Comprehensive Classification of Mutual Fund Schemes (Part 5)

This final installment of our guide to Chapter II: Concept and Role of a Mutual Fund provides a detailed breakdown of the various categories of mutual fund schemes. To ensure investors select the right product, the Securities and Exchange Board of India (SEBI) has established a standardized categorization framework. These notes are derived from the NISM Series VA: Mutual Fund Distributors curriculum to provide an exhaustive and professional resource.

Categorisation of Equity Schemes

Equity schemes primarily invest in stocks and are categorized based on the market capitalization of the companies they target or their specific investment strategy.

• Multi Cap Fund: An open-ended equity scheme that invests across large-cap, mid-cap, and small-cap stocks. It must maintain a minimum investment in equity of 65 percent of total assets.
• Large Cap Fund: Predominantly invests in large-cap companies. The minimum investment in equity of large-cap companies must be 80 percent of total assets.
• Large and Mid-Cap Fund: Invests in both large and mid-cap stocks. It must allocate at least 35 percent of total assets to equity mid-cap stocks and 35 percent to large-cap stocks.
• Mid Cap Fund: Predominantly invests in mid-cap companies, with a minimum equity allocation of 65 percent of total assets.
• Small Cap Fund: Focuses on small-cap companies, requiring a minimum equity investment of 65 percent of total assets.
• Dividend Yield Fund: An open-ended scheme that predominantly invests in dividend-yielding stocks.
• Value Fund or Contra Fund: These schemes follow a value investment strategy (picking undervalued stocks) or a contra-investment strategy (taking a contrarian view of the market).
• Focused Fund: An open-ended scheme that invests in a concentrated portfolio of maximum 30 stocks. The fund must specify its focus (e.g., large-cap, mid-cap, etc.).
• Sectoral / Thematic: Schemes that invest in a specific sector (e.g., Banking, Power) or a broader theme (e.g., Infrastructure, which may include cement, steel, and telecom).
• Equity Linked Savings Scheme (ELSS): An open-ended equity scheme with a statutory lock-in period of 3 years that provides specific tax benefits to investors.

Categorisation of Debt Schemes

Debt schemes invest in fixed-income securities and are primarily categorized based on the Macaulay duration (a measure of time until the fund's investment is recovered) or the credit quality of the underlying assets.

Categorisation of Hybrid Schemes

Hybrid schemes invest in a combination of both equity and debt instruments to balance risk and return.

• Conservative Hybrid Fund: Focuses on debt (75% to 90% of assets) with a small equity component (10% to 25%).
• Balanced Hybrid Fund: Maintains a relatively equal balance, with equity and debt each ranging between 40 percent and 60 percent. No arbitrage is permitted in this scheme.
• Aggressive Hybrid Fund: Primarily equity-driven (65% to 80% of assets), with a debt portion of 20% to 35%.
• Dynamic Asset Allocation (Balanced Advantage): An open-ended fund where the allocation between equity and debt is managed dynamically based on market conditions.
• Multi Asset Allocation: Must invest in at least three asset classes with a minimum allocation of 10 percent in each.
• Arbitrage Fund: Exploits price differences in different markets. It must invest at least 65 percent in equity and equity-related instruments.

Solution-Oriented and Other Specialized Schemes

These schemes are designed for specific life goals or follow unique structural patterns.

• Retirement Fund: A solution-oriented scheme with a lock-in of 5 years or until retirement age, whichever is earlier.
• Children’s Fund: A goal-based fund with a lock-in of 5 years or until the child attains the age of majority.
• Index Funds / ETFs: Passive schemes that replicate a specific index. They must invest at least 95 percent of total assets in the securities of that index.
• Fund of Funds (FoF): An open-ended scheme that invests at least 95 percent of its assets in an underlying fund (either domestic or overseas).
• Fixed Maturity Plans (FMP): Close-ended debt funds where the portfolio's duration is closely aligned with the scheme's maturity.
• Infrastructure Debt Funds: Specialized vehicles sponsored by banks or NBFCs specifically for institutional investors to fund infrastructure projects.
• Real Estate Mutual Funds / REITs: Schemes that invest in real estate assets or infrastructure investment trusts to provide investors with exposure to the property market.

Key Takeaways

• Equity funds are classified to help investors choose between growth (Small/Mid Cap) and stability (Large Cap).
• Debt fund selection is primarily driven by the investor's time horizon and the Macaulay duration of the fund.
• Hybrid funds offer a "middle ground" for investors seeking moderate risk.
• Lock-in periods are standard for solution-oriented schemes like Retirement and Children's funds to promote long-term discipline.

Important Terms to Know

• Macaulay Duration: A measure of the time it takes for an investor to be repaid the bond's price by its total cash flows.
• Market Capitalization: The total value of a company's outstanding shares (used to define Large, Mid, and Small-cap).
• Arbitrage: The simultaneous purchase and sale of an asset to profit from an imbalance in the price.

This concludes the complete short notes for Chapter II: Concept and Role of a Mutual Fund. Part 1 covered basic roles, Part 2 operational concepts, Part 3 advantages, Part 4 limitations and structures, and Part 5 final scheme categorisations.