Types of mutual Fund Plans : Sebi categorization of Mutual Funds
Various Types of Mutual Fund Schemes in India: Investment objectives & Discussion
Rakesh and Datta for a coffee chat where they discuss the different types of mutual fund Plans in India. Rakesh, a seasoned investor, helps Datta, an amateur, understand the basics over their favorite brews.
Conversation:
[Scene: A cozy coffee shop. Rakesh and Datta are seated at a corner table, enjoying their coffee.]
Datta: Hey Rakesh, I’ve been reading up on investing, and I keep hearing about mutual funds. But I’m confused—there seem to be so many types. Can you help me understand the differences?
Rakesh: Of course, Datta! Mutual funds can be a great way to invest because they pool money from many investors to buy a diversified portfolio of stocks, bonds, or other securities. There are several types of mutual funds, each with its own focus and strategy.
Datta: Okay, that sounds interesting. What are the main types of mutual funds?
Rakesh: Let’s break it down. There are a few major categories: equity funds, debt funds, Hybrid funds, and Solution-oriented & Other funds. Each serves a different purpose.
Rakesh: Hey Datta, have you heard about SEBI’s categorization of mutual funds? I was reading about it the other day.
Datta: Oh yeah? I’ve heard bits and pieces. Isn’t it supposed to make investing easier or something?
Rakesh: Exactly! SEBI introduced this framework to bring some order to the mutual fund market. Before this, it was quite chaotic with funds having similar names but different investment strategies. It was super confusing for investors.
Datta: That sounds like a nightmare. So, what exactly did SEBI do?
Rakesh: They categorized mutual funds into five broad categories: Equity Funds, Debt Funds, Hybrid Funds, Solution-Oriented Funds, and Other Funds. Each of these has sub-categories with specific investment objectives.
Datta: Interesting. Let’s start with Equity Funds. What’s in there?
Rakesh: Sure! Equity Funds are divided based on market capitalization and investment strategy. You’ve got Large Cap Funds, Mid Cap Funds, and Small Cap Funds, which invest in large, mid, and small companies, respectively. Then there are Multi Cap Funds that invest across all sizes. Plus, there are Sectoral/Thematic Funds focusing on specific sectors like IT or Pharma, and ELSS which offers tax benefits.
Datta: Got it. So, Large Cap Funds are for the big, stable companies, right?
Rakesh: Exactly. They’re generally less volatile than Mid Cap or Small Cap Funds.
Datta: What about Debt Funds? I assume they’re for more conservative investors?
Rakesh: You got it. Debt Funds are divided based on the duration and credit quality of their investments. For example, there are Overnight Funds that invest in securities with a maturity of one day, Liquid Funds for up to 91 days, and Short Duration Funds for one to three years. There are also Corporate Bond Funds focusing on high-quality corporate bonds.
Datta: That makes sense. And Hybrid Funds mix both equity and debt, right?
Rakesh: Yep. There are Aggressive Hybrid Funds which invest more in equity but also hold some debt, and Conservative Hybrid Funds which focus more on debt but include some equity for growth.
Datta: What about Solution-Oriented Funds? I haven’t heard much about those.
Rakesh: These are designed for specific goals. For instance, Retirement Funds aim to grow your savings over the long term for retirement, and Children’s Funds help save for kids’ future needs like education or marriage.
Datta: Nice! And what’s in the ‘Other Funds’ category?
Rakesh: This includes funds like Index Funds or ETFs that track specific indices like the Nifty 50, and Fund of Funds which invest in other mutual funds.
Datta: Wow, that’s a lot of options! So how does this categorization benefit us as investors?
Rakesh: Well, for one, it brings clarity and transparency. Each category has a clear definition, making it easier to understand what the fund aims to achieve. It also simplifies comparing funds from different houses, helping us make better decisions. Plus, it reduces the chances of mis-selling.
Datta: Sounds like SEBI did a great job then. It must make the whole process of picking a mutual fund a lot less daunting.
Rakesh: Definitely. It’s still crucial to do your research and maybe consult a financial advisor, but this categorization makes the landscape much more navigable.
Datta: Thanks for the breakdown, Rakesh. I feel a lot more confident about understanding mutual funds now!
Rakesh: Glad to help, Datta! Maybe we should look into our portfolios over the weekend. But wait Datta If you want to dig deep I am sharing all the above in tabular format on WhatsApp
Equity Funds:
| Scheme Category | Features of Scheme |
| Multi Cap Fund* | Minimum 75% investment in equity & equity related instruments |
| Flexi Cap Fund | Minimum 65% investments in equity & equity related instruments |
| Large Cap Fund | Minimum 80% investment in large-cap stocks |
| Large & Mid Cap Fund | Minimum 35% investment in large-cap stocks and 35% in mid-cap stocks |
| Mid Cap Fund | Minimum 65% investment in mid-cap stocks |
| Small Cap Fund | Minimum 65% investment in small-cap stocks |
| Dividend Yield Fund | Mainly invests in dividend-yielding stocks with a minimum of 65% in stocks |
| Value Fund | Value investment strategy with a Minimum of 65% investments in equity & equity-related instruments. |
| Contra Fund | Contrarian investment strategy with Minimum 65% investments in equity & equity related instruments |
| Focused Fund | Focussed strategy( Maximum 30 stocks) with a minimum of 65% investments in equity & equity related instruments |
| Sectoral/ Thematic Fund | Minimum 80% investment in Stocks of a particular sector or theme |
| ELSS | Minimum 80% investment in Stocks following Equity linked saving scheme 2005, according to notification of ministry of finance |
Datta: Hey, Rakesh Can you explain how stocks are divided into large cap, mid cap, and small cap?
Rakesh: Sure! In the Indian stock market, stocks are categorized based on their market capitalization. Market cap is calculated by multiplying the company’s current share price by its total number of outstanding shares.
- Large Cap: Companies ranked from 1 to 100 in terms of market cap. These are typically well-established, stable companies.
- Mid Cap: Companies ranked from 101 to 250. They are usually in the growth phase and have the potential to become large caps.
- Small Cap: Companies ranked beyond 250. These are often younger companies with higher growth potential but also higher risk.
Datta: Got it. Now, what’s the difference between a multicap fund and a flexicap fund in India?
Rakesh: Good question! Both are types of mutual funds regulated by SEBI, but they differ in terms of investment strategy:
- Multicap Fund: Invests across large-cap, mid-cap, and small-cap stocks with a minimum allocation of 25% in each category. The allocation is relatively fixed to ensure diversification across all market caps.
- Flexicap Fund: Has the flexibility to invest in large, mid, and small caps without any fixed proportion. The fund manager can change the allocation based on market conditions and opportunities.
Debt Funds:
| Scheme Category | Features of Scheme |
| Overnight Fund | Invest in Overnight securities having maturity of 1 day |
| Liquid Fund | With Debt and money market instruments with maturity of up to 91 days only |
| Ultra Short Duration Fund | Invest in debt and money market Instruments for 3 to 6 months (Macaulay duration for your portfolio). |
| Low Duration Fund | An open-ended debt scheme that Invest in debt and money market Instruments for 6 to 12 months (Macaulay duration for your portfolio). |
| Money Market Fund | Invests in money market instruments with a maturity of up to one year |
| Short Duration Fund | Invest in debt and money market Instruments for 1 to 3 years (Macaulay duration for your portfolio). |
| Medium Duration Fund | Invest in debt and money market Instruments for 3 to 4 years (Macaulay duration for your portfolio). |
| Medium to Long Duration Fund | Invest in debt and money market Instruments for 4 to 7 years (Macaulay duration for your portfolio). |
| Long Duration Fund | Invest in debt and money market Instruments for more than 7 years (Macaulay duration for your portfolio). |
| Dynamic Bond | Investment across duration |
| Corporate Bond Fund | Invest in a Minimum 80% investment in corporate bonds only in AA+ & above. |
| Credit Risk Fund | Invest in a Minimum 65% investment in corporate bonds, only in AA and below. |
| Banking and PSU Fund | Invest in a Minimum of 80% in Debt instruments of in Debt instruments of banks, Public Sector Undertakings, Public Financial Institutions etc. |
| Gilt Fund | Invest in a Minimum 80% in G-secs, across maturity |
| Gilt Fund With 10 year constant duration | Invest in Minimum 80% in G-secs for 10 years ( Macaulay duration of the portfolio is equal to 10 years) |
| Floater Fund | Invest in a Minimum 65% in floating rate instruments. |
Datta: That makes sense. I also came across the term “Macaulay duration.” What is that?
Rakesh: Macaulay duration is a measure of the weighted average time until a bond’s cash flows are paid. It’s used to assess a bond’s sensitivity to interest rate changes. In India, it’s often used in debt funds to gauge interest rate risk. The longer the duration, the more sensitive the bond is to interest rate changes.
Datta: Interesting. And what about low-duration and short-duration funds?
Rakesh: Both are types of debt funds, differing mainly in the duration of their holdings:
- Low Duration Fund: Typically holds securities with a duration of 6 to 12 months. These funds aim to provide higher returns than liquid funds but with slightly higher risk.
- Short Duration Fund: Holds securities with a duration of 1 to 3 years. These funds balance between income generation and risk and are a bit less volatile compared to low-duration funds.
Hybrid Funds:
| Scheme Category | Features of Scheme |
| Aggressive Hybrid Fund | The investment range for equity and equity-related instruments is 65 % to 80 %, while for debt instruments it is 20% to 35%. |
| Balanced Hybrid Fund | The investment range for equity and equity-related instruments is 40% to 60%, while for debt instruments it is 40% to 60%. |
| Conservative Hybrid Fund | Multi-Asset Allocation Fund |
| Dynamic Asset Allocation or Balanced Advantage Fund | Dynamically managed investments in debt and equity (0% to 100% in debt instruments and 0% to 100% in equity and equity-related products |
| Multi Asset Allocation Fund | investment in a minimum of three asset classes, each with a minimum commitment of 10% |
| Arbitrage Fund | Strategy based on arbitrage, with a minimum of 65% allocated to equity and equity-related instruments |
| Equity Savings | Invests at least 65% of its funds in equities and equity-related products, 10% of its funds in debt instruments, and derivatives. |
Datta: That clarifies a lot. Lastly, what’s the difference between a dynamic fund and a dynamic advantage fund?
Rakesh:
- Dynamic Fund: Actively changes its asset allocation between debt and equity based on market conditions. The fund manager adjusts the portfolio to optimize returns and manage risks.
- Dynamic Advantage Fund: Similar to a dynamic fund but often includes additional strategies like using derivatives for hedging or leveraging to enhance returns. These funds aim for higher returns by taking advantage of various market opportunities.
Solution-Oriented Funds:
| Scheme Category | Features of Scheme |
| Retirement Fund | lock-in for a minimum of five years, or until the age of retirement, whichever comes first |
| Children’s Fund | lock-in for a minimum of five years, or until the child reaches majority, whichever comes first |
Other Funds:
| Scheme Category | Features of Scheme |
| Index Funds/ ETFs | A minimum of 95% of the investment should be made in securities from that specific index. |
| Fund of Funds (Overseas/ Domestic) | The underlying fund(s) must get at least 95% of the investment. |
Datta: Thanks, Rakesh! This really helps clear things up.
Rakesh: No problem! Always happy to help with investment queries
Dear Datta if you want to further research, please refer below Articles.
https://rocksofwisdom.com/how-mutual-funds-works-in-india
https://getmoneyrich.com/tax-on-mutual-fund-returns-in-india
https://getmoneyrich.com/debt-mutual-funds-basics
https://rocksofwisdom.com/how-to-identify-multibagger-stocks-for-2024
https://rocksofwisdom.com/fundamentally-strong-smallcap-stocks-in-india
https://rocksofwisdom.com/canslim-investment-criteria-how-it-works