There are around 2500+ mutual funds operating in India across the various asset classes namely equities, debt securities, bonds, money market instruments, pension oriented funds etc. All of them have different asset allocation with various objectives, portfolio, and lock in period. So, it is quite confusing for a common individual investor to choose the perfect mutual funds in order to gain satisfactory return over the long term taking consideration time horizon and risk appetite. To solve this riddle Categorization and Rationalization of Mutual fund schemes have come into effect under the guidelines of Securities and Exchange Board of India. In this column, we will discuss 36 types of mutual funds in India after Categorization and Rationalization of Mutual fund schemes by SEBI.

What is Categorization and Rationalization of Mutual fund Schemes by SEBI?

Before the circular came into being mutual fund offers various equity oriented mutual funds with a lot of irregularities in equity funds in respect of asset allocation and inherent risk profile. Let’s make it clear with the following example.

A Large-cap equity fund is supposed to invest a larger portion of the fund i.e. 80% of money in large cap companies. But in order to generate a higher rate of return it is seen that the large-cap oriented mutual fund invests more than 40% in mid-cap and small cap companies. In addition to this small-cap equity fund invests more than 50% in large-cap stocks.

Types of Mutual Funds

In order to ensure standardization the SEBI has introduced Categorization and Rationalization of mutual fund schemes where all the mutual fund schemes are divided into 5 types of funds across all the asset class i.e. equity, debt, money market funds, exchange traded funds etc.

After the categorization and rationalization of mutual funds there are 36 types of mutual funds offered by several mutual fund houses.

Categorization and Rationalization of Equity oriented Mutual fund Schemes

In order to uniformity, the definition of large-cap, mid-cap, and small-cap are as follows,

Large-cap companies – companies between 1 st and 100 th in respect of their market capitalization.

Mid-cap companies – companies between 101 th and 250 th in respect of their market capitalization.

Small-cap companies – companies 251th onwards in respect of their market capitalization.

Types of Equity Oriented Mutual Funds

Now, to indicate the risk level the equity oriented mutual funds are further divided into twelve sub-categories which have own individual portfolio namely,

Large-cap fund – Invests minimum of 80% fund in the assets of large-cap stocks i.e. between 1st and 100th company/stock.

Mid-cap fund – Invests minimum of 65% fund in the assets of mid-cap stocks i.e. between 101th and 250th company/stock.

Small-cap fund – Invests minimum of 65% fund in the assets of small-cap stocks i.e. from 251th company/stock and beyond.

Large-cap and Mid-cap fund – Invests minimum of 35% fund in the assets of large-cap stocks and 35% fund in the assets of mid-cap stocks.

Multi-cap fund – Invests minimum of 65% fund in the assets of large-cap stocks, mid-cap stocks and small-cap companies stocks.

Dividend Yield Fund – Invests minimum of 65% fund in the equity asset class. But under this scheme fund houses predominantly invest in dividend yielding stocks.

Value Fund – Invests minimum of 65% fund in the equity asset class which follows value investment strategy. Needless to say, value investment strategy can be defined as,

Below the price-to-book ratio than the industry peer companies/stocks.

Lower than price-to-earnings ratio than the industry peer companies/stocks.

Good Dividend yield.

OR

Contra Fund – Invests minimum of 65% fund in the equity asset class which follows contrarian investment strategy. Contrarian investment strategy can be defined as where investors are against the market trends. Just make it clear with an example. When the market touches new highs in leaps and bounds then these types of investors sell stocks. But when market is under correction then these types of investors buy stocks.

Focused Fund – Invests minimum of 65% fund in the equity asset class with a limit of investment in maximum 30 stocks.

Sectoral/Thematic Fund – Invests minimum of 80% fund of equity asset class of any specific sector or any theme.

Equity Linked Savings Scheme or ELSS – Invests minimum of 80% fund of equity asset class with a minimum lock-in-period of 3 years.

**Mutual funds are allowed to offer between Value Fund and Contra Fund.

Categorization and Rationalization of Debt oriented Mutual fund Schemes

Now in order to indicate the interest risk and the credit risk, the debt-oriented mutual funds are further divided into sixteen sub-categories which have own individual portfolio namely,

Overnight fund – Invests a minimum of 80% fund in debt securities which mature overnight.

Liquid fund – Invests minimum of 80% fund in such debt securities which mature within 91 days.

Ultra-short duration fund – Invests minimum of 80% fund in debt securities and money market instrument with Macaulay duration which is between 3 month and 6 month.

Low duration fund – Invests minimum of 80% fund in debt securities and money market instruments with Macaulay duration between 6 month and 12 month.

Money Market fund – Invests minimum of 80% fund in such money market instruments which mature within one year.

Short duration fund

Invests minimum of 80% fund in debt securities and money market instruments with Macaulay duration between 1 year and 3 years.

Medium duration fund – Invests minimum of 80% fund in debt securities and money market instruments with Macaulay with the duration of 3 to 4 years.

Medium to Long duration fund – Invests minimum of 80% fund in debt securities and money market instruments with Macaulay duration between 4 years and 7 years.

Long duration fund – Invests minimum of 80% fund in debt securities and money market instruments with Macaulay duration is beyond 7 years.

Dynamic Bond Fund – Invests across durations i.e. changes in market value of securities owing to change in interest rate of 1%.

Corporate bond fund

Invests minimum of 80% fund in corporate bonds with a credit rating of AAA, AA+ etc.

Credit risk fund – Invests minimum of 65% fund in corporate bonds with a credit rating below AA+.

Banking and PSU fund – Invests minimum of 80% fund in debt instruments issued by banks, public sector undertakings, public financial institutions etc.

Gilt fund – Invests minimum of 80% fund in Government securities across maturity period between one day and beyond.

Gilt with 10 year constant duration – Invests minimum of 80% fund in Government securities with Macaulay duration of 10 years.

Floater fund – Invests minimum of 65% fund in instruments which have floating rate.

Categorization and Rationalization of Hybrid Mutual fund Schemes

Conservative Hybrid Fund – Invests 10-25% fund in the equity assets class and 75-90% fund in debt securities.

Balanced Hybrid Fund – Invests 40-60% fund in the equity assets class and 60-40% fund in debt securities.

Aggressive Hybrid Fund – Invests 65-80% fund in the equity assets class and 35-20% fund in debt securities.

Dynamic Asset Allocation or Balanced Advantage Fund – Invests in the equity asset class and debt securities without any restriction.

Multi Asset Allocation Fund – Invests in at least 3 asset classes with a minimum investment of 10% of each asset class.

Arbitrage Fund – Invests at least 65% fund in the equity asset class which follows arbitrage investment strategy. Arbitrage investment Strategy gives opportunity to investors who want profit when the market is volatile without taking too much risk.

Equity Savings Fund – Invests at least 65-80% fund in the equity asset class and 10% fund in debt securities.

**Mutual funds are allowed to offer between Balanced Hybrid Fund and Aggressive Hybrid Fund.

Categorization and Rationalization of Solution oriented Schemes

Retirement Fund – Mutual funds are allowed to offer for retirement purposes with a lock-in-period of 5 years or till the retirement age of 60, whichever is earlier.

Children’s Fund – Mutual funds are allowed to offer for purposes to secure the future to meet the expenditure like children’s education cost. It has a lock-in-period of 5 years or till the age of 18 of the child, whichever is earlier.

Categorization and Rationalization of Other Schemes

Index Funds or Exchange Traded Funds – Invests minimum of 95% fund of equity asset class of any specific Index such as S&P BSE Sensex, S&P BSE FMCG, Nifty Auto, Nifty Bank etc.

Fund-of-Funds [Domestic/Overseas] – Invests minimum 95% fund in various funds irrespective of domestic or overseas.

How Categorization and Rationalization of mutual funds impact on Mutual fund houses

Mutual funds offer various schemes under the same category with a confusing investment strategy. Let’s make it clear with an example. A Large-cap equity fund is supposed to invest a larger portion of the fund i.e. 80% of money in large cap companies. But in order to generate a higher rate of return it is seen that the large-cap oriented mutual fund invests more than 40% in mid-cap and small cap companies. In addition to small-cap equity fund invests more than 50% in large-cap stocks.

So, after the categorization and rationalization of mutual fund schemes one common individual can have a clear view about what the asset allocation of the particular fund is offered by mutual fund houses. Since there is only one scheme is permitted under one category, mutual fund houses need to merge the mutual fund schemes with identical and confusing portfolio.

How Categorization and Rationalization of mutual funds impact common individual investor

Since mutual fund houses offer only one fund in each category, it is easy to choose the best fund across various categories in accordance with risk appetite and risk profile. Let’s explain. Large-cap oriented equity fund invests more than 40% in mid-cap and small-cap companies in order to generate better returns. In addition small-cap equity fund invests more than 50% in large-cap stocks.

Since only one scheme is allowed with strict portfolio, it is easier to choose the best mutual fund in accordance with risk appetite.

Among the 36 types of mutual funds which is ideal for common individual investor

Usually risk and returns are directly proportionate. The higher is the return the higher will be the risk involvement. Before making investment you should consider your goals and then invest accordingly. Suppose you have a long time horizon of 20 years or above, you can consider the small-cap or mid-cap oriented mutual funds for investment. If you are a salaried person and will retire after 30 years then you can make a portfolio of small-cap or mid-cap mutual funds. Small-cap and mid-cap mutual funds have the potential to give you better returns, but they are more volatile as compared to large cap mutual funds.

On the other hand, if you have a short time span of 5 years or less then you can invest in large-cap oriented mutual funds. Large caps are less volatile and can give you steady returns over the years.

Hope this will help you to choose the best mutual fund among the 36 types of mutual funds in India. If you have found any question feel free to comment so that we can have a discussion. If you have found this post helpful feel free to share with your loved one.