SEBI Mutual Fund Categories: A Simple Map of Fund Types

A category tells you the broad rules a fund must follow: what kind of assets it holds and in roughly what proportions. It does not tell you how well the fund is managed, how much it costs, or how it will perform.

Think of the category as the type of vehicle. Two cars of the same type can still differ a lot in quality and price. You still need to compare funds within the category.

Before categorisation, fund names could be vague and two funds with similar names could hold very different things. Investors found it hard to compare.

SEBI introduced clear categories with rules on what each must hold, and limited each fund house to one scheme per category in most cases. That made like-for-like comparison possible. Our page on who regulates mutual funds explains SEBI role.

These invest mainly in company shares. The main categories include large cap, mid cap, small cap, large and mid cap, multi cap, flexi cap, focused, value or contra, dividend yield, sectoral or thematic, and ELSS.

They differ mainly by company size and style. Our page on large, mid and small cap funds explains the size bands, and flexi cap versus multi cap explains two common categories.

These invest in bonds and money market instruments. Categories are mostly defined by how long the holdings last: overnight, liquid, ultra short, low duration, money market, short duration, medium, medium to long, long duration, and dynamic bond.

Others are defined by what they hold: corporate bond, credit risk, banking and PSU, gilt, and floater funds. Our page on debt funds explains the basics, and YTM and modified duration explains how to read them.

These mix equity and debt, and sometimes other assets. Categories include conservative hybrid, balanced hybrid or aggressive hybrid, dynamic asset allocation or balanced advantage, multi asset allocation, arbitrage, and equity savings.

Our pages on hybrid funds and aggressive hybrid versus balanced advantage explain how they differ.

These are built for a specific life goal: retirement funds and children funds. They come with a lock-in of five years or until a stated age, whichever comes first.

Our page on solution-oriented funds explains their purpose and limits.

This group includes index funds and ETFs, which copy an index, and fund of funds, which invest in other funds, including international and gold or silver fund of funds.

Our pages on index funds, fund of funds and mutual funds versus ETFs cover these.

Each category has minimum holding rules. For example, a large cap fund must keep most of its money in the largest companies, and a mid cap fund must keep most of its money in mid-sized companies.

The scheme information document states which category a fund belongs to and the rules it follows. Our page on the scheme information document explains where to find this.

Because most fund houses can offer only one scheme per category, you cannot be sold three nearly identical large cap funds from the same house under different names.

It also makes it easier to spot genuine differences between fund houses, since each one runs a single scheme in each category.

Alongside category, every scheme shows a riskometer, which rates its risk on a scale from low to very high. Categories give a rough guide, but the riskometer reflects the specific portfolio.

Our page on the riskometer explains how to read it.

Some names sound alike but mean different things. Multi cap and flexi cap are different. Balanced hybrid and balanced advantage are different. Credit risk and corporate bond funds hold very different quality of bonds.

When in doubt, read the category in the scheme documents rather than relying on the fund name.

The main benefit of categories is fair comparison. Compare a large cap fund with other large cap funds, not with a small cap fund or a liquid fund.

Look at returns against the benchmark over several years, costs and risk measures. Our page on how to review your portfolio shows how.

Money needed within a year: overnight, liquid or ultra short debt funds.

Money needed in two to three years: short duration debt or conservative hybrid funds.

Long-term money: equity funds such as large cap, flexi cap or index funds, possibly with some mid or small cap.

Regular income in retirement: steadier hybrid or debt funds, drawn through a withdrawal plan, as our page on SIP versus SWP explains.

Our page on asset allocation explains the method.

The category is printed on the fact sheet, the scheme information document and most comparison websites. If a fund name is unclear, the category tells you what it actually is.

SEBI updates the framework from time to time, adding or adjusting categories as the market develops. Fund names may also change when schemes are merged or recategorised.

If a fund you hold changes category, read the letter from the fund house. Our post on what happens when a fund is merged or renamed explains what to check.

• Five groups: equity, debt, hybrid, solution-oriented, other.
• Each category has rules on what it holds.
• One scheme per category per fund house, in most cases.
• Compare only within a category.

We are distributors rather than investment advisers and we recommend no schemes. If you want help understanding which categories fit your goals, get in touch.