75-5-10 Rule in Mutual Funds

The 75-5-10 rule is a guideline for mutual funds to be considered diversified. It states that a mutual fund must Invest at least 75% of its assets in other issuers' securities and cash, Invest no more than 5% of its assets in any one company, and own no more than 10% of any company's outstanding voting stock.
EXPLORE FUNDS
Understanding the 75-5-10 Rule in Mutual Funds
EXPLORE FUNDS
3 min
04-October-2024

The 75-5-10 rule for mutual funds is an investment guideline for diversified mutual funds. Under this rule, such funds must invest 75% of their assets in other issuers’ securities and cash, not more than 5% in any one company, and not more than 10% in holding the issuers’ outstanding voting shares.

Mutual funds have become one of the most sought-after investment instruments. They are comparatively less volatile and managed by expert portfolio managers. Investors look toward investing in mutual funds to multiply their investments through compounding and diversifying them.

Investors who seek diversification by investing in mutual funds should ensure that the scheme is launched by a diversified management investment company. For that purpose, the mutual fund house must have assets that adhere to the 75-5-10 rule.

This blog will help you understand what is the 75-5-10 rule for a mutual fund to ensure that you can identify diversified mutual fund schemes for effective diversification.

What is the 75-5-10 rule for mutual funds?

An investment company, such as a mutual fund house, pools money from various investors to invest in a host of securities, such as equities and bonds. Since a mutual fund house holds a portfolio of assets, investors invest in a specific mutual fund scheme to ensure their portfolio is diversified and they can spread the risk across various investment instruments.

In the case of a mutual fund house, the company is known as diversified only if it follows the 75-5-10 rule. The rule is as follows:

  • 75% - 75% of the fund assets must be invested in other securities such as equities or cash and cash equivalents such as Treasury bills.
  • 5% - The company must not invest more than 5% of its assets in any one company.
  • 10% - The mutual fund company must not invest more than 10% of its assets in holding any company’s outstanding voting stock.

A mutual fund house must have the above asset allocation structure to be called a diversified fund house. If it fails to allocate its assets in this order, it ceases to be termed diversified, increasing the attached risk.

Have you ever wondered how much your mutual fund could grow over time? Discover potential returns with our SIP return calculator and Lumpsum calculator. Estimate your investment's future value now!

How to use the 75-5-10 rule for mutual funds?

The 75-5-10 rule for mutual funds allows you to identify diversified mutual fund schemes with a balanced portfolio and can offer steady and low-risk returns. Here is how you can use the 75-5-10 rule for a better investment approach in mutual fund schemes.

  • The 75%: The mutual fund house must invest 75% of its total assets in securities of other companies and cash and cash equivalents. These investments are mostly in top holdings, along with cash and cash equivalents that have lower associated risks. This ensures that the majority of the fund's investments are in stable and well-performing assets, increasing returns while taking on lower risks.
  • The 5%: The mutual fund house must not invest more than 5% of its assets in a single company's stock. It means that the fund will invest in various stocks, spreading the risk of losses if one investment falls in price while preventing overexposure to the performance of one company.
  • The 10%: The fund house must not invest more than 10% of the assets in any company’s outstanding voting stock. This allows protection from risks attached to investing in a single company’s outstanding voting stocks, as investors with voting rights can influence a company’s operations positively or negatively.

Examples of using 75-5-10 rule

For a better understanding of using the 75-5-10 rules for mutual funds, here is an example of how a mutual fund allocation should look that follows the rule:

Mutual Fund A

Total assets: Rs. 100 crores

  • 75% top holdings: Top 5 holdings sum up to Rs. 60 crores (60%).
  • 5% single stock: Largest holding, company X, at Rs. 4 crores (4%).
  • 10% outstanding voting stocks: Company P’s outstanding voting stocks, at Rs. 18 crores (9%).

As you can see from the above example, this fund successfully applies the 75-5-10 rule for mutual funds, maintaining diversification and effectively managing risk.

Benefits of using the 75-5-10 rule for investors

Here are the benefits of using the 75-5-10 rule for investors:

Effective diversification

Choosing mutual funds schemes that follow the 75-5-10 rule provides enhanced diversification, as the investments are not limited to a single security but multiple securities across various asset classes. This significantly reduces the risk of losses from any single investment.

Risk management

Investor investing in diversified mutual fund schemes allows for a balanced investment approach that includes a mix of high-quality assets. The rule helps in achieving long-term growth and stability, as different sectors and stocks perform well at different times, thus promoting effective risk management.

Transparency

Mutual funds that follow the 75-5-10 rule provide a transparent structure where investors know how the assets are allocated. Investors can be more confident that their investments in mutual fund schemes are managed in a way that minimises risk and promotes steady growth.

Liquidity

Diversified mutual funds are more liquid than other types of mutual funds as they attract more risk-averse investors. Hence, investors who invest in diversified mutual funds are more likely to find buyers quickly, making it easier to realise cash for their investments.

How to choose mutual funds using the 75-5-10 rule?

Here is how you can choose mutual funds using the 75-5-10 rule:

1. Understand the 75-5-10 rule

Before making a mutual fund investment decision, understand what is the 75-5-10 rule for a mutual fund in detail. It will allow you to decide whether the rule is apt for you or if you want to create your own mutual fund investment strategy.

2. Identify your investment goals

Review your current financial situation to determine how much you can invest in mutual funds, either as a lump sum or through monthly SIPs. Furthermore, identify how long you want to hold your investments and for what purposes (short-term or long-term goals). This will help you identify your investment goals, risk appetite, and investment horizon.

3. Compare mutual funds

Compare mutual funds trading on stock exchanges to identify those following the diversified 75-5-10 asset allocation structure before investing. You can do this by analysing the prospectus of mutual funds and reviewing the fund’s portfolio, including top holdings, sector allocation, and individual stock investments.

Challenges of the 75-5-10 rule

Here are the challenges you may face if you invest in mutual funds that follow the 75-5-10 rule:

Limited flexibility

When fund managers use the 75-5-10 rule for mutual funds, they have limited flexibility to reap the benefits of good investments. For example, suppose a fund manager thinks that a single stock is fundamentally and technically strong and can offer hefty returns. In that case, the rule does not allow more than 5% of the fund’s assets to be invested in a single stock. This lack of flexibility can force the mutual fund to lose out on higher profits.

Lack of real-time adjustment

The capital market is volatile and can change quickly. The rule’s rigid adherence to predetermined asset allocation may prevent fund managers from responding quickly and effectively to change the asset allocation to avoid potential losses.

Performance impact

Diversification based on set asset allocation limits the potential for higher gains. In a bullish market, this rule might prevent the fund from achieving maximum returns. Furthermore, the rule may force fund managers to include low-quality stocks to meet the asset allocation requirements.

Lower returns

Investing in mutual funds that follow the 75-5-10 rule can provide a low-risk investment option but come with the possibility of offering lower returns than other mutual funds that invest majorly in equities. Furthermore, the rigid asset allocation structure may offer lower overall returns if other investments turn negative.

Factors to consider while using the 75-5-10 rule

Here are the factors you should consider while using the 75-5-10 rule:

  • Risk tolerance: Assess your risk tolerance to determine whether your portfolio needs a diversified mutual fund.
  • Demat account: Consider opening a demat account with a reputed stockbroker to invest in mutual fund units.
  • Fund performance: When comparing diversified mutual funds, evaluate them on historical performance, consistency, and track record of delivering returns over the long term.
  • Asset allocation: Ensure that the mutual fund you are investing in adheres to the asset allocation specified in the 75-5-10 rule.
  • Liquidity: Ensure that the selected funds offer sufficient liquidity, allowing for ease of entry and exit from investments as per your financial needs and market conditions.

Conclusion

The 75-5-10 rule for mutual funds is a specified rule where the fund house follows a predetermined investment approach. The rule allows a mutual fund scheme to be called diversified and offers low-risk investment options with the potential of steady returns. Now that you know what is the 75-5-10 rule for mutual funds, you can make informed decisions while investing in mutual funds schemes.

You can visit the Bajaj Finserv Platform to use unique tools such as mutual fund calculators to compare mutual fund schemes and invest in the most diversified and suitable ones.

Frequently asked questions

What is the 75-5-10 rule in mutual funds?

The 75-5-10 rule states that mutual funds must invest 75% of the fund’s assets in other issuers’ securities and cash, not more than 5% in any one company, and not more than 10% in holding the issuers’ outstanding voting shares.

Why is the 75-5-10 rule important for mutual funds?

The 75-5-10 rule is important for mutual funds as it results in healthy diversification and provides low-risk, steady returns to investors.

How does the 75-5-10 rule promote diversification?

The 75-5-10 rule promotes diversification by setting pre-determined asset allocation limits of 75%, 5%, and 10%. It means that investments are spread across numerous assets and provide effective diversification.

What types of assets are included in the 75% portion of the rule?

The 75% portion of the 75-5-10 rule typically includes assets such as equity mutual funds, individual stocks, or exchange-traded funds (ETFs) that offer exposure to the stock market.

Can a mutual fund still be considered diversified if it does not adhere to the 75-5-10 rule?

No, a mutual fund must adhere to the 75-5-10 rule for mutual funds to be called a diversified mutual fund.

What happens if a diversified mutual fund exceeds the 5% or 10% limitations?
If a diversified mutual fund exceeds the 5% or 10% limitations set by the 75-5-10 rule, it may indicate a shift from the desired asset allocation. In such a case, investors must consider portfolio rebalancing.
Are there any exceptions to the 75-5-10 rule?

The 75-5-10 rule may have some exceptions based on investor risk profiles, market conditions, and specific investment opportunities. However, after such changes, the mutual fund ceases to be termed diversified.

How does the 75-5-10 rule affect mutual fund management?

The 75-5-10 rule influences mutual fund management by guiding their asset allocation decisions as they have to adhere to a specific asset allocation limit.

Does the 75-5-10 rule apply to all mutual funds?

The 75-5-10 rule is a general asset allocation guideline and does not universally apply to all mutual funds. If a mutual fund wants to be termed as diversified, it can use the asset allocation rule.

What are the benefits of investing in a mutual fund that follows the 75-5-10 rule?

The biggest benefit is effective diversification, which can significantly lower the risk and ensure steady long-term returns.

Show More Show Less

Bajaj Finserv app for all your financial needs and goals

Trusted by 50 million+ customers in India, Bajaj Finserv App is a one-stop solution for all your financial needs and goals.

You can use the Bajaj Finserv App to:

  • Apply for loans online, such as Instant Personal Loan, Home Loan, Business Loan, Gold Loan, and more.
  • Explore and apply for co-branded credit cards online.
  • Invest in fixed deposits and mutual funds on the app.
  • Choose from multiple insurance for your health, motor and even pocket insurance, from various insurance providers.
  • Pay and manage your bills and recharges using the BBPS platform. Use Bajaj Pay and Bajaj Wallet for quick and simple money transfers and transactions.
  • Apply for Insta EMI Card and get a pre-approved limit on the app. Explore over 1 million products on the app that can be purchased from a partner store on Easy EMIs.
  • Shop from over 100+ brand partners that offer a diverse range of products and services.
  • Use specialised tools like EMI calculators, SIP Calculators
  • Check your credit score, download loan statements, and even get quick customer support—all on the app.

Download the Bajaj Finserv App today and experience the convenience of managing your finances on one app.

Do more with the Bajaj Finserv App!

UPI, Wallet, Loans, Investments, Cards, Shopping and more

GET THE APP

Disclaimer

1. Bajaj Finance Limited (“BFL”) is a Non-Banking Finance Company (NBFC) and Prepaid Payment Instrument Issuer offering financial services viz., loans, deposits, Bajaj Pay Wallet, Bajaj Pay UPI, bill payments and third-party wealth management products. The details mentioned in the respective product/ service document shall prevail in case of any inconsistency with respect to the information referring to BFL products and services on this page.

2. All other information, such as, the images, facts, statistics etc. (“information”) that are in addition to the details mentioned in the BFL’s product/ service document and which are being displayed on this page only depicts the summary of the information sourced from the public domain. The said information is neither owned by BFL nor it is to the exclusive knowledge of BFL. There may be inadvertent inaccuracies or typographical errors or delays in updating the said information. Hence, users are advised to independently exercise diligence by verifying complete information, including by consulting experts, if any. Users shall be the sole owner of the decision taken, if any, about suitability of the same.

Disclaimer:

Bajaj Finance Limited ("BFL") is registered with the Association of Mutual Funds in India ("AMFI") as a distributor of third party Mutual Funds (shortly referred as 'Mutual Funds) with ARN No. 90319

BFL does NOT:

(i) provide investment advisory services in any manner or form:

(ii) carry customized/personalized suitability assessment:

(iii) carry independent research or analysis, including on any Mutual Fund schemes or other investments; and provide any guarantee of return on investment.

In addition to displaying the Mutual fund products of Asset Management Companies, some general information is sourced from third parties, is also displayed on As-is basis, which should NOT be construed as any solicitation or attempt to effect transactions in securities or the rendering any investment advice. Mutual Funds are subject to market risks, including loss of principal amount and Investor should read all Scheme/Offer related documents carefully. The NAV of units issued under the Schemes of mutual funds can go up or down depending on the factors and forces affecting capital markets and may also be affected by changes in the general level of interest rates. The NAV of the units issued under the scheme may be affected, inter-alia by changes in the interest rates, trading volumes, settlement periods, transfer procedures and performance of individual securities forming part of the Mutual Fund. The NAV will inter-alia be exposed to Price/Interest Rate Risk and Credit Risk. Past performance of any scheme of the Mutual fund do not indicate the future performance of the Schemes of the Mutual Fund. BFL shall not be responsible or liable for any loss or shortfall incurred by the investors. There may be other/better alternatives to the investment avenues displayed by BFL. Hence, the final investment decision shall at all times exclusively remain with the investor alone and BFL shall not be liable or responsible for any consequences thereof.

Investment by a person residing outside the territorial jurisdiction of India is not acceptable nor permitted.

Disclaimer on Risk-O-Meter:

Investors are advised before investing to evaluate a scheme not only on the basis of the Product labeling (including the Riskometer) but also on other quantitative and qualitative factors such as performance, portfolio, fund managers, asset manager, etc, and shall also consult their Professional advisors, if they are unsure about the suitability of the scheme before investing.