What are the categories of mutual funds in India?
- Srujan Pavuluri
- Apr 22, 2022
- 5 min read
An overview of the various categories of mutual funds available in India
How are mutual funds categorized?
As per SEBI guidelines on Categorization and Rationalization of Schemes, mutual fund schemes are classified as :
Equity Schemes
Equity funds primarily invest in equities (stocks). Their objective is long-term capital appreciation, although they are prone to short-term volatility. They are suitable for investors with high risk appetite and a long investment horizon (> 5-7 years).
The subcategories of equity schemes are :
Large Cap Fund
They invest at least 80% in large cap stocks. Large cap stocks are the top 100 stocks in India by market capitalization.
Mid Cap Fund
They invest at least 65% in mid cap stocks. Mid cap stocks are the top 100 to 250 stocks in India by market capitalization.
Large and Mid Cap Fund
They invest at least 35% in large cap stocks and at least 35% in mid cap stocks.
Small Cap Fund
They invest at least 65% in small cap stocks. Stock ranked below top 250 by market capitalization are called small cap stocks.
Multi Cap Fund
They invest at least 75% in stocks. Further, they must invest at least 25% each in large cap, mid cap, and small cap stocks.
Flexi Cap Fund
They invest at least 65% in stocks. The fund has the flexibility to change the allocation to large, mid and small cap stocks as per market conditions.
ELSS Fund
They invest at least 80% in stocks. These are also called tax-saving funds because they are eligible for deduction under Section 80C of the Income Tax Act.
Dividend Yield Fund
They invest at least 65% in stocks. The stocks are predominantly high dividend paying stocks.
Value Fund
They invest at least 65% in stocks with a value-based investment strategy.
Contra Fund
They invest at least 65% in stocks with a contrarian investment strategy. Fund houses can either offer a value fund or a contra fund, but not both.
Focused Fund
They invest at least 65% in stocks. The number of stocks is capped at 30.
Sectoral/Thematic Fund
They invest at least 80% in stocks of a specified sector or theme such as banking, technology, pharma etc.
Debt Schemes
Debt funds invest primarily in bonds and other debt securities. They invest in short and long-term securities issued by the government, public financial institutions, and companies. The securities are Treasury bills, Government Securities, Debentures, Commercial paper, Certificates of Deposit and others.
Debt funds can be categorized based on the tenor of the securities held in the portfolio and/or on the basis of the issuers of the securities or their fund management strategies, such as Short-term funds, Medium-term funds, Long-term funds, Gilt funds, Corporate bond fund etc.
The objective of debt funds are income generation and capital preservation.
The subcategories of debt schemes are :
Overnight Fund
They invest in debt securities having maturity of 1 day.
Liquid Fund
They invest in debt securities having maturity of upto 91 days.
Ultra Short Duration Fund
They invest in debt securities and the duration of the portfolio is between 3 to 6 months.
Low Duration Fund
They invest in debt securities and the duration of the portfolio is between 6 to 12 months.
Money Market Fund
They invest in money market instruments having maturity of upto 1 year.
Short Duration Fund
They invest in debt securities and the duration of the portfolio is between 1 to 3 years.
Medium Duration Fund
They invest in debt securities and the duration of the portfolio is between 3 to 4 years.
Medium to Long Duration Fund
They invest in debt securities and the duration of the portfolio is between 4 to 7 years.
Long Duration Fund
They invest in debt securities and the duration of the portfolio is more than 7 years.
Dynamic Bond Fund
They invest in debt securities and the duration of the portfolio is flexible.
Corporate Bond Fund
They invest at least 80% in corporate bonds rated AA+ and above.
Credit Risk Fund
They invest at least 65% in corporate bonds rated AA and below.
Banking and PSU Fund
They invest at least 80% in debt securities of banks, Public Sector Undertakings, Public Financial Institutions, and Municipal Bonds.
Floater Fund
They invest at least 65% in floating-rate debt securities. The fund may also invest in fixed-rate securities and convert them into floating-rate securities using swaps or derivatives.
Gilt Fund
They invest at least 80% in Government debt securities.
Gilt Fund with 10-year constant duration
They invest at least 80% in Government debt securities, and the duration of the portfolio is maintained at 10 years.
Hybrid Schemes
Hybrid funds invest in both equities and debt securities.
The subcategories of hybrid schemes are :
Aggressive Hybrid Fund
They invest 65% to 80% in equities and 20% to 35% in debt securities.
Dynamic Asset Allocation or Balanced Advantage Fund
They invest 40% to 60% in equities and 40% to 60% in debt securities.
Conservative Hybrid Fund
They invest 10% to 25% in equities and 75% to 90% in debt securities.
Multi Asset Allocation Fund
They invest in at least 3 asset classes (equities, debt and gold) with at least 10% allocation to each asset class.
Arbitrage Fund
They invest in equity and equity arbitrage strategies, with at least 65% in equity and equity arbitrage instruments. These schemes also use derivatives to earn arbitrage profits.
Equity Savings Fund
They invest in equity, debt and arbitrage strategies, with at least 65% in equity and equity arbitrage instruments.
Solution Oriented Schemes
Solution Oriented funds invest with a goal-based objective.
The subcategories of solution oriented schemes are :
Retirement Fund
They have a lock-in period of at least 5 years, or retirement age, whichever is earlier.
Children's Fund
They have a lock-in period of at least 5 years, or till the child attains age of majority whichever is earlier.
Other Schemes
Other schemes include index funds, ETFs, Fund of Funds (FoFs) and international funds.
The subcategories of other schemes are :
Index Fund
Index funds passively track a benchmark index such as Nifty or Sensex. They aim to exactly replicate the return of the benchmark. The fund manager does not actively manage the securities and their allocation in the portfolio. Hence, their expense ratios are quite low compared to actively managed funds.
ETF
ETFs are similar to index funds because they also aim to mirror the return of an underlying benchmark. However, there is an important difference. They are traded like shares on the stock exchange. Their prices change continuously during market hours, unlike index funds whose NAV is published at the end of each day.
ETFs exist for Nifty, Sensex, Bank Nifty, gold and other indices.
Fund of Fund (FoF)
FoFs invest in units of other mutual funds. They can be international or domestic FoFs.
Most international mutual funds in India are structured as FoFs where they invest in the units of a mother fund located in another country. International funds provide a way for investors to gain exposure to global markets.
Conclusion
There are more than 2,500 mutual fund schemes offered by AMCs across all categories. Understanding the schemes and categories can be a daunting task for any investor. To make investing simpler, SEBI has issued guidelines that every asset management company (AMC) can offer only 1 scheme in each sub-category. This means that an AMC can can have only 1 ELSS scheme, 1 mid-cap scheme, 1 balanced advantage scheme etc.
If you are confused about which mutual fund scheme is right for you, reach out to us and we will help you select the best mutual funds for your goals.
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