In a circular issued in October 2017, the Securities and Exchange Board of India asked all mutual fund houses to clearly distinguish each mutual fund scheme in term terms of asset allocation, investment strategy, etc to bring uniformity among the mutual funds. The move was taken to benefit investors so that they can evaluate different options before taking an informed decision to invest in a scheme.
Accordingly, Sebi has categorised mutual fund schemes broadly under the following categories:
- Equity schemes
- Debt schemes
- Hybrid schemes
- Solution oriented schemes
- Other schemes
Equity Scheme –
Equity funds invest a major part of their corpus in stocks with a long-term investment objective. When you buy share of an equity mutual fund, you effectively become a part owner of each of the securities in your fund’s portfolio. Equity mutual fund schemes can invest up to 65-100% of their corpus in equity and equity related securities. These funds may invest in a wide range of industries or focus on one or more industry sectors. These funds are suitable for investors with a long-term outlook and higher risk appetite.
Within equity schemes, the Sebi has defined large cap, mid cap and small cap funds as follows:
- Large Cap – The first 100 companies with highest market capitalisation.
- Mid Cap – Companies in 101 to 250 bracket in terms of market capitalisation
- Small Cap – Companies listed after 250 in terms of market capitalisation
This list would be arranged by the Association of Mutual Funds in India (AMFI) and updated every six months. Following the guidance provided by Sebi, the Association of Mutual Funds in India (AMFI) categorised 5,249 companies at the end of December 31, 2017.
Debt Scheme –
Debt or income funds generally invest in securities such as bonds, corporate debentures, government securities (gilts) and money market instruments. These funds invest primarily in fixed income securities. Debt instruments provide low risk and stable income to investors. The volatility of these funds is low as compared to equity funds. These funds also produce a regular income. These funds are suitable for clients whose main objective is to preserve capital as well as generate monthly income.
Hybrid Scheme -
Hybrid funds have a balance between equity and fixed income instruments in the kitty. While the debt component provides stability to the corpus, the equity part earns capital appreciation. Hybrid funds have different combination in asset allocation. For example, the conservative hybrid fund invests 10-25% of the total assets in equity and equity related instruments, while 75-90% is invested in debt instruments. Meanwhile, an aggressive hybrid fund invests 65-80% of total assets in equity and equity related instruments and 20-35% in debt instruments.
Solution Oriented Scheme -
Sebi has categorises two funds under the solution oriented scheme segment. These are retirement fund and children’s fund. The retirement fund is a scheme with a lock-in period of at least 5 years or till retirement age, whichever is earlier. Similarly, the children’s fund also has a lock-in period of at least 5 years or till the child becomes an adult, whichever is earlier.
Other Schemes -
Under the other schemes category, Sebi has listed the index funds or ETFs and the fund of funds. Index schemes replicate the performance of a particular index such as the BSE Sensex or the CNX Nifty. These schemes comprise only those stocks that represent the index, according to the weightage assigned to each stock by the exchange. Returns garnered are equal to those generated by the index.
Fund of funds is a scheme where the fund invests in various other types of funds.
At present, mutual funds are primary instruments of investing yielding good returns over a period of time. Hence, learn all about it before choosing the route to grow your money.