SEBI has recently come up with a circular to categorize and rationalize mutual funds schemes. Basically, SEBI wants to reduce confusion for investors. So, as per new circular one mutual fund company can have only one scheme under each category. Let us look how it is going to impact investors.

Today there are 12,000+ mutual fund schemes across 40 mutual fund companies. There are multiple mutual fund schemes from the same company in the same category.  Except in case of index funds, exchange-traded funds (ETFs), fund of funds having a different underlying scheme, sectoral or thematic funds investing in different themes.

Earlier SEBI gave multiple warnings to mutual fund companies to merge similar schemes but they had a lot of resistance. Hence, SEBI finally issued a circular.

Mutual Fund Categorization

One of the most important points in the circular is that different Mutual Funds schemes should be clearly distinct in terms of investment strategy and asset allocation. The schemes will be broadly classified into following categories

  1. Equity Schemes
  2. Debt Schemes
  3. Hybrid Schemes
  4. Solution Oriented Schemes
  5. Other Schemes

The existing type of scheme would be replaced with the new type of schemes. Let’s look at each type of scheme

Equity Schemes

SEBI has decided total 11 categories under Equity Schemes but a mutual fund company can only have 10 categories and it has to choose between Value or Contra. Still 10 categories looks bit high but I think its fair considering the possible variations in the startegy. To make this easier SEBI has also defined meaning of Large Cap, Mid Cap and Small Cap.

  • Large Cap: Top 100 companies in terms of market capitalization
  • Mid Cap: 101st- 250th companies in term of market capitalization
  • Small Cap: 251st company onwards in terms of market capitalization
1 Multi Cap Funds  Minimum investment in equity & equity related instruments65% of total assets
Multi Cap Fund – An equity mutual fund investing across Large Cap, Mid Cap, Small Cap stocks
2 Large Cap Fund Minimum investment in equity & equity related instruments of large cap companies 80% of total assets
Large Cap Fund – An equity
mutual fund predominantly investing in Large Cap stocks
3 Large & Mid Cap Fund Minimum investment in equity & equity related instruments of large cap companies – 35% of total assets

Minimum investment in equity & equity related instruments of mid cap stocks – 35% of total assets
Large & Mid Cap Fund – An open ended equity mutual

fund investing in both large cap and mid cap stocks
4 Mid Cap Fund
Minimum investment in equity & equity related instruments of mid cap companies – 65% of total assets
Mid Cap Fund – An equity
mutual fund predominantly investing in Mid Cap stocks
5 Small Cap Fund
Minimum investment in equity & equity related instruments of small cap companies – 65% of total assets
Small Cap Fund – An equity
mutual fund predominantly investing in Small Cap stocks
6 Dividend Yield Fund
Scheme should predominantly invest in dividend yielding stocks. Minimum investment in equity – 65% of total assets
An equity
mutual fund predominantly investing in dividend yielding stocks
7a Value Fund*
Scheme should follow a value investment strategy. Minimum investment in equity & equity related instruments – 65% of total assets
An equity
mutual fund following a value investment strategy
7b  Contra Fund*
Scheme should follow a contrarian investment strategy. Minimum investment in equity & equity related instruments – 65% of total assets
An equity
mutual fund following contrarian investment strategy
8  Focused Fund
A scheme focused on the number of stocks (maximum 30) Minimum investment in equity & equity related instruments – 65% of total assets
An equity scheme investing in maximum 30 stocks (mention where the scheme intends to focus, viz., multi cap, large cap, mid cap, small cap)
9  Sectoral/Thematic
Minimum investment in equity & equity related instruments of a particular sector/particular theme – 80% of total assets
An open ended equity scheme following the theme as mentioned
10  ELSS
Minimum investment in equity & equity related instruments – 80% of total assets (in accordance with Equity Linked Saving Scheme, 2005 notified by Ministry of Finance)
An open ended equity linked saving scheme with a statutory lock in of 3 years and tax benefit
*Mutual Funds will be permitted to offer either Value fund or Contra fund.

Debt Schemes

SEBI has decided total 16 categories under Debt Schemes. 16 categories are very high for debt funds considering their similarity in risk and returns from a retail investor perspective. Some categories like Overnight Fund and Liquid Fund are similar. Same is the case with money market fund and ultra-short term debt fund categories.

1
Overnight Fund
Investment in overnight securities having maturity of 1 day
A debt scheme investing in overnight securities
2
Liquid Fund
Investment in Debt and money market securities with maturity of upto 91 days only
A liquid scheme
3
Ultra Short Duration Fund
Investment in Debt & Money Market instruments such that the Macaulay duration of the portfolio is between 3 months – 6 months
An ultra – short term debt scheme investing in instruments with Macaulay duration between 3 months and 6 months
4
Low Duration Fund
Investment in Debt & Money Market instruments such that the Macaulay duration of the portfolio is between 6 months – 12 months
A low duration debt scheme investing in instruments with Macaulay duration between 6 months and 12 months
5
Money Market Fund
Investment in Money Market instruments having maturity up to 1 year
A debt scheme investing in money market instruments
6
Short Duration Fund
Investment in Debt & Money Market instruments such that the Macaulay duration of the portfolio is between 1 year – 3 years
A short term debt scheme investing in instruments with Macaulay duration between 1 year and 3 years
7
Medium Duration Fund
Investment in Debt & Money Market instruments such that the Macaulay duration of the portfolio is between 3 years – 4 years A medium term debt scheme investing in instruments with Macaulay duration between 3 years and 4 years
8
Medium to Long Duration Fund
Investment in Debt & Money Market instruments such that the Macaulay duration of the portfolio is between 4 – 7 years
A medium term debt scheme investing in instruments with Macaulay duration between 4 years and 7 years
9
Long Duration Fund
Investment in Debt & Money Market Instruments such that the Macaulay duration of the portfolio is greater than 7 years
A debt scheme investing in instruments with Macaulay duration greater than 7 years
10 Dynamic Bond
Investment across duration
A dynamic debt scheme investing across duration
11
Corporate Bond Fund
Minimum investment in corporate bonds – 80% of total assets (only in highest rated instruments)
A debt scheme predominantly investing in highest rated corporate bonds
12
Credit Risk Fund
Minimum investment in corporate bonds – 65% of total assets ( investment in below highest rated instruments)
A debt scheme investing in below highest rated corporate bonds
13
Banking and PSU Fund
Minimum investment in Debt instruments of banks, Public Sector Undertakings, Public Financial Institutions – 80% of total assets
A debt scheme predominantly investing in Debt instruments of banks, Public Sector Undertakings, Public Financial Institutions
14 Gilt Fund
Minimum investment in Gsecs – 80% of total assets (across maturity)
A debt scheme investing in government securities across maturity
15
Gilt Fund with 10 year constant duration
Minimum investment in Gsecs – 80% of total assets such that the Macaulay duration of the portfolio is equal to 10 years
A debt scheme investing in government securities having a constant maturity of 10 years
16 Floater Fund
Minimum investment in floating rate instruments – 65% of total assets
A debt scheme predominantly investing in floating rate instruments

Hybrid Schemes

SEBI has decided total 7 categories under Hybrid Schemes but a mutual fund company can only have 6 categories and they have to choose between Balanced Hybrid Fund or Aggressive Hybrid Fund. Also, Finally SEBI has made Arbitrage Fund under Hybrid Fund category.

1
Conservative Hybrid Fund
Investment in equity & equity related instruments – between 10% and 25% of total assets; Investment in Debt instruments – between 75% and 90% of total assets
A hybrid mutual fund investing predominantly in debt instruments
2A
Balanced Hybrid Fund@
Equity & Equity related instruments – between 40% and 60% of total assets; Debt instruments – between 40% and 60% of total assets. No Arbitrage would be permitted in this scheme
50-50 balanced scheme investing in equity and debt instruments
2B
Aggressive Hybrid Fund@
Equity & Equity related instruments – between 65% and 80% of total assets; Debt instruments – between 20% – 35% of total assets. Most of the balanced funds will fall into this category.
A hybrid scheme investing predominantly in equity and equity related instruments
3
Dynamic Asset Allocation or Balanced Advantage
Investment in equity/ debt that is managed dynamically. All famous balanced advantage or dynamic funds will fall into this category.
A hybrid mutual fund which will change its equity exposure based on market conditions
4
Multi-Asset Allocation
Invests in at least three asset classes with a minimum allocation of at least 10% each in all three asset classes. Foreign investment will be considered as a separate asset class.
A scheme investing in 3 different asset
classes.
5 Arbitrage Fund
Scheme following arbitrage strategy. Minimum investment in equity & equity related instruments – 65% of total assets
A scheme investing in arbitrage opportunities
6 Equity Savings Minimum investment in equity & equity related instruments – 65% of total assets and minimum investment in debt – 10% of total assets. Minimum hedged & unhedged to be stated in the SID.  Asset Allocation under defensive considerations may also be stated in the Offer Document
A scheme investing in equity, arbitrage, and debt
@Mutual Funds will be permitted to offer either an Aggressive Hybrid fund or Balanced fund

Solution Oriented Schemes

1
Retirement Fund
Scheme having a lock – in for at least 5 years or till retirement age whichever is earlier
A retirement solution oriented scheme having a lock-in of 5 years or till retirement age (whichever is earlier)
2
Children’s Fund
Scheme having a lock – in for at least 5 years or till the child attains age of majority whichever is earlier
A fund for investment for children having a lock – in for at least 5 years or till the child attains age of majority (whichever is earlier)

Other Schemes

1
Index Funds/ ETFs
Minimum investment in securities of a particular index (which is being replicated/ tracked) – 95% of total assets
A mutual fund replicating/ tracking any index
2
FoF’s (Overseas/Domestic)
Minimum investment in the underlying fund – 95% of total assets
A fund of fund is a mutual fund that invests in other mutual funds

Here is the circular for Categorization and Rationalization Of Mutual Fund Schemes By SEBI.

How Does The New Categorization Impact Investors?

From investor perspective, this new categorization will help investors as there will be no longer confusing categories. Here are few things, that might happen

  1. Some schemes might get merged with others
  2. Your expense ratio might come down because of higher AUM per scheme
  3. The number of schemes might reduce