rs 1,00,000/- sent against that figure divides into 2,857.143 units after the scheme's rounding convention is applied. The identical Rs 1,00,000/- sent against a figure struck on a different day gives a different unit count, from the same rupees, by the same clerk, under the same rule.

What does a debt scheme hold, and why does one figure carry two movements?

A debt schemeA pooled scheme holding lending instruments, each of which carries a stated sum falling due on a stated day. holds instruments that lend money out. Each one carries an amount due and a date on which it falls due. A stated sum with a stated date produces a figure per unit that behaves in two distinct ways at once, and the two are worth separating.

The first movement is accumulation. Money is out on loan and the amount owed back to the scheme grows as the calendar advances. Nothing has to happen in any market for this to occur. Accumulation happens because time passed. Left on its own, this limb would push the figure per unit gently and steadily upward, day after undramatic day, in the way the amount owed on any lending arrangement climbs while nobody looks at it.

The second movement is re-pricing. The contract does not fix what somebody would pay today to step into the scheme's position on one of those instruments. The price shifts when the general level of yields moves, and it shifts when views change about whether the borrower will actually pay. Neither of those is on a schedule. So this limb sits quiet for stretches and then moves the figure in a single session.

One published number carries both, and a holder looking at it has no way to tell from the number alone which limb produced today's change. The single number is not a defect in the disclosure. A figure per unit is one division, done once, over everything the scheme holds and owes.

How each individual holding gets priced is a separate question, covered separately. Pricing follows requirements SEBI sets, applied through the scheme's own written valuation policyThe written method a scheme uses to put a price on each thing it holds, framed to meet SEBI's requirements..

Is a hybrid scheme a species of its own, or just a proportion?

A hybrid schemeA pooled scheme keeping both share holdings and lending holdings at the same time, in whatever mix it actually runs. keeps both kinds of holding at once. Its figure per unit therefore carries a blend of the two behaviours already described, weighted by how much of each it is actually running.

A hybrid is not a third species with behaviour of its own; it is a ratio between the two behaviours already described, and what a transaction meets is that ratio rather than the word printed on the cover. Two schemes can both be entitled to the word and be running very different ratios, and on any given day they will not do the same thing.

An everyday version. A street vendor sells tea and also sells packaged snacks. Calling the stall a mixed stall says something true and almost useless. A stall at nine parts tea and one part snacks and a stall at the reverse are both mixed stalls, and their days look nothing alike. The split settles how the takings will swing, and the split is a fact about the stall rather than a fact about the word mixed.

What stays identical across a transaction in any of the three?

A great deal more than readers tend to expect, and this is precisely what makes the subject one about transactions rather than about categories.

The apparatus does not consult the contents. Rupees are the fixed side of a subscription and units are the side that floats, in all three. One figure is struck for a dealing day, in all three. The rule deciding which struck figure an instruction attaches to is the same rule, in all three. Units land in the record to the same three decimal places, in all three. In all three, the expense ratio bites into the assets day by day instead of arriving as a bill.

The identity is precisely why the machinery was taught once instead of three times over, and why a reader who has followed it already knows how to transact in a kind of scheme they have never held.

The charge is worth pausing on. Holders most often expect the charge to differ, and it does not differ in kind. On the equity scheme above, 1.65 per cent struck on net assets of Rs 4,200 crore works out at Rs 69.30 crore for a year. Spread over a 365 day year that is Rs 18,98,630.14 on an average day, or about Rs 0.0015822 against each unit each day. The charge comes out of the pool before the pool is divided, so it is already inside the figure a holder transacts at, and no folioThe account number under which one holder's units in a scheme are recorded and reported. statement in any of the three kinds shows it as a line.

What does an instruction actually meet in each of the three?

Here the subject belongs to transactions rather than to categories, and the ground is worth taking slowly. There is no choice between three procedures. There is one procedure, sent into three different cupboards.

On the way in, the only thing the contents change is how far the divisor may have travelled between the moment of the decision and the moment the instruction attached to a struck figure. With shares behind the scheme, the reading was taken afresh from a continuously moving market. With lending instruments behind it, part of the movement was simply the calendar advancing and part was a re-pricing that may or may not have happened since the last look. With both behind it, both apply in the running ratio. The clerk's arithmetic is identical in every case: rupees divided by a struck figure, rounded by the scheme's convention, recorded to three decimals.

On the way out, redemption reverses it and the same asymmetry appears in the same place. Units are the fixed side now and rupees are the side that floats. The number of units leaving the folio is a figure that can be stated before the instruction is sent. The rupees arriving are not stated in advance in any of the three. The amount is the product of those units and a figure that has not been struck yet.

A switch is the case where this bites hardest, and it is the one worth rehearsing. A switch out of an equity scheme and into a hybrid scheme is not a transfer of a holding. A switch is a redemption on one side and a subscription on the other, and each leg meets its own scheme's own struck figure. So a single instruction is exposed to two divisors, drawn from two different cupboards, behaving in two different ways. Understanding that before instructing is the difference between reading the resulting entries and being puzzled by them.

And on the record itself, the field names never change. A statement carries the scheme name, the folio, the units held to three decimals, a figure per unit and a rupee amount. Where units sit in a demat account instead, they are recorded in the systems the depositories run, Central Depository Services (India) Limited (CDSL) at cdslindia.com and National Securities Depository Limited (NSDL) at nsdl.co.in, and those fields do not vary with contents either. Nowhere on any of these records is there a field whose meaning depends on whether the scheme holds shares, lending instruments or both. The record therefore cannot say why the figure moved.

Which conditions behind the three names are settled elsewhere?

Every condition that decides which name a scheme may carry. The conditions include any holding a scheme is required to maintain, any limit it must stay inside and any test it must satisfy. SEBI writes all of it, in the scheme categorisation provisions and in the master circular governing mutual funds, and the live text is read at sebi.gov.in. The Association of Mutual Funds in India (AMFI), at amfiindia.com, publishes the industry level classification. The classification records practice rather than making any rule.

Two reasons, and the second is the sharper one. The first is that these conditions get revised, so a summary carrying one does not merely age; it turns incorrect. Turning incorrect is both a worse failure and a quieter one. The second is that a name is a set of conditions satisfied, not a description of contents, so even a perfectly current condition would not say what any particular scheme is holding this morning.

Where the conditions themselves are the subject, they are covered separately under scheme categories. Scheme categories take the classification apart properly and give each of the three its own treatment.

What may honestly be set beside what, and on which basis?

Two returns may be put next to each other only when they cover the same stretch of time and rest on the same basis. Period and basis, both, every time.

Basis is where nearly everything goes wrong, so take it slowly. A scheme's published return has already had its own costs removed, making it a net returnA return worked out from figures that already had the running cost taken out of them, so nothing is deducted afterwards.. A net return is computed from figures per unit that already had the running charge removed before they were struck, so no further deduction is owed or available. An index return is a gross returnA return with no cost inside it, which is what an index figure is, because an index is not a thing anyone can actually hold.. A gross return carries no cost whatever, for the simple reason that an index cannot be held by anybody and so nobody ever paid anything to hold one.

Now the record. Across the stated year the Girnar Large Cap Equity Fund came in at 13.4 per cent net, taken from one struck figure per unit to another a year later. Its stated benchmark returned 12.1 per cent across that same year, carrying no costs. The subtraction gives 1.3 points, but it has taken a figure with a cost already inside it away from a figure with no cost in it at all, so those 1.3 points do not compare like with like, and treating them as though they did understates what the scheme did.

Put both on one basis and the picture changes materially. Adding the 1.65 per cent expense ratio back gives roughly 15.05 per cent, and leaves a difference of about 2.95 points. Backing it out properly, allowing for the fact that the charge accrued daily rather than in one lump, gives roughly 15.30 per cent and a difference of about 3.20 points. Neither route is exact, and neither supports a precise bridge. One finding survives both routes: a difference the headline puts at 1.3 points is closer to three points once both sides are restated on a single basis, and that is over double what the headline offered. One year, one scheme, and nothing about any other year or any other scheme follows from it.

There is a limb of this that the record does not settle, and it gets said rather than assumed. Whatever income reached the scheme is inside the return it reports. An index, on the other hand, can be built on prices by themselves or with income folded back in, and those two versions of the same index do not give the same figure. Which of the two the stated benchmark uses is something the invented record never fixes, so the comparison stays open rather than settled in either direction.

What does the equity side look like, worked end to end?

Every figure below comes from the invented record, and the arithmetic that produced it is printed beside it rather than asserted. Two of the check rows carry a residue, and both are shown with their sign because neither of them cancels.

The last two rows are the ones worth reading twice. Rounding the day's charge to the nearest paisa and then multiplying it back across a year leaves Rs 1.10/- more than the year's actual charge. Rounding the per unit figure to seven decimals and multiplying it back across 120.00 crore units leaves about Rs 9.86/- a day too much. Across the year that is about Rs 3,600/-. Neither is an error. Both are what rounding does when a small figure is multiplied by a large one, and printing them is how the difference shows between arithmetic that reconciles and arithmetic that merely looks tidy.

One check has been deliberately left out of that table, and leaving it out is the point. Working the per unit daily charge as 1.65 per cent of Rs 35.00 divided by 365 looks like an independent confirmation of the same figure. It is not. Because Rs 35.00 is itself Rs 4,200 crore divided by 120.00 crore, that route is the same multiplication and the same division in a different order, and it cannot disagree with the first no matter what is wrong upstream. A check that is incapable of failing has confirmed nothing. In its place stands the one reconciliation that genuinely can fail: whether the record's own three figures agree with each other.

Which of the three kinds carries worked figures, and which carries none?

The invented record fixes a complete set of figures for one equity scheme. Net assets, units in issue, the figure per unit that divides out, the expense ratio, the folio count, a one year net return and its stated benchmark. The record also fixes a partial set for one invented tracker, the Girnar Broad Market Index Fund, whose numbers belong to a different question and are set out where that question is handled.

For a debt scheme it fixes nothing at all. No net assets, no units, no figure per unit, no expense ratio, no return. For a hybrid scheme, the same: nothing, including no ratio between the two kinds of holding.

A control setting the three kinds of scheme moving against each other would need a run of figures behind each of them, and two of the three have no figures behind them at all. A control of that kind would have to run on fabricated figures.

A neat three column table built out of eleven manufactured cells would be worse than an uneven one that states only what it has. Numbers get quoted. A plausible figure sitting in a cell nobody verified travels, and it travels with the authority of the layout that held it. Each empty cell above says why it is empty.

The apparatus survives for all three, with not one manufactured number, and it happens to be the part a reader holding an instruction needs most. The apparatus is identical. A subscription divides rupees by a struck figure, whichever of the three received it. A redemption takes units and multiplies. The charge accrues day by day. The attachment rule never varies. Four constants like those point at precisely the comparison a holder has to make, out of published documents.

The Girnar Large Cap Equity Fund, the Girnar Broad Market Index Fund, Girnar Asset Management Limited, Kalyani Bhagat and Sohail Merchant are invented.
Educational material. Not advice on any investment, tax, budget or market position.