The big announcement last year in the mutual fund industry was categorization and rationalization of mutual fund schemes by SEBI. The market regulator sought to bring uniformity in the characteristics of similar schemes to ensure that an investor is able to evaluate various options before making any investment.
As per the circular, SEBI has demarcated a total of 36 categories under 5 broad groups:
- Equity Schemes (10)
- Debt schemes (16)
- Hybrid Schemes (6)
- Solution Oriented Schemes (2)
- Other Schemes (2)
It is said that fund houses shall be allowed to have just one scheme per category. This is except in categories like index funds, fund of funds & sectoral funds. This will simplify selection of funds for investors and advisors.
Due to standard categorization, comparison of schemes will be easier and one would be able to conduct an apple-to-apple comparison for each category. Similar schemes will have to be either merged or reclassified into different category. Due to the ‘1 scheme per category’ criteria, there would be a reduction in duplication of schemes. Several fund houses have recently merged, change names and basic attributes of some schemes to comply with the new SEBI norms.
Below are the salient features of major equity schemes:
| Category | Portfolio | SEBI definition | Stocks with market capitalization* |
| Large Cap | Minimum 80% assets in Large Cap stocks | 1st-100th Company by market cap | 1st– Reliance Ind 100th– Vakrangee Ltd |
| Mid cap | Minimum 65% assets in Mid Cap stocks | 101st-250th Company by market cap | 101st– Colgate 100th– Manappuram Finance |
| Small cap | Minimum 65% assets in Small Cap stocks | 251st Company onwards by market cap | 251st– V-Guard Ind onwards |
| Multi Cap | Minimum 65% assets in equity across market cap | Invests across all market caps | |
| Large & Mid Cap | Minimum 35% assets in large cap & 35% in mid cap | Invests in large cap & mid cap stocks | |
| Focused Fund | Maximum 30 stocks irrespective of market cap | Invests in less than 30 stocks | |
| Dividend Yield Fund | Minimum 65% assets in equity, predominantly in dividend yielding stocks | Invest in high dividend paying stocks | |
| Value Fund# | Minimum 65% assets in equity, equity related instruments | Follow a value investing strategy | |
| Contra Fund# | Minimum 65% assets in equity, equity related instruments | Follow a contrarian investment strategy | |
| Sectoral Fund | 80% of assets in equity of a particular sector/theme | Fund house can have different sectoral funds like Pharma Fund, banking Fund etc. | |
| ELSS | 80% assets in equity, statutory lock-in of 3 years with tax benefit | Tax saving fund with 3 year lock-in | |
#Mutual funds will be allowed to offer either a Value Fund or Contra Fund
*Stocks are as per AMFI’s list of Average Market Capitalization of listed companies during the six months ended 31st December 2017. AMFI will upload the list of stocks on its website every six months based on data at the end of June and December every year. Portfolio rebalance has to be done in subsequent 1 month.
Debt funds follow two strategies: duration and accrual. Duration funds benefit from interest rate movements, whereas accrual funds earn regular income from corporate bonds.
Earlier, the maturity of funds was not defined. This made it difficult for investors to track the fund’s performance. But now, transparency has improved as the fund’s portfolio duration should be aligned within the limit specified for each category.
Below are the salient features of major debt schemes:
| Category | Portfolio/Duration | Description |
| Overnight Fund | Invest in securities with maturity of 1 day | Good Alternative to savings account. Negligible interest rate risk and low credit risk |
| Liquid Fund | Invest in securities with maturity up to 91 days | |
| Ultra Short Duration Fund | Portfolio duration of funds- 3-6 months | |
| Low Duration Fund | Portfolio duration of funds- 6-12 months | |
| Money Market Fund | Invest in securities with maturity up to 1 year | |
| Short Duration Fund | Portfolio duration of funds- 1-3 years | Longer the duration greater the sensitivity to interest rates
Shorter durations have lower risk & yield while longer durations have higher risk & yields |
| Medium Duration Fund | Portfolio duration of funds- 3-4 years | |
| Medium to Long Duration Fund | Portfolio duration of funds- 4-7 years | |
| Long Duration Fund | Portfolio duration of funds more than 7 years | |
| Dynamic Bond | Duration not fixed, managed dynamically | |
| Corporate Bond Fund | Minimum 80% assets in AA+ and above rated corporate bonds | Credit rating is parameter of selection Lower credit rating- Higher credit risk High credit risk & low interest rate risk |
| Credit Risk Fund | Minimum 65% assets in AA and below rated corporate bonds | |
| Banking & PSU Fund | Minimum 80% of assets in debt instruments of banks, PSUs & Public financial Institutions | – |
| Gilt Fund | Minimum 80% of assets in government securities | – |
| Gilt Fund with 10 year constant duration | Minimum 80% of assets in government securities with portfolio maturity constant at 10 years | – |
| Floater Fund | Minimum 65% investment in floating rate instruments | – |
Below are the salient features of major hybrid schemes:
| Category | Portfolio | Description |
| Conservative Hybrid Funds | Equity- 10 to 25% & Debt 75 to 90% | MIPs- Debt oriented for tax purpose |
| Balanced Hybrid Funds | Equity- 40 to 60% & Debt 40 to 60% | Debt oriented for tax purpose. No arbitrage permitted |
| Aggressive Hybrid Funds | Equity- 65 to 80% & Debt 20 to 35% | Equity oriented for tax purpose. Balanced Funds will come under this category |
| Dynamic Asset Allocation or Balanced Advantage | Equity/Debt managed dynamically | Dynamic asset allocation between equity & debt |
| Multi-Asset Funds | Invest in atleast 3 asset classes with minimum of 10% in each | Invest in different asset classes |
| Arbitrage Fund | Minimum 65% in equity following arbitrage strategy. | Invest in arbitrage opportunities |
| Equity Savings | Equity- 65% & Debt 10%, rest in hedged/unhedged instruments | Equity oriented for tax purpose. Invest in equity, arbitrage & debt. |
*Mutual funds will be permitted to offer either Balanced Hybrid or Aggressive Hybrid.
Below are the salient features of major solution oriented schemes:
| Category | Description |
| Retirement Planning | Scheme having lock-in of 5 years or till retirement age |
| Children Future Planning | Scheme having lock-in of 5 years or till child attains majority age |
Below are the salient features of major other scheme categories:
| Category | Portfolio/Description |
| Index funds | Minimum 95% assets in securities of index replicated/tracked |
| ETFs & Fund of Funds | Minimum 95% assets in underlying fund |
Categorization of schemes may lead to short-term turbulence due to changes that need to be made in each scheme. But, in the long run, this move will have a positive growth effect for the industry as a whole. With more and more investors preferring investment in mutual funds, this initiative is a step in the right direction.
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Sabyasachi Paul has been associated with equity research and advisory on equity markets in India for over 9 years & currently heads the equity research desk of Eastern Financiers Ltd, Kolkata. He also manages a portfolio on the online platform Kristal. Find link to the strategy named ‘The Tortoise’