To simplify fund selection and prevent misleading scheme names, SEBI issued standard categorization rules. Mutual fund schemes are classified into five broad umbrella categories:
- 1. Equity Schemes: Growth & Capital Appreciation
- 2. Debt Schemes: Income Generation & Stability
- 3. Hybrid Schemes: Asset Allocation Mix
- 4. Solution-Oriented Schemes: Retirement & Children's Future
- 5. Other Schemes: Passive, ETFs, FoFs & Commodities
1. Equity Mutual Fund Schemes
Equity schemes invest primarily in shares of listed companies. They focus on long-term capital appreciation but carry higher short-term price volatility.
Market Cap Definitions (SEBI Standardization)
- Large Cap: 1st – 100th company in terms of full market capitalization.
- Mid Cap: 101st – 250th company in terms of full market capitalization.
- Small Cap: 251st company onwards.
Specialized Equity Sub-Categories
| Category / Strategy | Core Investment Focus | Risk Profile & Key Considerations |
|---|---|---|
| Sectoral Funds | Single economic sector (e.g., Banking, IT, Pharma, FMCG). | Highest Risk: Lacks sector diversification; cyclical timing is crucial. |
| Thematic Funds | Broader multi-sector themes (e.g., Infrastructure, PSU, Manufacturing). | High Risk: More diversified than sectoral funds, but tied to theme cycles. |
| Value / Growth Funds | Focus on undervalued stocks (Value) or high-growth momentum stocks (Growth). | Focuses on mispriced assets. (Note: Fund houses can offer Value or Contra, not both). |
| Contra Funds | Contrarian strategy buying out-of-favor or defensive assets. | Bets against prevailing trends; can underperform during prolonged bull runs. |
| ELSS (Tax Saving) | Mandatory minimum 80% allocation to equities under Govt rules. | 3-Year Lock-in: Qualifies for tax deductions up to ₹1.5 Lakh under Sec 80C. |
2. Debt & Fixed-Income Schemes
Debt schemes invest in fixed-income instruments like Government Securities (G-Secs), Treasury Bills, Commercial Papers (CPs), and Corporate Bonds. They prioritize steady capital preservation and accrual income.
Structure of Debt Categories
- Short-End Duration: Overnight, Liquid, Ultra Short Duration, and Low Duration Funds.
- Medium-to-Long Duration: Short Term, Medium Term, Long Duration, and Gilt Funds.
- Specialized Mandates: Credit Risk, Dynamic Bond, and Floating Rate Funds.
Key Debt Strategies & Structures
- Dynamic Bond Funds: Strategically shift portfolio duration based on interest rate forecasts (lengthening duration when rates are expected to fall to gain from price appreciation).
- Floating Rate Funds: Invest in instruments with periodically resetting interest coupons, reducing sensitivity to interest rate shifts.
- Fixed Maturity Plans (FMPs): Close-ended debt schemes that lock in yields by matching instrument maturities directly to the fund's tenure, removing mark-to-market volatility. Units trade on stock exchanges in demat form.
3. Hybrid Schemes
Hybrid funds blend equity (for capital growth) and debt (for income stability) to create balanced asset allocations.
Low Equity % → High Equity %
[Conservative Hybrid: 10-25%] → [Balanced Hybrid: 40-60%] → [Aggressive Hybrid: 65-80%] → [Arbitrage Funds: Cash-Futures Spread]
[Conservative Hybrid: 10-25%] → [Balanced Hybrid: 40-60%] → [Aggressive Hybrid: 65-80%] → [Arbitrage Funds: Cash-Futures Spread]
- Multi-Asset Allocation Funds: Mandated to invest across at least 3 distinct asset classes (e.g., Equity, Debt, Gold) with a minimum 10% allocation to each.
- Arbitrage Funds: Capitalize on price differences between the Cash (Spot) and Derivatives (Futures) markets. By taking equal and opposite positions, they lock in market-neutral spreads with minimal directional equity risk.
- Capital Protection Oriented Funds: Close-ended schemes that invest the bulk of capital in high-grade debt maturing at par to safeguard principal, while allocating the remaining portion to equity derivatives for upside potential.
4. Passive, ETF, and Other Special Schemes
Passive Investments: Index Funds vs. ETFs
| Feature | Index Funds | Exchange Traded Funds (ETFs) |
|---|---|---|
| Trading Mode | Transacted directly through AMC at end-of-day NAV. | Traded continuously on stock exchanges during market hours. |
| Demat Requirement | Optional | Mandatory |
| Expense Ratio | Low (Capped at 1.50%) | Ultra-low (Minimal management overhead) |
| Management Style | Passive tracking of benchmark index | Passive tracking of benchmark index |
Fund of Funds (FoF)
FoFs invest in units of other mutual fund schemes rather than buying underlying stocks or bonds directly.
Expense Caps on FoFs (TER Limits):
- FoF investing in Liquid / Index / ETFs: Maximum TER capped at 1.00%.
- FoF investing in Equity Schemes: Maximum TER capped at 2.25%.
- Other FoF Structures: Maximum TER capped at 2.00%.
Commodity & International Funds
- Gold ETFs & Gold FoFs: Each Gold ETF unit represents a physical holding of pure gold (typically 1 gram or a fraction thereof). They eliminate risks of theft, storage costs, and purity issues. For tax purposes, they fall under non-equity fund taxation rules.
- International Funds: Allocate capital outside India via foreign equities, global ETFs, or foreign fund units. They offer geographical diversification and exposure to global leaders, though they carry currency exchange rate risk and geopolitical exposure.