equity-mutual-funds-and-its-types 
In this post, we discuss the major changes that were brought by SEBI via a circular on “Categorization and Rationalization of Mutual Fund Schemes” dated October 6, 2017. The basic idea behind this circular was to ease the process of investment in mutual fund by the investors.

The Indian  mutual fund industry  offers many types of  mutual fund schemes, and this  circular helps us to understand these types better. SEBI has defined the following broad categories -


1. Equity Mutual  Funds (invest predominantly in equity)


2. Debt Mutual  Funds (invest predominantly in debt)


3. Hybrid Mutual  Funds (combinations of both asset classes)


4. Solution-Oriented Mutual  Funds (built to provide a solution for customer)


5. Other Mutual  Funds. 

Each of the categories is further classified on the basis of type of scheme; and minimum investment the scheme should have in equity and equity related assets. Before we understand each of the categories briefly, let us understand some important points from the circular. 


Q. What are the different types of schemes available in mutual funds?


Mutual funds schemes can be of two  types - open-ended and closed-ended. 

Open-ended schemes are those from which an investor can enter and exit anytime they like.  They are highly  liquid  in  nature,  and are not  traded in the stock market.  These mutual funds are available for purchase only through the Asset Management Company that prepares the mutual fund. 

Closed-ended schemes are those which have a fixed number of units, and have restrictions on entry into the fund.

There are three types of mutual fund categories built on the basis of market capitalization

Large Cap Mutual  Funds

The schemes  comprising  of  the first  100  companies ranked on the basis of market capitalization are large cap funds.


Mid Cap Mutual  Funds 

The schemes  comprising  of  the companies  ranked 101st - 250th on the basis of market capitalization are mid cap funds.




Small Cap Mutual  Funds 




The schemes comprising of the companies ranked below the 250th company on the basis of market capitalization are small cap funds.  

For  selecting  the companies for  building  these category mutual funds shall follow the list uploaded by the Association of Mutual Funds in India (AMFI).

Post the updating of the stock list by AMFI, mutual funds will be required to readjust the existing portfolios as per the updated list of stocks on the AMFI website. Only one scheme per category of mutual fund  shall  be permissible except: Index funds, ETFs, Fund of funds and Sectoral/thematic funds.

This means that  a scheme of one category (large, mid or small cap) can  either be open-ended or closed-ended. For example, no Asset Management Company can  hold  two  large cap mutual fund schemes, with one of each scheme type. 

Now let us study each category of equity mutual fund scheme separately.
 

1. Multi  Cap Fund 
This scheme is open-ended and invests across combinations of large cap, mid cap and small cap stocks. Minimum 65% of its total assets should be invested in equity and equity-related instruments.

2. Large Cap Fund 
This scheme is open-ended and majorly invests in large cap stocks. Minimum 80%  of its  total assets should be invested  in  equity  and equity-related instruments  of large cap companies. 

3. Large & Mid Cap Fund 
This scheme is open-ended and invests in both large and mid cap stocks. Minimum 35% of its total assets should be invested in the equity and equity-related instruments of mid cap companies, and minimum 35% of its total assets should be invested in the equity and equity-related instruments of large cap companies.

4. Mid Cap Fund 
This scheme is open-ended and invests in mid cap stocks. Minimum 65% of its total assets should be invested in the equity and equity- related instruments of mid cap companies. 

5. Small Cap Fund 
This scheme is open-ended and invests in small cap stocks. Minimum 65% of its total assets should be invested in the equity and equity-related instruments of small cap companies. 

6. Dividend Yield Fund 
This scheme is open-ended and invests predominantly in dividend yielding stocks. Minimum 65% of its total assets should be invested in equity. 
7. Value  Fund 
This scheme is open-ended and it follows a value investment strategy. This means that the fund focuses on three types of stocks - i.    Under-performing stocks; ii. Stocks with a low P/E ratio (Price-to-Earnings ratio); and/or iii. Stocks of companies of emerging sectors, which show potential for rapid growth in the future. Minimum 65% of its total assets should be invested in equity and equity-related instruments. 

8. Contra Fund 
This scheme is open-ended and it follows a contrarian investment strategy. This means that the fund invests against the ongoing market trends. Minimum 65% of its total assets should be invested in equity and equity-related  instruments. A mutual fund can either be a value fund or a contra fund. It cannot follow both strategies at the same time. 

9. Focused Fund 

This  scheme is  open-ended and invests  in  a maximum of 30  stocks while focusing  on  a certain level of market capitalization. Minimum 65% of its total assets should be invested in equity and equity-related instruments.

10.Sectoral/Thematic Fund 

This scheme is open-ended and invests in a particular sector or defines a theme around which its investments revolve. Minimum 80% of its total assets should be invested in the equity and equity-related instruments of the selected theme or sector by a particular mutual fund.

11.Equity Linked Savings Scheme (ELSS) 

This scheme is open-ended, with a statutory lock-in period of three years and tax benefits under section 80C  of the Income Tax Act, 1961. In  accordance with  the Equity  Linked  Saving  Scheme,  2005,  as notified  by Ministry   of Finance, minimum 80% of its total assets should be invested in equity and equity-related instruments.

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