Part-1 Category of Mutual Fund Schemes

Categorization topic is very vast so due to this reason I will divided this blog content into 3 parts.

Categorization of Mutual Funds In India

Part-1 Category of Mutual Fund Schemes

As per SEBI guidelines on Categorization of mutual funds schemes and Rationalization of schemes issued in October 2017, mutual fund schemes are classified as –

1. Equity Schemes

2. Debt Schemes

3. Hybrid Schemes

4. Solution Oriented Schemes – For Retirement and Children

5. Other Schemes – Index Funds & ETFs and Fund of Funds

– Under Equity category, Large, Mid and Small cap stocks have now been defined.

– Naming convention of the schemes, especially debt schemes, as per the risk level of

underlying portfolio (e.g., the erstwhile ‘Credit Opportunity Fund’ is now called “Credit

Risk Fund”)

– Balanced / Hybrid funds are further categorised into conservative hybrid fund, balanced hybrid fund and aggressive hybrid fund.

EQUITY SCHEMES

An equity Scheme is a fund that –

– Primarily invests in equities and equity related instruments.

– Seeks long term growth but could be volatile in the short term.

– Suitable for investors with higher risk appetite and longer investment horizon.

The objective of an equity fund is generally to seek long-term capital appreciation. Equity funds may focus on certain sectors of the market or may have a specific investment style, such as investing in value or growth stocks.

Equity Fund Categories as per SEBI guidelines on Categorization and Rationalization of schemes

Multi Cap Fund	At least 65% investment in equity & equity related instruments
Large Cap Fund	At least 80% investment in large cap stocks
Large & Mid Cap Fund	At least 35% investment in large cap stocks and 35% in mid cap stocks
Mid Cap Fund	At least 65% investment in mid cap stocks
Small cap Fund	At least 65% investment in small cap stocks

Dividend Yield Fund	Predominantly invest in dividend yielding stocks, with at least 65% in stocks
Value Fund	Value investment strategy, with at least 65% in stocks
Contra Fund	​Scheme follows contrarian investment strategy with at least 65% in stocks
Focused Fund	Focused on the number of stocks (maximum 30) with at least 65% in equity & equity related instruments
Sectoral/ Thematic Fund	At least 80% investment in stocks of a particular sector/ theme
ELSS	At least 80% in stocks in accordance with Equity Linked Saving Scheme, 2005, notified by Ministry of Finance

*Also referred to as Diversified Equity Funds – as they invest across stocks of different sectors and segments of the market. Diversification minimizes the risk of high exposure to a few stocks, sectors or segment.

SECTOR SPECIFIC FUNDS

Sectoral funds invest in a particular sector of the economy such as infrastructure, banking, technology or pharmaceuticals etc.

– Since these funds focus on just one sector of the economy, they limit diversification, and are thus riskier.

– Timing of investment into such funds are important, because the performance of the sectors tend to be cyclical.

Examples of Sector Specific Funds - Equity Mutual Funds with an investment objective to invest in

• Pharma & Healthcare Sector

• Banking & Finance Sector:

• FMCG (fast moving consumer goods) and related sectors.

• Technology and related sectors

THEMATIC FUNDS

• Thematic funds select stocks of companies in industries that belong to a particular theme

- For example, Infrastructure, Service industries, PSUs or MNCs.

• They are more diversified than Sectoral Funds and hence have lower risk than Sectoral funds.

VALUE FUNDS (STRATEGY AND STYLE BASED FUNDS)

• Equity funds may be categorized based on the valuation parameters adopted in stock selection, such as

– Growth funds identify momentum stocks that are expected to perform better than the market – Value funds identify stocks that are currently undervalued but are expected to perform well over time as the value is unlocked

• Equity funds may hold a concentrated portfolio to benefit from stock selection.

– These funds will have a higher risk since the effect of a wrong selection can be substantial on the portfolio’s return

CONTRA FUNDS

• Contra funds are equity mutual funds that take a contrarian view on the market.

• Underperforming stocks and sectors are picked at low price points with a view that they will perform in the long run.

• The portfolios of contra funds have defensive and beaten down stocks that have given negative returns during bear markets.

• These funds carry the risk of getting calls wrong as catching a trend before the herd is not possible in every market cycle and these funds typically underperform in a bull market.

• As per the SEBI guidelines on Scheme categorisation of mutual funds, a fund house can either offer a Contra Fund or a Value Fund, not both.

EQUITY LINKED SAVINGS SCHEME (ELSS)

ELSS invests at least 80% in stocks in accordance with Equity Linked Saving Scheme, 2005, notified by Ministry of Finance.

• Has lock-in period of 3 years (which is shortest amongst all other tax saving options)

• Currently eligible for deduction under Sec 80C of the Income Tax Act upto ₹1,50,000

For Debt Schemes refer part - 2 of the "CATEGORIZATION OF MUTUAL FUND SCHEMES Part-2"

I hope! my efforts on spreading awareness on Part-1 Category of Mutual Fund Schemes,

have fulfil your curiosity.

then waiting for what?

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