A Guide to SEBI's New Mutual Fund Categorisation

On 6th October, 2017, SEBI (Securities and Exchange Board of India) announced the re-categorization and re-rationalized of Mutual Fund schemes. The primary purpose of this was to bring uniformity between schemes offered by Mutual Fund Houses.

SEBI intends to make Mutual Fund Investments easier for the investors. Investors should be able to easily understand schemes as per their investment objectives, needs and risk appetite. In the current scenario, there are a number of schemes of the same type within the AMC, which creates lot of confusion for the investors during fund selection. The new classification will clearly define the schemes, along with its allocations, etc.

SEBI has classified 10 categories in Equity Funds, 16 categories in debt funds, six in hybrid funds and two each in solution-oriented scheme and other fund groups.

Equity Funds

SEBI has categorised equity mutual funds into 10 broad categories. In its rule, SEBI has redefined large-cap, mid-cap and Small cap funds:

Large-caps

First 100 companies on full market capitalisation basis

Mid-caps

All companies from 101st to 250th on full market capitalisation basis

Small-caps

All other companies from 251st onwards on full market capitalisation basis

As per the new rules, large-cap schemes should invest at least 80 percent of their total assets in large-cap stocks. Mid-cap and small-cap funds should invest minimum 65 percent of its total assets in the mid & small cap stocks.

Multi-cap fund, Value/contra fund, focused fund should invest at least 65 percent of its total assets in their equities. Equity Linked Saving Schemes (ELSS) and Thematic/Sector should invest minimum 80 percent of its assets in equities.

Debt Funds

SEBI has categorised debt funds into 16 broad categories. The classification of debt schemes is based on Macaulay duration, maturity and credit ratings. Macaulay duration is a measure of how the price of a bond will change in response to movement in interest rates.

As per SEBI, the medium duration funds will invest in debt and money market instruments such that Macaulay duration of the portfolio is between three to four years. In medium duration funds, the portfolio Macaulay duration under adverse situation is one to four years.

The medium to long duration fund will invest debt and money market securities such that the Macaulay duration of the portfolio is between four to seven years. Under the adverse situation, the portfolio Macaulay duration is one to seven years.

Overnight funds, Liquid Funds, Money market funds, Gilt Funds are classified under maturity based funds.

Corporate Bonds would be allowed to invest in AA+ and above-rated instruments. The Credit Risk Funds can invest in AA and below rated instruments, excluding AA+ rated instruments.

The other schemes added by SEBI are the Banking and PSU Fund, which will invest about 80 percent of its investment in PSUs, public sector banks, etc., and Floater Fund that will invest about 65 percent in floating rate instruments.

Hybrid Funds

SEBI has introduced five categories to Hybrid Funds. These are the funds that will invest in both debt and equity funds. SEBI has set a particular allocation for these schemes. The Conservative Hybrid Fund would invest 10-25 percent in equities and 75-90 percent in debt instruments. A fund house can only offer either Balanced Hybrid Fund or Aggressive Hybrid Fund.

The Multi Asset Allocation Fund can invest in at least three asset classes with a minimum allocation of 10 percent each in three asset classes. Arbitrage Fund can invest 65 percent of total assets in equities. Equity Savings can invest a minimum of 65 percent in equities and 10 percent in debt assets.

Investment in debt/equity can be dynamically managed for Dynamic Asset Allocation or Balanced Advantage schemes.

Solution Oriented Schemes

SEBI has introduced retirement Fund and Children’s Fund schemes under this category. Retirement schemes have a minimum lock-in of five years or till retirement, whichever is earlier. Children’s schemes will have a lock-in of at least five years or till the child attains the age of majority, whichever is earlier.

Other Schemes

SEBI has categories Index Funds/ETFs and FOFs (Overseas/Domestic) in other schemes. These schemes can invest in a minimum of 95 percent of their total assets.

Top Mutual Fund Houses Schemes that got New Names

Mutual fund houses are making changes in the schemes to comply with SEBI's new re-categorisation norms. Here is the list of existing mutual fund schemes that got new names.

*Note-The list will be updated as and when we get an insight about the changes in the scheme names.