What are the different types of mutual funds in India?
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 subcategory||Unique attributes|
|Multicap Fund||Invests across large, mid and small caps with a minimum equity allocation of 65%|
|Largecap Fund||Minimum of 80% investment in largecaps|
|Large & Midcap Fund||Minimum large and midcap investment of 35% each|
|Midcap Fund||At least 65% investment to midcap companies|
|Smallcap Fund||Minimum smallcap investment of 65%|
|Dividend Yield Fund||Invests chiefly in dividend-yielding stocks with at least 65% investment allocation to equity|
|Value Fund||Invests predominantly in companies that conform to a value-oriented investment strategy with minimum equity exposure of 65%|
|Contra Fund||Invests predominantly in companies that conform to a contrarian investment strategy with minimum equity exposure of 65%|
|Focused Fund||Invest in 30 stocks at maximum retaining minimum equity exposure of 65%|
|Sectoral/Thematic Fund||At least 80% exposure to a specified sector/theme|
|ELSS Fund||Minimum equity exposure of 80%|
Note: A mutual fund house can either offer a value fund or a contra fund
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:
|Overnight Funds||Invest in securities with a maturity period of 1 day|
|Liquid Funds||Invest in debt and money market securities with a maturity of 91 days at maximum|
|Ultra-short Duration Funds||Invest in debt and money market securities having Macaulay Duration of 3-6 months|
|Low Duration Funds||Invest in debt and money market securities having Macaulay Duration of 6-12 months|
|Money Market Funds||Invest in money market securities with a maturity of up to 1 year|
|Short Duration Funds||Invest in debt and money market securities having Macaulay Duration of 1-3 years|
|Medium Duration Funds||Invest in debt and money market securities having Macaulay Duration of 3-4 years|
|Medium to Long Duration Funds||Invest in debt and money market securities having Macaulay Duration of 4-7 years|
|Long Duration Funds||Invest in debt and money market securities having Macaulay Duration of 7 years plus|
|Dynamic Bond Funds||Invest in debt instruments across the duration spectrum|
|Corporate Bond Funds||At least 80% exposure to the top-rated instruments|
|Credit Risk Funds||At least 65% exposure to instruments rated below the highest grade|
|Banking and PSU Funds||A minimum of 80% of assets are allocated to banks, PSUs and public-sector financial institutions|
|Gilt Fund||At least 80% is invested in sovereign debt across maturities|
|Gilt Fund with 10-Year Constant Duration||At least 80% is invested in sovereign debt with a target Macaulay Duration of the portfolio of 10 years|
|Floater Fund||Minimum 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:
|Conservative Hybrid Funds||Allocation to equity: 10%-25%
Allocation to debt: 75%-90%
|Balanced Hybrid Funds||Allocation to debt as well as equity ranges between 40%-60% each. No arbitrage trades allowed|
|Aggressive Hybrid Funds||Allocation 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 Funds||Exposure to at least 3 asset classes; for instance, debt, equity and gold with at least 10% allocation to each of them|
|Arbitrage Fund||65% exposure to equity with an aim of investing in arbitrage opportunities|
|Equity Savings Fund||Minimum 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
|Retirement Fund||Solution-oriented offering with a 5-year lock-in period or till the age of retirement (whichever is earlier)|
|Children’s Fund||Solution-oriented offering with a 5-year lock-in period or runs till the child becomes a major (whichever happens earlier)|
Subtypes of other schemes
|Index Funds/ETF||Minimum 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.
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.
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