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SEBI Introduces New Mutual Fund categorization

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Why is SEBI insisting on a name change?

SEBI wants to make it easy for a customer to choose a mutual fund according to his needs and ability. According to the regulator, AMCs use these names as marketing tools to attract customers and many of the new buyers may not fully understand the scheme.

So SEBI wants MF companies to distinguish different schemes in terms of asset allocation and investment strategy. The regulator also wants to bring in a uniformity in similar schemes launched by different mutual funds so that an investor finds it easier to compare the products before buying.

That is why in its October 6, 2017, circular MF categorization, SEBI while laying down the categories of schemes, described each scheme’s characteristics. The regulator mandated fund houses to categorize all their existing and future schemes into five broad categories and 36 sub-categories. The five broad categories are – equity funds, debt funds, hybrid funds, solution-oriented funds and other funds.

There is clear classification as to what is a large cap, mid cap or a small cap company:

Market CapitalizationDescription
Large Cap Company1st to 100th company in terms of full market capitalization
Mid Cap Company101st to 250th company in terms of full market capitalization
Small Cap CompanyCompanies beyond 250th company in terms of full market capitalization

We list the latest categories and their scheme characteristics:

Equity PortfolioPortfolio Construction
Large Caps to invest at least 80% in large caps
Large & Mid Caps  to invest at least 35% in large caps and at least 35% in mid caps
Mid Caps  at least 65% in mid caps
Small Capsat least 65% in small caps
Multi Capsat least 65% in equities & no market-cap wise restriction
Dividend yieldat least 65% in equities but in dividend yielding stocks
Value / Contraat least 65% in equities but a fund house can either offer a value fund or a contra fund but not both
Focusedat least 65% in equities but can have a maximum of 30 stocks
Sectoral / Thematic  at least 80% in chosen sector stocks
ELSS (Equity Linked Savings Scheme)at least 80% in equities
Debt FundsPortfolio Construction
Overnight fundsholding portfolio with maturity of upto 1 day
Liquid fundsholding portfolio with maturity of upto 91 day
Ultra-Short Durationholding portfolio with maturity 3-6 months
Low durationholding portfolio with maturity 6-12 months
Money marketholding portfolio of money market instruments with maturity of upto 1 year
Short durationholding portfolio with maturity 1-3 years
Medium durationholding portfolio with maturity 3-4 years
Medium to long durationholding portfolio with maturity 4-7 years
Long durationholding portfolio with maturity more than 7 years
Dynamic bondcan invest across durations
Corporate bondatleast 80% in corporate bonds (AA+ & above)
Credit risk fundatleast 65% in corporate bonds below AA
Banking and PSUatleast 80% in instruments issued by banks, PSU undertakings, municipal corporations, etc.
Giltatleast 80% in instruments issued by government across periods
Gilt with 10-year constant durationatleast 80% in instruments issued by government across periods such that average maturity is 10 years
Floateratleast 65% in floating rate instruments
Hybrid FundsPortfolio Construction
Conservative hybrid funds10 to 25% equity allocation and 75 to 90% in debt
Balanced hybrid funds40 to 60% equity allocation and 40 to 60% in debt
Aggressive hybrid funds65 to 80% equity allocation and 20 to 35% in debt
Dynamic Asset AllocationEquity/debt - dynamic allocation
Multi-Asset fundsinvest in at least 3 assets with minimum of 10% in each
Arbitrage fund65% in arbitrage opportunities
Equity SavingsEquity - 65%, debt 10% and rest in hedged and unhedged instruments
Other SchemesPortfolio Construction
Index/ETFs95% in securites of a particular index
FOFs overseas/domestic95% in the underlyring fund
Solution OrientedPortfolio Construction
Retirement FundSchemes having lock-in for at least 5 years or till retirement age whichever is earlier
Children FundSchemes having lock-in for at least 5 years or till the child attains 18 whichever is earlier

Source: SEBI

These changes, SEBI hopes, will enable investors to know where the scheme invests. What is the level of risk involved and how much return an investor should expect?

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