Picking a mutual fund is not an easy job. Even after you have decided whether to invest in equity or debt, you still need to choose a specific sub-category. Until October 2017, there were no regulator-defined fund sub-categories and your best bet was personal finance websites and ratings agencies for a classification system. It also led to fund houses launching multiple funds in the same category, adding to the confusion.
In October last year, markets regulator Securities Exchange Board of India (SEBI) laid down new classification for mutual funds. The SEBI notification mandates that funds comply with the rules laid down for each sub-category and that fund houses launch no more than one fund per sub-category. Now, you will find a lot of fund houses sending you emails notifying you of scheme name or attribute changes in order to comply with the new fund classification.
In this article, we explain the SEBI fund categories within Equity Funds (We will write about other classes of funds in subsequent articles, so be tuned).
Categories set around company size
These are categories whose portfolio companies are defined by company size.
Minimum 80% of assets in large-cap companies (those ranging from the first to the 100th largest company by market capitalization).
Minimum 65% of assets in mid-cap companies (those ranging from the 101st to the 240th largest company by market capitalization)
Minimum 65% of assets in small cap companies (those with a market cap below the top 250 largest companies by market cap)
A scheme which invests across large, mid and small-cap companies. At least 65% of its assets must be in equities.
Large and Mid Cap
Minimum 35% of assets in large caps
Minimum 35% of assets in mid caps
Explanation: This is a new category created by SEBI to capture the funds that invest in a mix of large and midcap stocks.
Categories set around a Strategy
These are categories built around common investment strategies such as dividend yield or value. In all cases, the funds must have 65% of their assets in equity.
Mainly investing in dividend yield stocks. Minimum 65% of assets in equity.
Explanation: Dividend yield is obtained by dividing dividend per share with market price per share. For example, a stock paying a dividend of Rs 4 per share which currently trades at Rs 200 per share has a dividend yield of 2%. A high dividend yield can indicate an attractive valuation
Following a value strategy. Minimum 65% of assets in equity
Explanation: A value strategy focuses on undervalued stocks in the expectation that they will over time, be ‘discovered’ and re-rated by the market. The low valuation can be measured by ratios such as Price-to-Earnings (PE), Price-to-book (PB) and Dividend Yield.
Following a contra strategy. Minimum 65% of assets in equity.
Explanation: A contra strategy takes a contrarian position. It seeks out stocks that are out of favour in which are expected to be cheap and yield good returns once they return to favour in the market.
SEBI will allow mutual funds to offer either a value fund or a contra fund but not both.
Minimum investment of 80% of assets in equity and equity related instruments pertaining to a sector or theme.
Minimum investment of 80% of assets in equity and equity related instruments in accordance with the Equity Linked Savings Scheme, 2005 notified by the Ministry of Finance
Focused on a select number of stocks (maximum 30).
Explanation: A focused strategy takes a ‘high conviction approach’. It focuses the portfolio on a small number of stocks in order to benefit relatively more than a diversified portfolio, when such stocks perform.