Sebi Categorization Of Mutual Funds In India

The Securities and Exchange Board of India (SEBI), which is the regulator of mutual funds in India, had recently issued regulations on the categorisation and rationalisation of mutual funds. This move has been made by SEBI to help investors identify schemes that cater to their investment needs and risk appetite. SEBI’s effort in this direction also seeks to bring in uniformity in the attributes of similar mutual fund schemes offered by different fund houses.

Earlier asset management companies (AMCs) and research and advisory firms did not follow any standard methodology to categorise the schemes and had different schemes with the same characteristics. This caused a lot of confusion among investors who found it difficult to pick a suitable fund to meet their investment needs.

What was the need for the recategorisation?

As stated above, there was no proper categorisation of mutual funds earlier. With more than 2,000 mutual schemes offered by 40 fund houses, investors were confused about which fund to pick and to add to that, all these schemes had a regular and a direct plan. Also, larger fund houses would have multiple schemes with the same structure but different names. All of these made picking the right fund tough for the investor.

To eliminate the confusion of investors and provide greater clarity to the investors in mutual funds about the nature of the investment portfolio they are investing in, SEBI decided to categorise the mutual fund schemes in a definite manner.

How have mutual funds been classified?

SEBI has classified mutual fund schemes in the following categories:

  1. Equity Schemes (10 categories)
  2. Debt schemes (16 categories)
  3. Hybrid Schemes (6 categories)
  4. Solution Oriented Schemes (2 categories)
  5. Other Schemes (2 categories)

Equity schemes

As per SEBI, equity schemes have been further classified into 10 categories, the features of which, along with the uniform scheme description have been given below:

Category of Schemes Scheme Attributes Uniform Description of the Scheme
Large Cap Fund Should invest 80% of total assets in equity and its related securities of large cap firms An open-ended equity scheme that majorly invests in large cap stocks
Mid Cap Fund Should invest 65% of total assets in equity and its related securities of mid cap firms An open-ended equity scheme that majorly invests in mid cap stocks
Small Cap Fund Should invest 65% of total assets in equity and its related securities of small cap firms An open-ended equity scheme that majorly invests in small cap stocks
Multi Cap Fund Should invest 65% of total assets in equity and its related securities An open-ended equity scheme that majorly invests across large cap, mid cap, and small cap stocks
Large & Mid Cap Fund Should invest 35% of total assets in equity and its related securities of large cap firms and 35% of total assets in equity and its related securities of mid cap firms An open-ended equity scheme that majorly invests in both large cap and mid cap stocks
Dividend Yield Fund Should invest majorly in dividend yielding stocks and at least 65% of total assets in equity An open-ended equity scheme that majorly invests in dividend yielding stocks
Value Fund Should follow a value investment strategy and invest 65% of total assets in equity and its related securities An open-ended equity scheme following a value investment strategy
Contra Fund Should follow a contrarian investment strategy and invest 65% of total assets in equity and its related securities An open-ended equity scheme following a contrarian investment strategy
Sectoral/Thematic Fund Should invest at least 80% of total assets in equity and its related securities of a particular theme or sector An open-ended equity scheme investing in (name of the theme or sector)
Focused Fund Should invest 65% of total assets in equity and its related securities. Should focus on the number of stocks (a maximum of 30 stocks) An open-ended equity scheme investing in a maximum of 30 stocks (mention where the scheme intends to focus, viz., multi cap, large cap, mid cap, small cap)
ELSS Should invest 80% of total assets in equity and its related securities (in accordance with Equity Linked Saving Scheme 2005 notified by the Ministry of Finance) An open-ended equity-linked savings scheme with a statutory lock-in of 3 years and tax benefits

Please note that a mutual fund house will be allowed to offer either a value or a contra fund.

Also, according to SEBI, the large cap, mid cap, and small cap firms have been defined as follows:

Large cap firms - Firms ranked between 1 and 100 by full market capitalisation.

Mid cap firms - Firms ranked between 101 and 250 by full market capitalisation.

Small cap firms - Firms ranked above 250 by full market capitalisation.

Debt Schemes

Category of Schemes Scheme Attributes Uniform Description of the Scheme
Low Duration Fund Should invest in debt and money market securities so that the Macaulay duration of the portfolio is between 6 months and 12 months An open-ended low duration debt scheme investing in securities with Macaulay duration between 6 months and 12 months
Ultra Short Duration Fund Should invest in debt and money market securities so that the Macaulay duration of the portfolio is between 3 months and 6 months An open-ended ultra short-term debt scheme investing in securities with Macaulay duration between 3 months and 6 months
Liquid Fund Should invest in debt and money market securities having a maturity of up to 91 days only An open-ended liquid scheme
Overnight Fund Should invest in overnight securities with a maturity of 1 day An open-ended debt scheme investing in overnight securities
Short Duration Fund Should invest in debt and money market securities so that the Macaulay duration of the portfolio is between 1 year and 3 years An open-ended short-term debt scheme investing in securities with Macaulay duration between 1 year and 3 years
Medium Duration Fund Should invest in debt and money market securities so that the Macaulay duration of the portfolio is between 3 years and 4 years An open-ended medium-term debt scheme investing in securities with Macaulay duration between 3 years and 4 years
Money Market Fund Should invest in money market securities with maturity of up to 1 year An open-ended debt scheme investing in money market securities
Medium to Long Duration Fund Should invest in debt and money market securities so that the Macaulay duration of the portfolio is between 4 years and 7 years An open-ended medium-term debt scheme investing in securities with Macaulay duration between 4 years and 7 years
Long Duration Fund Should invest in debt and money market securities so that the Macaulay duration of the portfolio is more than 7 years An open-ended debt scheme investing in securities with Macaulay duration of more than 7 years
Corporate Bond Fund Should invest 80% of total assets in highest rated corporate bonds An open-ended debt scheme investing in the highest rated corporate bonds
Dynamic Bond Fund Should invest across duration An open-ended dynamic debt scheme investing across duration
Banking & PSU Fund Should invest 80% of total assets in debt securities of banks, public sector undertakings, and public financial institutions An open-ended debt scheme investing in debt securities of banks, public sector undertakings, and public financial institutions
Credit Risk Fund Should invest 65% of total assets in the below highest rated corporate bonds An open-ended debt scheme investing in below highest rated corporate bonds
Floater Fund Should invest 65% of total assets in floating rate instruments An open-ended debt scheme predominantly investing in floating rate instruments
Gilt Fund Should invest 80% of total assets in government securities An open-ended debt scheme investing in government securities across maturity
Gilt Fund with 10 year Constant Duration Should invest 80% of total assets in government securities so that the portfolio’s Macaulay duration is 10 years An open-ended debt scheme investing in government securities that have a constant maturity of 10 years

Hybrid Schemes

Category of Schemes Scheme Attributes Uniform Description of the Scheme
Balanced Hybrid Fund Should invest between 40% and 60% of total assets in equity and its related securities; should invest between 40% and 60% of total assets in debt securities. No arbitrage will be allowed An open-ended balanced scheme investing in equity and debt securities
Aggressive Hybrid Fund Should invest between 65% and 80% of total assets in equity and its related securities; should invest between 20% and 35% of total assets in debt securities An open-ended hybrid scheme investing in equity and debt securities
Conservative Hybrid Fund Should invest between 10% and 25% of total assets in equity and its related securities; should invest between 75% and 90% of total assets in debt securities An open-ended hybrid scheme investing mainly in debt securities
Dynamic Asset Allocation or Balanced Advantage Fund Should invest in dynamically managed equity or debt securities An open-ended dynamic asset allocation fund
Multi-Asset Allocation Fund Should invest in a minimum of three asset classes with a minimum allocation of 10% in each asset class An open-ended scheme investing in (names of the asset classes)
Equity Savings Should invest at least 65% of the total assets in equity and its related securities and at least 10% of total assets in debt securities An open-ended scheme investing in equity, arbitrage, and debt
Arbitrage Fund Should follow arbitrage strategy and invest at least 65% of total assets in equity and its related securities An open-ended scheme investing in arbitrage opportunities

Fund houses will be allowed to offer either a balanced fund or an aggressive hybrid fund.

Solution Oriented Schemes

Scheme Category Scheme Attributes Uniform Description of the Scheme
Children’s Fund Lock-in period for at least 5 years or till the child attains majority age, whichever is earlier An open-ended fund for investment for children with a lock-in period for a minimum of 5 years or until the child reaches majority age, whichever is earlier
Retirement Fund Lock-in period of at least 5 years or till retirement age, whichever is earlier An open-ended retirement solution-oriented scheme with a lock-in period of 5 years or till retirement age (whichever is earlier)

Other schemes

Scheme Category Scheme Attributes Uniform Description of the Scheme
Index Funds/ETFs Should invest at least 95% of total assets in securities of a particular index An open-ended scheme tracking/replicating (name of the index)
Fund of Funds (Overseas or Domestic) Should invest at least 95% of total assets in the underlying fund An open-ended fund of fund scheme investing in (name of the underlying fund)

What is the impact of the categorisation and rationalisation by SEBI?

The categorisation and rationalisation of mutual fund schemes by SEBI will usher clarity in the minds of investors and help them pick a suitable fund suited to their investment requirements. Below we have explained in what ways the categorisation has impacted the overall mutual fund industry.

  • Shuffle in portfolios - The portfolio of many existing schemes will need to be restructured which consequently, would lead to a short-term agitation in the mutual fund segment.
  • Better understanding of risk - Since each scheme has well-defined characteristics, investors will now be able to match their return expectations with their risk-tolerance level to identify which fund they should invest in.
  • Decrease in mis-selling - Categorisation will curb mis-selling as earlier, many investors were misled into investing in schemes that do not meet their requirements. Now even novice investors can identify, understand, and pick the suitable fund for themselves.
  • Increase in the AUM of the fund - Due to the new categorisation, many schemes will be merged and this will cause the Assets Under Management (AUM) of the scheme to rise. This is because the assets of one scheme will be consolidated with the target scheme. Therefore, fund managers will need to put their expertise into managing the rapid increase in the assets of the scheme.

Short-term returns may be impacted - As per the regulation imposed by SEBI, many funds would have to do a reshuffling of their portfolios. This would result in a higher turnover which, in turn, may impact the returns offered by the funds over a short term.

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