All You Need To Know About New Equity Mutual Fund Categories

All You Need To Know About New Equity Mutual Fund Categories

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Even today, many people are found to be asking, “What is a mutual fund?” To put it simply, a mutual fund scheme is a financial vehicle that poolsinvestor money and invests it in securities such as bonds, stocks, money market and other financial instruments.

The Securities and Exchange Board of India (SEBI), which is India’s capital markets regulator, amended thenorms for rationalization and re-categorization of mutual fund schemeson October 06, 2017. As per the SEBI circular, 10 different categories of equity mutual fundshave been defined.Let us understand thisre-categorization in detail to understand more about the mutual fund industry.

Why did SEBI introduce new categories in Mutual Funds?

SEBI introduced broader categories in mutual fund investment to bring uniformity in similar schemes offered byan individual mutual fund house. This was done to helpinvestors compare andevaluate multiple financial products before they invest in mutual funds online. This makes it easier for individuals to invest in mutual funds in accordance with their financial planning.

What are the new categories introduced by SEBI?

Following are the 10 new categories SEBI introduced with its circular:

1 Small-Cap Funds:These schemes primarily invest in equity and related instruments of small-cap companies,        wherein the exposure has to be a minimum of 65% of the total assets.

2 Mid-Cap Funds:These schemes predominantly invest a minimum of 65% of total assets in equity and related instruments of mid-cap companies.

3 Large-Cap Funds: These funds invest in equity and related instruments of large-cap companies and their minimum exposure to such stocks is 80% of the scheme’s total assets.

4 Multi-Cap Funds:These schemes invest across large-, mid­-, and small-cap stocks. The minimum exposure to equity and related instruments in such funds is 65% of total assets.

5 Large-& Mid-Cap Funds: These schemes predominantly invest in large- and mid-cap stocks. The minimum investment requirement is 35% each in equity and related instrumentsof mid- and large-cap companies.

6 Dividend Yield Funds: These schemes will mainly invest in dividend-yielding stocks. They are mandated to invest a minimum of 65% of total assets in dividend-yielding equity.

7 Value Funds & Contra Funds:

  1. 1 Value Funds: These mutual fund schemes follow a “value” style of investment. They are mandated to maintain a minimum of 65% allocation to equity and related instruments.
  2. 2 Contra Funds: These schemes follow a“contrarian” style of investment, wherein the exposure to equity and related instruments is 65% of total assets.

8 Equity-Linked Savings Scheme (ELSS): ELSS are tax-saving mutual fundsthat come with a lock-in period of 3 years. These schemes are required to allocate a minimum of 80% of total assets to equity and related instruments.

8 Focused Funds: These schemes can invest in a maximum of 30 stocks, be it small-, mid-, large-, or multi-cap, at a given time. The exposure to equity and related instruments is 65% in such funds.

10 Sector/Thematic Funds: These schemes invest in a particular sector or theme.The mandate is to invest a minimum of 80% of total assets in equity and related instruments of such a sector or theme.

How has this affected Asset Management Companies?

As per the new SEBI mandate, Asset Management Companies (AMC) now have to classify all existing and future schemes into these 10 distinct categories. They will not be permitted to offer two similar schemes under different names to investors. As such, they can now sell only one mutual fund schemeunder a single category. Consequently, mutual fund houses are now realigning their schemes and portfolios to classify them under the new categories.

Numerous mutual fund houses have recently changed names, merged, and/or inculcated the basic attributes of old equity mutual fund schemes to comply with the new SEBI norms. While there are new entrants to the list, some traditional categories remain the same with little tweaks here and there.

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