SEBI Categorization Of Mutual Funds
The SEBI, or the Securities and Exchange Board of India, the Indian regulator of mutual funds, recently issued some regulations about the rationalisation and categorisation of mutual funds. This is a move, made by SEBI, to aid investors to identify mutual fund schemes catering to risk appetites and investment requirements. The effort of the SEBI categorisation of mutual funds also aims to create a uniform approach to classifying mutual funds having similar attributes.
Previously, AMC (asset management companies), and advisory and research companies never followed any standardization for the classification of schemes. Hence, there were different schemes that had identical characteristics. As a result of this, investors faced a lot of confusion regarding the choice of mutual funds to meet investment requirements.
How Mutual Funds Are Categorized
With more than 2,000 schemes offered by some 40 fund houses, the need for categorisation was vital. The SEBI categorisation of mutual funds has occurred in the following way:
- Equity Funds - Ten categories
- Debt Funds - Sixteen categories
- Hybrid Funds - Six categories
- Solution Oriented Funds - Two categories
- Other Funds - Two categories
How Debt Schemes Are Classified
According to the SEBI, debt mutual fund schemes have been classified further into sixteen categories. Some of the key ones are listed below, along with their highlights:
- Low Term Funds - These schemes invest in debt and money market securities. This is the case so that the Macaulay tenure of the fund is typically between 6 - 12 months, and it is an open-ended fund.
- Ultra Short-term Funds - This is an open-ended ultra-short period fund with a Macaulay duration lasting 3 - 6 months.
- Liquid Funds - These funds should generally invest in money market securities and debt with a maturity that lasts till 91 days. This is an open-ended fund, with the attribute of easy liquidity attached.
- Overnight Funds - In the SEBI mutual fund categorisation, overnight funds invest in the class of overnight securities, and typically come with a maturity period lasting a day. These are open-ended funds.
- Short-term Funds - These are short-duration debt schemes in which the funds are open-ended and last for a period of 1 - 3 years.
- Medium-term Funds - These are open-ended funds that invest in money market and debt securities with portfolio durations of 3 - 4 years.
- Money Market Funds - This is an open-ended debt scheme, investing in money market securities for a duration of anytime up to a year.
- Medium to Long-term Funds - The duration of these open-ended funds is 4 - 7 years, and they invest your capital in debt and money market securities.
- Long-term Funds - These invest in a portfolio that lasts more than 7 years, and are open-ended in nature, investing in money market instruments and debt.
- Corporate Bond Funds - With regard to mutual fund categories, SEBI classifies these funds as having the ability to invest 80% of their total assets in the highest rated corporate bonds. These are open-ended schemes.
- Dynamic Bond Funds - These are open-ended funds that invest in dynamic debt, across duration.
- PSU and Banking Funds - Such funds invest 80% of their total securities in the debt securities of public sector undertakings, banks, and public financial organisations.
- Credit Risk Funds - Credit risk funds invest 65% of their total asset value in the highest rated corporate bonds, but in the lowest of these. These are open-ended funds.
- Floater Funds - These funds normally invest 65% of their assets in instruments of a floating rate, and are open-ended schemes.
- Gilt Funds - These invest 80% of their total assets in government securities, and have maturity periods that cut across duration.
How Equity Schemes Are Classified
In the SEBI mutual fund categorization, equity-linked schemes are further categorized into ten categories. It is important to note that, in terms of equities, SEBI has clearly defined large, medium and small cap companies. Large cap companies are those which have been ranked within 1 and 100 according to total market capitalization. Medium or mid cap firms are those which have rankings between 101 - 250 according to total market capitalization.
Finally, small cap companies rank beyond 250, by way of total market capitalisation. Here are the equity funds that SEBI has classified:
- Large Cap Funds - Large cap funds should ideally invest around 80% of their total value of assets in equity and associated securities belonging to large cap companies. These are open-ended funds.
- Mid Cap (Medium Cap) Funds - Mid caps invest 65% of their total assets in equity and securities related to equity of mid cap companies.
- Small Cap Funds - These invest 65% of their total assets in equity and linked securities of small cap companies.
- Multi Cap Funds - These invest 65% of their total assets in equity and linked securities across all cap companies - large cap, mid cap, and small cap firms.
- Large and Mid Cap Funds - In the SEBI categorisation of mutual funds, large and mid cap funds are classified as those that invest 35% of their total assets in the equity and associated securities of large cap companies, and 35% of their total assets in equity and linked securities in mid cap companies.
- Dividend Yield Funds - Funds which majorly invest in stocks of a dividend yielding type and 65% (at least) of their total assets in equity are dividend yield funds.
- Value Funds - Value funds typically follow a strategy of value investment. They invest 65% of their total assets in equity and securities which are related.
- Contra Funds - Such funds are those which follow a contrarian strategy while investing 65% of all assets in equity and linked securities.
- Thematic/Sectoral Funds - These should ideally invest 80% of all assets in equity and linked securities, belonging to a specific sector or theme.
- Focused Funds - Focused funds invest about 65% of their assets in equity and connected securities, but target their focus on a certain stock amount, such as a maximum of 30 shares.
- ELSS (Equity Linked Saving Scheme) Funds - These must ideally invest in 80% of all assets in equity and related securities, but this has to be in accordance with the 2005 Ministry of Finance notified ELSS scheme. Furthermore, concerning mutual fund categories, SEBI stipulates that ELSS funds have tax benefits and statutory periods of lock-in for 3 years.
How Hybrid Schemes are Classified
Hybrid schemes, as the name tells you, are those funds that invest in both debt instruments and in equity. Here are the SEBI categories of hybrid funds:
- Balanced Hybrid Funds - These should ideally invest around 40% - 60% of their total asset value in equity and an equal amount in debt instruments, with no arbitrage permitted.
- Aggressive Hybrid Funds - With an aggressive investment approach, these funds invest about 65% - 80% of their assets in equity, and some 20% - 35% in debt instruments.
- Conservative Hybrid Funds - Such funds are almost the opposite of aggressive funds, in terms of their percentages of investment forms, with just 10% - 25% invested in equity, and 75% - 90% invested in debt.
- Balanced Advantage Fund/Dynamic Asset Allocation - The unique characteristic of such funds is they invest in equity or debt which is dynamically managed.
- Multi Asset Allocation Funds - Funds like this, in the SEBI categorisation of mutual funds, have to invest at least 3 asset classes with a minimum of 10% allocation in each of the classes.
- Equity Savings Funds - These are funds that must invest a minimum of 65% of all assets in equity and at least 10% in debt instruments.
- Arbitrage Funds - Ideally, these funds follow an arbitrage strategy and they invest 65% of all assets in equity.
How Solution Oriented Schemes Are Classified
Solution oriented funds are those with stringent lock-in periods that range from one fund to the other. If you are looking for a longer investment horizon and have a particular financial aim in mind, these are the go-to funds for you. Here are the types of solution oriented funds stipulated by SEBI:
- Retirement Funds - These are funds specifically geared to accumulating wealth for retirement. Consequently, such funds have a lock-in period of five years, at the minimum, or until the age of retirement of the investor (whichever is earlier).
- Children’s Funds - Funds which cater to children’s needs when they achieve a maturity age, or those with a lock-in tenure of five years, are called children’s funds. Investors may build wealth in these funds, to suit children’s financial requirements, either a child’s marriage, further education, or any other child’s need.
Other Mutual Fund Categories
With regard to the SEBI mutual fund categorisation, there are categories of mutual funds that fall within the “other funds” class of mutual funds:
- ETFs/Index Funds - As their name aptly states, these funds invest about 95% of their asset value to securities of a specific index. Such funds are said to track an index.
- Funds of Other Funds - These are domestic or overseas funds that invest 95% of assets in an underlying security/asset class.
Essentially, the categorisation of mutual funds by SEBI enables investors to make quick and convenient investment decisions. Furthermore, investors get funds that are custom-made to suit their financial requirements and goals. Although many funds have to re-shuffle their portfolios to fit new categories, this effort is justified as there are many advantages for investors by this change.
- How does re-categorisation of funds help in investment?
Re-categorisation of funds by SEBI can give more clarity about which mutual funds to invest in. Individual investors have different goals and aspirations and being aware of different offerings by mutual funds permits investors to find the right matches.
- When did SEBI introduce the re-categorisation of funds?
The SEBI categorisation of mutual funds took place in October 2017.
- Why was the categorisation of mutual funds introduced?
The categorisation of mutual funds was introduced by SEBI to offer investors clarity in choosing mutual funds as investment vehicles. The categorisation aids investors in finding the right match of mutual funds to unique financial goals.
- Which mutual fund category invests the most in equity?
Large cap mutual funds, under the equity fund segment, invest 80% of their total assets in equity.
- Which mutual fund category invests the most in debt instruments?
Debt-linked mutual funds invest the most in debt instruments, and conservative hybrid funds also invest about 90% of their total assets in debt instruments.