The SEBI (Securities and Exchange Board of India) has established a standardised framework for categorising mutual fund schemes to bring investors uniformity, clarity, and transparency. This move ensures that investors can make informed decisions by clearly understanding the characteristics of each scheme. Let’s explore SEBI’s categorisation of mutual fund schemes and what they mean for investors.
📌 Why SEBI Categorised Mutual Funds?
Before SEBI’s guidelines, mutual fund houses had the flexibility to create multiple schemes with similar investment objectives, leading to confusion among investors. To address this, SEBI introduced a uniform classification system, making it easier for investors to compare funds and make suitable investment choices. The key objectives behind SEBI’s categorisation include:
- Uniformity in Scheme Names – Ensuring similar schemes from different fund houses have the same investment objective.
- Better Comparability – Enabling investors to compare schemes based on standardised parameters.
- Transparency and Clarity – Helping investors make well-informed investment decisions.
- Avoidance of Duplication – Preventing fund houses from launching multiple similar schemes, thereby eliminating redundancy.
📌 SEBI’s Categorisation of Mutual Fund Schemes
SEBI has classified mutual fund schemes into five broad categories, with specific subcategories under each to clarify their investment objectives.
1. Equity Schemes
These funds mainly invest in stocks and are further classified based on market capitalisation, sectoral exposure, and investment style.
- Large-cap fund – Invests at least 80% in large-cap stocks (top 100 companies by market capitalisation).
- Mid-Cap Fund – Invests at least 65% in mid-cap stocks (101st to 250th company by market capitalisation).
- Small-Cap Fund – Invests at least 65% in small-cap stocks (251st company onward by market capitalisation).
- Multi-Cap Fund – Diversifies across large, mid, and small-cap stocks with at least 25% allocation in each category.
- Flexi-Cap Fund – Has flexibility to invest across all market capitalisations without predefined limits.
- Large & Mid-Cap Fund – Minimum 35% investment in large-cap stocks and 35% in mid-cap stocks.
- Value Fund – Follows the value investing strategy, identifying undervalued stocks.
- Contra Fund – Invests based on a contrarian strategy, picking stocks currently out of favour.
- Focused Fund – Focuses on a concentrated portfolio of up to 30 stocks.
- Sectoral/Thematic Fund – This fund focuses on sectors like banking and technology or ESG (Environmental, Social, and Governance) themes.
- ELSS (Equity-Linked Savings Scheme) – Provides tax deductions under 80C, but investments are locked in for 3 years.
2. Debt Schemes
Debt funds allocate capital to fixed-income securities, including government, corporate, and treasury bills. SEBI categorises them based on duration and credit risk profile.
- Overnight Fund – Invests in securities with a 1-day maturity.
- Liquid Fund – Focuses on short-term debt, maturing within 91 days.
- Ultra Short Duration Fund – Portfolio duration of 3 to 6 months.
- Low Duration Fund – Portfolio duration of 6 to 12 months.
- Money Market Fund – Focuses on money market securities maturing within one year.
- Short Duration Fund – Portfolio duration of 1 to 3 years.
- Medium Duration Fund – Portfolio duration of 3 to 4 years.
- Medium to Long Duration Fund – Portfolio duration of 4 to 7 years.
- Long Duration Fund – Portfolio duration of more than 7 years.
- Dynamic Bond Fund – No fixed maturity profile, dynamically managed.
- Corporate Bond Fund – Invests at least 80% in highest-rated corporate bonds.
- Credit Risk Fund – Minimum 65% investment in below-highest-rated debt instruments.
- Gilt Fund – Invests 80% in government securities across various maturities.
- Gilt Fund with 10-Year Constant Duration – Invests 80% in government securities with a 10-year duration.
- Floater Fund – Invests at least 65% in floating-rate instruments.
3. Hybrid Schemes
These funds employ a diversified approach, investing in stocks and bonds with varying allocations to manage risk and enhance returns.
- Aggressive Hybrid Fund – 65-80% in equities and 20-35% in debt.
- Balanced Hybrid Fund – 40-60% in equities and 40-60% in debt (not permitted to invest in arbitrage opportunities).
- Conservative Hybrid Fund – 10-25% in equities and 75-90% in debt.
- Dynamic Asset Allocation/Balanced Advantage Fund – Changes the equity-debt mix depending on prevailing market conditions.
- Multi-Asset Allocation Fund – Employs a multi-asset strategy, investing in at least three asset types, each receiving at least 10% of the portfolio.
- Arbitrage Fund – Exploits arbitrage opportunities between cash and derivative markets with at least 65% investment in equity-related instruments.
- Equity Savings Fund – Invests in equity (at least 65%), debt, and arbitrage to balance risk.
4. Solution-Oriented Schemes
These schemes are designed for specific financial goals and come with a lock-in period.
- Retirement Fund – This fund encourages long-term retirement planning. Its lock-in period is 5 years or until retirement age, whichever is earlier.
- Children’s Fund – This fund helps save for children’s education and future expenses. There is a mandatory lock-in period of 5 years or until the child turns 18, whichever is earlier.
5. Other Schemes
- Index Funds/ETFs – These funds use passive management to mirror the returns of a specific index, such as the Nifty 50 or Sensex.
- Fund of Funds (FoFs) – These invest in other mutual funds rather than direct securities, providing diversified exposure.
- Gold Exchange Traded Funds (FoF) – Invests in gold ETFs to provide exposure to gold as an asset class.
- International Funds – Invest in foreign securities to provide global diversification opportunities.
- Commodity Funds – Primarily invest in commodities such as gold and silver ETFs.
📌 Final Words
SEBI’s categorisation of mutual fund schemes has streamlined the investment landscape, ensuring investors can make well-informed choices. Whether you are looking for equity growth, stable debt returns, or a balanced approach, understanding these categories can help you select the right fund for your financial goals.
📢 Disclaimer
Mutual fund investments are subject to market risks, so read all scheme-related documents carefully before investing. Past performance is not indicative of future results. The information provided in this blog is for educational and informational purposes only and should not be considered investment advice. Investors should consult their financial advisors before making any investment decisions. VSJ FinMart is an AMFI-registered mutual fund distributor (MFD) that does not provide portfolio management or stock advisory services.