10 New Equity Mutual Fund Categories That Investors Should Know About

By | April 30, 2018

Equity schemes now have 10 distinct categories after SEBI introduced a new system for Mutual Fund classification last year. We’ll tell you about them here.

10 New Equity Mutual Fund Categories That Investors Should Know About

Even with our curiosity about money matters and financial literacy growing with time, it’s hard to keep up with changes happening in the capital market every now and then. It’s harder still, to navigate the dynamic landscape of Mutual Fund investments and to know which Mutual Fund should be your top pick among the plethora of options that companies offer you.

After several failed attempts at nudging Asset Management Companies (AMCs) to reduce the clutter of similar schemes under one category and to merge them under one product heap, last year in September, SEBI introduced a slew of measures that stipulate the categorisation of Mutual Funds.  Currently, the 42-member Mutual Fund industry in India handles over INR 19.5 lakh crore in assets across 2,000 schemes.

Additional Reading: Mutual Fund Mergers: 3 Crucial Points To Know

With this move, SEBI wants to reduce ambiguity and introduce more transparency for investors since they often have to choose from several similar schemes under one category, which tends to cause confusion.

What are the changes?

Mutual Fund schemes will now have three categories – equity, debt and hybrid which will be further classified into subcategories as per the investment mandate.

Under the equity category, there will be 8-10 divisions such as large-cap, multi-cap, mid-cap and small-cap funds among others. In debt, there are 16 new categories of funds whereas equity schemes have in total 10 distinct categories.

SEBI has also mandated that Mutual Funds should benchmark their schemes against the Total Return Index (TRI). This is a benchmark that captures dividend income and gives investors a truer picture of the fund performance with respect to the benchmark.

It is crucial that investors stay updated with the nature of these changes as they might need to rejig their Mutual Fund portfolio.

Additional reading: How To Check Aadhaar Status Linked To Mutual Funds Online

Equity Mutual Fund categories

Here’s the list of new equity fund categories with their asset allocation plan:

  1. Large-Cap Funds: Investments in large-cap stocks or large-sized companies are less risky in comparison to mid or small-cap funds. The exposure in large-cap stocks has to be a minimum 80% of the scheme’s assets. Investors over a period of time can expect decent returns from such schemes.
  2. Multi-Cap Funds: This scheme category will continue its investments across large, small and mid-cap companies. Minimum 65% of the total asset base has to be divested in stocks.
  3. Large and Mid-Cap Funds: SEBI introduced this new category which will invest both in mid and large cap company stocks. These funds will invest a minimum of 35% each in mid and large-cap stocks.
  4. Mid-Cap Funds: This scheme will invest 65% of its assets in mid-cap stocks. These stocks are riskier in comparison to large-cap funds.
  5. Small-Cap Funds: This scheme will invest 65% of its small-cap stocks that are highly risky. However, they offer huge returns to the investor.
  6. Dividend Yield Funds: This is a new category of funds which will invest in dividend yielding stocks or stocks that pay the dividend on a periodic basis.
  7. Focused Funds: This scheme will focus on mid, small, large or multi-cap stocks and will invest in a maximum of 30 stocks.
  8. ELSS: Equity-linked Savings Schemes is a tax-saving Mutual Fund category with a lock-in period of 3 years. A minimum of 80% has to be invested in equities of the total scheme assets.
  9. Contra Funds: A contra fund is different from other funds in terms of its style of investing. The manager of a contra fund bets against the prevailing market trends. The fund buys assets that are either under-performing or depressed at that point in time. A contra fund takes a contrarian view of an asset, whether it witnesses exuberant demand from investors or is shunned by them at a particular point in time due to short-term triggers. In this scheme, 65% of total assets of the scheme are put in equity stocks.
  10. Value Funds: A value fund follows a value investing strategy. It seeks to invest in stocks that are undervalued in price based on fundamental characteristics. Value investing is comparable to growth investing which focuses on emerging companies with high growth prospects. This scheme will have 65% allocation in equities.

Additional reading: 5 Tips To Get The Best Returns From Mutual Funds

Tax treatment

Mutual Fund mergers have minimal tax implications and are tax neutral for investors. Fund houses may also offer investors an opportunity to exit a scheme without any load. Consider exiting if the fund has changed its mandate and is no longer in alignment with your investment goals.

Mutual Fund experts are of the opinion that these new categories won’t lead to large-scale changes in most investors’ portfolios. However, as is the case with any change, it’s crucial that one examines its implications before making a move.

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