A mutual fund is one of the easiest ways to create wealth in the long run, but for a retail investor, it is quite difficult to choose the right fund that suits their investment objective and risk profile. Various schemes are made available through asset management companies. To make it simpler, SEBI has introduced a new categorisation.
In today’s blog post, we will give you an overview and a guide to SEBI’s new categories of mutual funds.
What is SEBI Mutual Fund Categorisation?
SEBI categorisation of mutual funds is a framework that defines mutual fund schemes into various categories based on their investment objective and asset allocation. The mutual fund categorisation was introduced by SEBI in 2017 to bring uniformity among fund houses. Before this, the asset management companies offered multiple schemes with similar investment strategies.
Why did SEBI introduce categorisation?
SEBI introduced the new mutual fund categorisation due to the following objective:
- Easy Fund Selection: As mutual fund companies offer various schemes, the SEBI categorisation helps investors in identifying the suitable scheme based on their investment objective.
- Avoid Overlapping: Some AMCs offer multiple schemes with identical investment strategies under a similar name. SEBI category of mutual fund eliminates duplicate schemes.
- Enhance Transparency: Each scheme has a defined investment strategy. This allows investors to understand where their capital is invested.
- Comparison of Funds: Because of standard categorisation of mutual fund schemes by SEBI, investors can compare similar types of funds, allowing them to have a better understanding of funds.
Categories of Equity Mutual Fund
It is the most prominent category of mutual fund in which an investor invests their money. The equity mutual fund has 11 categories that are divided based on the market capitalisation of shares. For the convenience of investors.
SEBI has defined the meaning of large cap, mid cap, and small cap. The following is the categorisation of large cap, mid cap and small cap by SEBI:
- Large Cap: Top 100 shares based on market capitalisation.
- Mid Cap: 101st to 250th company based on market capitalisation.
- Small Cap: 251st company onwards based on market capitalisation.
1. Large Cap Fund Category
This fund is designed for investors seeking investment opportunities in well-established companies. Large cap companies are industry leaders having a proven track record of financial stability.
| Particular | Details |
|---|---|
| Scheme Type | Equity Scheme |
| Definition | An open-ended equity mutual fund that predominantly invests in large-cap companies. |
| Asset Allocation | Minimum 80% of total assets in equity and equity-related instruments of large-cap companies. |
2. Large & Mid Cap Fund Category
This category helps investors in having equal allocation in large-cap and mid-cap companies. This provides them a balanced approach in managing stability with growth.
| Particular | Details |
|---|---|
| Scheme Type | Equity Scheme |
| Definition | An open-ended equity mutual fund investing in both large-cap and mid-cap companies. |
| Asset Allocation | Minimum 35% in large-cap stocks and 35% in mid-cap stocks. |
3. Mid Cap Fund Category
These funds primarily invest in mid-cap companies that have strong growth potential in the long run. They can become future large-cap companies. This category is suitable for investors having an investment horizon of more than 7 years.
| Particular | Details |
|---|---|
| Scheme Type | Equity Scheme |
| Definition | An open-ended equity mutual fund investing predominantly in mid-cap companies. |
| Asset Allocation | Minimum 65% of total assets in mid-cap stocks. |
4. Small Cap Fund Category
These are relatively smaller companies having lower market capitalisation than mid and large cap companies. This category is highly volatile in nature. This is best suited for aggressive investors.
| Particular | Details |
|---|---|
| Scheme Type | Equity Scheme |
| Definition | An open-ended equity mutual fund investing primarily in small-cap companies. |
| Asset Allocation | Minimum 65% of total assets in small-cap stocks. |
5. Multi Cap Fund Category
This is one of the recent categories introduced by SEBI. The fund manager has liberty to invest across market caps, including large, mid and small, but in equal proportion.
| Particular | Details |
|---|---|
| Scheme Type | Equity Scheme |
| Definition | An open-ended equity mutual fund investing across large-cap, mid-cap, and small-cap companies. |
| Asset Allocation | Minimum 25% each in large-cap, mid-cap, and small-cap stocks. |
6. Flexi Cap Fund Category
In dynamic market conditions, investment opportunities also change. This fund provides flexibility to the fund manager to invest across all market capitalisations without having any fixed allocation.
| Particular | Details |
|---|---|
| Scheme Type | Equity Scheme |
| Definition | An open-ended dynamic equity mutual fund investing across market capitalisations. |
| Asset Allocation | Minimum 65% of total assets in equity and equity-related instruments. |
7. Dividend Yield Fund Category
This is a conservative equity category of mutual fund. The fund manager primarily invests in companies that have high dividend yields. This category of fund is suitable for long-term investors seeking both dividend income and capital appreciation.
| Particular | Details |
|---|---|
| Scheme Type | Equity Scheme |
| Definition | An open-ended equity mutual fund investing primarily in high dividend-yielding companies. |
| Asset Allocation | Minimum 65% in equity and equity-related instruments. |
8. Value Fund Category
Value investing is a very famous style in which one invests in companies that are generally trading below their intrinsic value, or undervalued companies. These undervalued companies can generate significant returns in the long-run.
| Particular | Details |
|---|---|
| Scheme Type | Equity Scheme |
| Definition | An open-ended equity mutual fund following a value investment strategy. |
| Asset Allocation | Minimum 65% in equity and equity-related instruments. |
9. Contra Fund Category
This fund follows a contrarian investment approach. Unlike a value fund contra fund manager invests in companies that are currently not in favour but have strong growth potential.
| Particular | Details |
|---|---|
| Scheme Type | Equity Scheme |
| Definition | An open-ended equity mutual fund following a contrarian investment strategy. |
| Asset Allocation | Minimum 65% in equity and equity-related instruments. |
10. Focused Fund Category
This is one of the riskiest categories of equity mutual fund because of its concentrated portfolio. According to the SEBI mandate, a focused fund manager can invest only in up to 30 stocks.
| Particular | Details |
|---|---|
| Scheme Type | Equity Scheme |
| Definition | An open-ended equity mutual fund with a concentrated portfolio. |
| Asset Allocation | Minimum 65% in equity and equity-related instruments with a maximum of 30 stocks. |
11. Sectoral or Thematic Fund Category
Sectors are cyclical in nature; hence, when a fund manager invests in a particular sector, including banking, pharma, IT, etc., they are known as sectoral funds. Whereas, on the other hand, if a fund manager invests in any particular theme, such as an infrastructure theme or an ESG theme, they are known as Thematic funds.
| Particular | Details |
|---|---|
| Scheme Type | Equity Scheme |
| Definition | An open-ended equity mutual fund investing in a specific sector or investment theme. |
| Asset Allocation | Minimum 80% of total assets in a particular sector or theme. |
Read Also: How to Compare Mutual Funds in India?
Categories of Debt Mutual Fund
The following new debt mutual fund categories were introduced by SEBI in 2017:
1. Overnight Fund Category
This fund was introduced by SEBI to facilitate investors to park their money for a very short period without taking any risk. The debt securities of this portfolio mature within one business day.
| Particular | Details |
|---|---|
| Scheme Type | Debt Scheme |
| Definition | An open-ended debt mutual fund investing in overnight securities with a maturity of one day. |
| Asset Allocation | Invests 100% of its assets in overnight securities having a maturity of 1 day. |
2. Short Duration Fund Category
This category of fund is suitable for investors who want to have better returns than liquid funds. The portfolio has securities with short maturity.
| Particular | Details |
|---|---|
| Scheme Type | Debt Scheme |
| Definition | An open-ended short-term debt mutual fund investing in debt and money market instruments. |
| Asset Allocation | Portfolio Macaulay Duration between 1 year and 3 years. |
3. Medium Duration Fund Category
These funds invest in debt securities having a maturity of duration between 3 to 4 years. Suitable for investors seeking income generation and capital appreciation.
| Particular | Details |
|---|---|
| Scheme Type | Debt Scheme |
| Definition | An open-ended debt mutual fund investing in medium-term debt securities. |
| Asset Allocation | Portfolio Macaulay Duration between 3 years and 4 years. |
4. Medium to Long Duration Fund Category
According to SEBI, this fund invests in securities having longer maturity. This is suitable for investors having a 4 to 7 years of investment horizon
| Particular | Details |
|---|---|
| Scheme Type | Debt Scheme |
| Definition | An open-ended debt mutual fund investing in medium- to long-term debt securities. |
| Asset Allocation | Portfolio Macaulay Duration between 4 years and 7 years. |
5. Long Duration Fund Category
This fund primarily invests in securities having long-term debt. These funds are generally highly volatile in nature due to changes in interest rates.
| Particular | Details |
|---|---|
| Scheme Type | Debt Scheme |
| Definition | An open-ended debt mutual fund investing in long-term debt instruments. |
| Asset Allocation | Portfolio Macaulay Duration of more than 7 years. |
6. Credit Risk Fund Category
This fund primarily invests in corporate bonds that generally have lower credit ratings and offer higher interest rates. They aim to generate higher returns by managing risk.
| Particular | Details |
|---|---|
| Scheme Type | Debt Scheme |
| Definition | An open-ended debt mutual fund investing primarily in below-highest-rated corporate bonds. |
| Asset Allocation | Minimum 65% of total assets in corporate bonds rated below the highest rating. |
Categories of Hybrid Mutual Fund
The newly introduced hybrid category mutual funds are as follows:
- Multi Asset Allocation Fund Category: There is correlation between the assets; when equity performs in a phase, the other assets might not perform. A multi-asset allocation fund can help investors.
- Equity Savings Fund Category: The fund adopts various investment strategies, including equity, arbitrage, and debt securities, etc. This approach helps investors sail through volatile markets.
Read Also: Types of Mutual Funds in India
Conclusion
On a concluding note, the standard categorisation introduced by SEBI has made investing organised for investors. It reduces confusion because of different scheme names and categories. The categorisation will make it easy for investors to pick a fund based on their investment objective and financial goal, etc. But it is advisable to consult your investment advisor before making any investment decision.
Frequently Asked Questions (FAQs)
How many total categories of mutual fund defined by SEBI?
SEBI has defined a total of 38 mutual fund categories across all asset classes.
Can an asset management company offer multiple schemes under the same category?
No, an AMC cannot offer multiple schemes under the same category.
What are hybrid mutual funds?
Hybrid mutual funds are considered a mix of equity and debt. The fund manager can have both equity and debt in their portfolio.
What is SEBI mutual fund categorisation?
SEBI mutual fund categorisation is a framework under which asset management companies can offer their schemes.
Which mutual fund category contains the highest risk?
Small cap, focused and sectoral/thematic categories of mutual funds carry the highest risk.
