Published on: 15 Jul, 2024 10:29

A mutual fund is a pool of funds collected from individuals/ companies/ other entities to invest in financial securities like equity and bond, gold/silver, and commodities. Each mutual fund is managed by one or more fund manager. 

A mutual fund is a pool of funds collected from individuals/ companies/ other entities to invest in financial securities like equity and bond, gold/silver, and commodities. Each mutual fund is managed by one or more fund manager. The fund manager makes investment decisions for that pool of fund. The fund manager makes investment decisions based on the investment objective of the fund. 

The benefit of a mutual fund to a small investor:

  • A small investor who may not have time and knowledge of investing can access a professionally managed fund at very minimal cost (expense ratio).
  • A small investor can own different type of securities by investing only a small amount of money, which would have been not possible if she/he invested alone.
  • All the required research and analysis is done by fund managers and their associates.
Categories of Mutual Fund

Every country has its own nomenclature for deciding mutual fund categories. In India one of financial market regulator Securities and Exchange Board of India (SEBI). The categories are decided based on the asset classification (equity, debt, gold) and objective of funds.

India has five broad categories of mutual funds:

  1. Equity Mutual Funds
  2. Debt Mutual Funds
  3. Hybrid Mutual Funds
  4. Solution-Oriented Mutual Funds
  5. Other Mutual Funds
Equity Mutual Funds: 

Equity mutual funds mostly invest in shares of companies or other words equity of any company. Based on SEBI guidelines there are 11 categories of equity mutual fund; however, a fund house /asset management company can only have 10 categories of equity mutual funds; they have to choose between Value and Contra fund. For classification purposes, SEBI has defined the meaning of Large Cap, Mid Cap and Small Cap companies. 

  • Large Cap Company: The top 100 companies in terms of market capitalization.
  • Mid Cap Company: Companies whose market capitalization rank falls between 101 and 250.
  • Small-Cap Company: Companies whose market capitalization rank is 251 and more. 

The market capitalization ranking is calculated by AMFI twice in a year (January and July). The market capitalization of a company is last six months average of its market capitalization. 

Table 1 shows 11 categories of equity mutual funds:

Table 1: Equity Mutual Fund Category

Fund Category Minimum Investment Requirement Definition
Large Cap Funds The minimum investment in equity & equity related instruments of large-cap companies- 80% of total assets. Large Cap Fund- An open-ended equity scheme predominantly investing in large-cap stocks.
Mid Cap Fund The minimum investment in equity & equity related instruments of mid-cap companies- 65% of total assets. Mid Cap Fund- An open-ended equity scheme predominantly investing in mid-cap stocks.
Small-Cap Funds The minimum investment in equity & equity related instruments of small-cap companies- 65% of total assets. Small Cap Fund- An open-ended equity scheme predominantly investing in small-cap stocks.
Multi-Cap Funds

The minimum investment in equity & equity related instruments -75% of total assets in the following manner: 

  • The minimum investment in equity & equity  related instruments of large-cap companies -25% of total assets
  • The minimum investment in equity & equity  related instruments of mid-cap companies -25% of total assets
  • The minimum investment in equity & equity  related instruments of small-cap companies -25% of total assets
Multi-Cap Fund- An open-ended equity scheme investing across large-cap, mid-cap, small-cap stocks.
Large and Mid Cap Funds The minimum investment in equity & equity related instruments of large-cap companies- 35% of total assets Minimum investment in equity & equity related instruments of mid-cap stocks- 35% of total assets Large & Mid Cap Fund- An open-ended equity scheme investing in both large-cap and mid-cap stocks
Value Funds

The scheme should follow a value investment strategy.

The minimum investment in equity & equity related instruments - 65% of total assets.

An open-ended equity scheme following a value investment strategy
Contra Funds The scheme should follow a contrarian investment strategy.
The minimum investment in equity & equity related instruments - 65% of total assets
An open-ended equity scheme following a contrarian investment strategy
Dividend Yields Funds

The scheme should predominantly invest in dividend-yielding stocks.

The minimum investment in equity- 65% of total assets

An open-ended equity scheme predominantly investing in dividend-yielding stocks.
Focused Funds A scheme focused on the number of stocks (maximum 30) Minimum investment in equity & equity related instruments - 65% of total assets An open-ended equity scheme investing in maximum 30 stocks (mention where the scheme intends to focus, viz.,multi-cap, large-cap, mid-cap, small-cap)
Sectoral or Thematic Funds The minimum investment in equity & equity related instruments of a particular sector/ particular theme- 80% of total assets  
ELSS (Tax Saving) Funds The minimum investment in equity & equity related instruments - 80% of total assets (per Equity Linked Saving Scheme, 2005 notified by Ministry of Finance) An open-ended equity-linked saving scheme with a statutory lock-in of 3 years and tax benefit

 

Sectoral/thematic funds can be further divided into multiple categories. Table 2 shows some of major sectoral /thematic funds offered by the asset management companies (AMC) or fund houses. 

Table 2: Sectoral/Thematic Funds

Fund Category Minimum Investment Requirement Definition
Consumption Fund The minimum investment in equity & equity related instruments of a particular sector/ particular theme- 80% of total assets  
Technology/Digital Fund The minimum investment in equity & equity related instruments of a particular sector/ particular theme- 80% of total assets  
Infrastructure Fund The minimum investment in equity & equity related instruments of a particular sector/ particular theme- 80% of total assets  
Banking and Financial Services

The minimum investment in equity & equity related instruments of a particular sector/ particular theme- 80% of total assets

 
Pharma Fund The minimum investment in equity & equity related instruments of a particular sector/ particular theme- 80% of total assets  

 

There are more sub-categories in like quant funds, ESG funds, however; the number of funds within those sub-categories not high.

Debt Mutual Funds

What is debt: Debt is the amount of money borrowed by individuals, business or government. The money can be borrowed in form of loan from banks or it can be borrowed by issuing debt securities like bonds, debenture or commercial papers (CP). 

A Debt mutual fund invests money collected from individual investors into these debt instruments. Debt can be classified based on issuers, maturity, ratings etc. In India debt mutual funds are also classified based on these three criteria. 

 

  

 






For Any Question Join Our Group On Facebook

Bmsmoney Highlights