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Different types of mutual funds
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There are various categories of Mutual Funds in India. Selecting only a handful of mutual fund schemes for your portfolio from the many different types of mutual funds can be a task. Hence, guided by SEBI, mutual funds categorise their offerings in a standard and uniform manner for the convenience of investors.

After reading this article, you will be able to know
- What are the different types of mutual funds (and their subtypes as well)
- The difference between various categories of mutual funds viz. equity vs debt vs hybrid mutual funds

Different categories of mutual funds in India are:

  • Equity mutual funds
  • Debt mutual funds
  • Hybrid mutual funds
  • Solution-oriented mutual funds
  • Other mutual funds (not falling in any of the above)

Understanding the categorization of mutual fund schemes

While these are broad categorizations, each of these mutual fund types entails various subtypes with unique schemes:

Subtypes of equity mutual funds:

Equity Mutual Funds invest in stocks of different companies based on the investment objective of the underlying scheme. These funds are a great investment option for long-term wealth creation. They may further be divided into:

Mutual fund subcategoryUnique attributes
Multicap FundInvests across large, mid and small caps with a minimum equity allocation of 65%
Largecap FundMinimum of 80% investment in largecaps
Large & Midcap FundMinimum large and midcap investment of 35% each
Midcap FundAt least 65% investment to midcap companies
Smallcap FundMinimum smallcap investment of 65%
Dividend Yield FundInvests chiefly in dividend-yielding stocks with at least 65% investment allocation to equity
Value FundInvests predominantly in companies that conform to a value-oriented investment strategy with minimum equity exposure of 65%
Contra FundInvests predominantly in companies that conform to a contrarian investment strategy with minimum equity exposure of 65%
Focused FundInvest in 30 stocks at maximum retaining minimum equity exposure of 65%
Sectoral/Thematic FundAt least 80% exposure to a specified sector/theme
ELSS FundMinimum equity exposure of 80%

Note: A mutual fund house can either offer a value fund or a contra fund

Definitions:

Largecap: first 100 companies on full market cap

Midcap: 101st to 250th company on full market cap

Smallcap: 251st company onwards on full market cap

Subtypes of debt funds:

Debt Mutual Funds generally invest in securities offering fixed-income returns such as bonds, corporate debentures, money market instruments etc. Their subtypes include:

SubcategoryUnique attributes
Overnight FundsInvest in securities with a maturity period of 1 day
Liquid FundsInvest in debt and money market securities with a maturity of 91 days at maximum
Ultra-short Duration FundsInvest in debt and money market securities having Macaulay Duration of 3-6 months
Low Duration FundsInvest in debt and money market securities having Macaulay Duration of 6-12 months
Money Market FundsInvest in money market securities with a maturity of up to 1 year
Short Duration FundsInvest in debt and money market securities having Macaulay Duration of 1-3 years
Medium Duration FundsInvest in debt and money market securities having Macaulay Duration of 3-4 years
Medium to Long Duration FundsInvest in debt and money market securities having Macaulay Duration of 4-7 years
Long Duration FundsInvest in debt and money market securities having Macaulay Duration of 7 years plus
Dynamic Bond FundsInvest in debt instruments across the duration spectrum
Corporate Bond FundsAt least 80% exposure to the top-rated instruments
Credit Risk FundsAt least 65% exposure to instruments rated below the highest grade
Banking and PSU FundsA minimum of 80% of assets are allocated to banks, PSUs and public-sector financial institutions
Gilt FundAt least 80% is invested in sovereign debt across maturities
Gilt Fund with 10-Year Constant DurationAt least 80% is invested in sovereign debt with a target Macaulay Duration of the portfolio of 10 years
Floater FundMinimum 65% investments in floating rate instruments

Macaulay duration: refers to the weighted average of term-to-maturity cash flows from a bond. This may be used by portfolio managers as an immunization strategy.

Subtypes of hybrid funds:

As the name may suggest, Hybrid Fund schemes invest in a mix of instruments. Aiming to provide investors with the best of both worlds i.e. – capital appreciation from equity assets and regular income from debt securities. Their sub-categories include:

SubcategoryUnique attributes
Conservative Hybrid FundsAllocation to equity: 10%-25%
Allocation to debt: 75%-90%
Balanced Hybrid FundsAllocation to debt as well as equity ranges between 40%-60% each. No arbitrage trades allowed
Aggressive Hybrid FundsAllocation to equity: 65%-80%

Allocation to debt: 20%-35%

Dynamic Asset Allocation or Balanced Advantage Funds

Allocation to debt and equity varies based on market conditions
Multi-Asset Allocation FundsExposure to at least 3 asset classes; for instance, debt, equity and gold with at least 10% allocation to each of them
Arbitrage Fund65% exposure to equity with an aim of investing in arbitrage opportunities
Equity Savings FundMinimum equity exposure: 65%

Minimum debt exposure: 10%

Exposure to arbitrage opportunities is permitted

Note: A mutual fund house can float either an aggressive hybrid fund or a balanced fund

In the case of multi-asset allocation funds, foreign securities aren’t treated as a separate asset class

Subtypes of solution-oriented funds

SubcategoryUnique attributes
Retirement FundSolution-oriented offering with a 5-year lock-in period or till the age of retirement (whichever is earlier)
Children’s FundSolution-oriented offering with a 5-year lock-in period or runs till the child becomes a major (whichever happens earlier)

Subtypes of other schemes

SubcategoryUnique attributes
Index Funds/ETFMinimum 95% exposure to a specified index
Fund of Fund (FoF) (Overseas and Domestic)Minimum 95% exposure to an underlying fund

All mutual fund classification norms mentioned previously are applicable to open-ended mutual fund schemes only.

Advantages to the categorisation of mutual funds in India

  • It’s comparatively easy for investors to select suitable mutual fund schemes when they are true to their categories and labels.
  • Categorisation and rationalisation of mutual fund schemes in India bring standardisation and uniformity to different mutual fund schemes falling under the same category. For instance, multi-cap equity mutual fund schemes from any mutual fund house will have similar fundamental attributes, standard indicative asset allocation and similar mandates for fund managers amongst others.
  • The right classification of mutual funds pre-empts mis-selling and helps investors pick the best possible schemes based on their investment objectives, risk appetite and time horizon preferences.

Disadvantages of categorisation of mutual funds in India

  • Mutual fund classification doesn’t offer much help at the scheme-level selection. For example, mutual fund classification can tell you what a multi-cap scheme is. But it offers no guidance on which multi-cap scheme you should invest in.
  • Too many options may sometimes confuse someone who is new to investing.

Conclusion

Mutual fund schemes in India are classified based on their asset allocation, risk profile and investment mandates. Investors should pick the best schemes from the suitable categories to make the most of them.

Disclaimer:

The blog is for information purposes only and anything mentioned herein shouldn’t be construed as a reason to buy/hold/sell any stock or a mutual fund. Furthermore, the information provided in the blog and observations made therefrom shouldn’t be treated as the extension of recommendations made on the other properties of Ventura Securities. If you follow any research recommendations made by our fundamental or technical experts, you should also read associated risk factors and disclaimers.

Mutual Funds are subject to market risks and you should pay close attention to risk factors before investing. We strongly suggest you consult your financial advisor before taking any decision pertaining to your finances.

We, Ventura Securities Ltd, (SEBI Registration Number INH000001634) its Analysts & Associates with regard to blog article hereby solemnly declare & disclose that:

We do not have any financial interest of any nature in the company. We do not individually or collectively hold 1% or more of the securities of the company. We do not have any other material conflict of interest in the company. We do not act as a market maker in securities of the company. We do not have any directorships or other material relationships with the company. We do not have any personal interests in the securities of the company. We do not have any past significant relationships with the company such as Investment Banking or other advisory assignments or intermediary relationships. We are not responsible for the risk associated with the investment/disinvestment decision made on the basis of this blog article.

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