There is no dearth to the number of schemes that each mutual fund comes out with. In order to bring in uniformity and facilitate easier comprehension for investors, SEBI has designed categories for mutual fund schemes, along with broad guidelines for each. These categories are listed below.
Mutual fund categories – Equity funds
All equity funds have the same taxation on capital gains and dividends. The categories are listed according to the risk level involved, moving from moderate risk to high risk in different shades. Do note that equity funds in general require a minimum of 5 years and that an entire portfolio should not be invested only in equity. Ensure that you have at least 20% of your portfolio invested in debt funds or other fixed-income instruments.
| Category | Description | Suitability |
| Equity index Funds/ETFs | Tracks a particular stock market or bond market index. | Suits investors who want to hold a particular index without taking the risk of a fund manager’s active calls |
| Large-cap | Needs to invest at least 80% of portfolio in large-cap stocks | Holds the lowest risk among equity fund categories. Suitable as part of any 5+ year portfolios for any investor |
| Multicap | Can invest across larege-cap, mid-cap, and small-cap stocks | Risk depends on the dynamism in market-cap allocations and the large-cap exposure. Suitable as part of long-term portfolios for any investor |
| Large-and-midcap | Needs to invest a minimum of 35% each in large-cap and mid-cap stocks | Risk depends on the dynamism in market-cap allocations and the large-cap exposure. Can be used by moderate and aggressive investors for long-term portfolios. If large-cap exposure is steadily higher, can be used by conservative investors as well |
| Dividend yield | Predominantly invests in dividend paying stocks. | Risk depends on nature of market-cap allocation. Despite the name, these funds do not need to pay dividends. Can be used for long-term portfolios |
| Value/ contra | Follows a value-based investment strategy, picking stocks trading below intrinsic valuations | High risk as value as a strategy can underperform for a long time before markets notice potential in under-valued stock picks. Need at least 7+ years in holding period |
| Focused | Can invest in a maximum of 30 stocks | High risk as concentrated holding in a few stocks can lead to volatility. Can be used by high-risk and moderate-risk investors with a long timeframe |
| ELSS | Needs to invest at least 80% of portfolio in equity | Qualifies for deductions under section 80C of the Income Tax Act. Each investment is locked in for 3 years. Suits any investor looking to make tax-saving investments. |
| Mid-cap | Needs to invest at least 65% in mid-cap stocks | High risk as mid-caps are volatile. Can be used by moderate and high-risk investors. Limit mid-cap allocation (along with small-cap allocation) to 30% of 5-7 and above portfolios. Do not use for short-term investments. |
| Small-cap | Needs to invest at least 65% in small-cap stocks | Very high risk as small-caps are volatile and several stocks can be illiquid. These funds can be used by moderate and high-risk investors. Limit mid-cap allocation (along with small-cap allocation) to 30% of 5-7 and above portfolios. Do not use for short-term investments. |
| Sectoral/thematic | Invests along a particular sector or theme with 80% of portfolio in such sectors/ themes | Very high risk as sectors and themes have only specific periods where they perform. Timing is crucial and can be done only by well-informed investors |
Mutual fund categories – Debt funds
All debt funds have the same taxation on capital gains and dividends. The list is split based on approximate minimum holding period required. Do note that a shorter-term debt fund can be held beyond the recommended minimum timeframe. A fund meant for a long-term timeframe should not be used for short-term investment horizons. Funds (in whichever debt fund category) which have credit risk, i.e., hold instruments which have a low credit quality/ credit rating, are generally avoidable except by high-risk investors with a long-term timeframe.
| Category | Description | Suitability |
| Extremely short term debt funds | ||
| Overnight | Invests in overnight securities having maturity of 1 day. | Suits any investor looking to park money for very short-term needs, and earn returns better than savings bank accounts. Holds extremely low risk |
| Liquid | Invests in debt and money market instruments with maturity of up to 91 days | Suits any investor looking to park money for very short-term needs and earn returns better than savings bank account. Very low risk, but may see slight volatility sometimes on a day-to-day basis. |
| Very short term debt funds | ||
| Ultra-short duration | Invests in debt and money market instruments such that the portfolio’s Macaulay duration is 3 to 6 months. | Suits investors looking to invest money for 6 months to 1 year, and want better returns than bank fixed deposits. Funds vary in risks based on credit quality of underlying portfolio, and those holding low-rated papers are unsuitable for this timeframe. |
| Low duration | Invests in debt and money market instruments such that the portfolio’s Macaulay duration is 6 to 12 months. | Suits investors looking to invest money for 6 months to 1 year, and want better returns than bank fixed deposits. Funds vary in risks based on credit quality of underlying portfolio, and those holding low-rated papers are unsuitable for this timeframe. |
| Money market | Invests in money market instruments up to 1 year in maturity | Suits investors looking to invest money for the short-term of about 1 year, and want better returns than bank fixed deposits. |
| Short-term debt funds | ||
| Short duration | Invests in debt instruments and maintains an average portfolio Macaulay duration of 1 – 3 years | Suits investors with a 1.5-3 year horizon, looking for returns above fixed deposits. Funds vary in risks based on credit quality of underlying portfolio, and those holding low-rated papers are unsuitable for this timeframe. |
| Banking and PSU | Invests at least 80% of portfolio in CDs and other bank debt instruments and debt instruments of PSU companies | Suits any investor with a 2-3 year timeframe looking for options that deliver higher than bank fixed deposits. Credit risk is usually low. |
| Floater | Invests at least 65% of portfolio in floating rate instruments | Suits any investor with a short-term timeframe, looking for returns above that of fixed deposits |
| Longer term debt funds | ||
| Corporate bond | Invests at least 80% of the portfolio in instruments rated AA+ and higher | Suits any investor with a 3+ year timeframe, or need debt allocation in long-term portfolios, looking for better returns and more tax efficiency compared to fixed deposits. |
| Medium duration | Invests in debt instruments and maintains an average portfolio Macaulay duration of 3-4 years | Suits investors with 3+ year holding periods or need debt allocation in long-term portfolios. Funds vary in risk based on credit quality of underlying portfolio. Funds with high credit risk do not suit conservative or moderate risk investors. |
| Dynamic bond | Aims to either make returns from bond price appreciation during downward interest rate cycles or earn interest accrual at other times | Suits aggressive and high-risk investors with a 3+ year timeframe. Returns can be volatile in the shorter term, and funds may see underperformance if interest rate calls are wrong or become unpredictable |
| Credit Risk | Invests at least 65% of the portfolio in instruments rated below AA+ | Suits only high risk investors with a 3+ year timeframe. Risks include write-offs due to downgrades or defaults resulting in sudden NAV declines. |
| Medium to long duration | Invests in debt instruments and maintains an average portfolio Macaulay duration of 4-7 years | Suits investors with 3+ year holding periods or need debt allocation in long-term portfolios. Funds vary in risk based on credit quality of underlying portfolio. Funds with high credit risk will not suit conservative or moderate risk investors. |
| Long duration | Invests in debt instruments and maintains an average portfolio Macaulay duration of at least 7 years | Suits investors with 3+ year holding periods or need debt allocation in long-term portfolios. Funds may see short-term volatility due to fluctuations in prices of bonds held. |
| Gilt | Invests at least 80% in government securities of any maturity | Suits any investor who does not mind short-term volatility, and have a 3+ year timeframe. Can form part of the debt allocation of long-term portfolios. |
| Gilt fund with 10-year constant duration | Invests at least 80% in government securities such that the Macaulay duration of the portfolio is 10 years | Suits any investor who does not mind short-term volatility, and have a 5+ year timeframe. Can form part of the debt allocation of long-term portfolios. |
What is Macaulay duration? Macaulay Duration is simply the time for the investment cost in a bond to be repaid based on weighted coupon payments. It plays a key role in helping debt fund investors measure the risk of the fund they are buying into.
Mutual fund categories – hybrid funds
These funds vary widely in terms of risk; funds with higher equity allocations are generally riskier and will be more volatile in periods such as 6 months to 1 year. For funds without defined equity allocations, taxation may change and will depend on the date of your redemption.
| Category | Description | Suitability | Taxation |
| Conservative Hybrid | Invests 10%-25% of portfolio in equity and the rest in debt | Suits investors with a higher risk appetite who want returns above pure debt funds in the 2-3 year period. | Taxed like a debt fund |
| Aggressive Hybrid | Invests 65-80% of portfolio in equity and the rest in debt. | Suits investors who want a lower-risk route to invest in equity. Require a timeframe of at least 3 years. | Taxed like an equity fund |
| Dynamic Asset allocation or Balanced Advantage | Invests in equity/debt that is managed dynamically, based on equity and debt market valuations | Suits investors who want changing allocations based on where opportunities are, or conservative investors looking for a low-risk route to equity. Returns tend to be lower than pure equity funds. Requires a minimum 1.5-2 years in holding period, but can be longer depending on fund strategy | If average equity holding is at least 65% for the 12 months preceding redemption date, equity tax rules apply. Else, debt fund tax rules apply. |
| Multi asset allocation | Invests in at least 3 asset classes with a minimum allocation of at least 10% each in all three asset classes | Suits investors who want exposure to different assets managed dynamically. Returns tend to be lower than pure equity funds. Requires a long-term holding period due to the extremely dynamic nature of funds. | If average equity holding is at least 65% for the 12 months preceding redemption date, equity tax rules apply. Else, debt fund tax rules apply. |
| Arbitrage | Invests at least 65% in equity and hedges the entire equity exposure through derivatives | Suits investors in the high tax brackets who have a holding period of 6 months-1.5 years, due to the tax advantage these funds have. Returns are generally on par with or even lower than liquid funds. | Taxed like an equity fund |
| Equity savings | Invests at least 65% of portfolio in equity (including derivatives) and at least 10% in debt | Suits investors with a 1-3 year timeframe who want tax-efficient returns that can beat debt funds or fixed deposits. | Taxed like an equity fund |
Mutual fund categories – other funds
| Category | Description | Suitability | Taxation |
| Retirement fund | Invest in equity, debt, or a combination. Investments are locked in for 5 years. Some funds qualify for deductions under section 80C of the Income Tax Act | Suit investors who are willing to remain locked in for a long period of time, and who would like to gradually reduce from equity allocations and move towards debt as they age. These funds typically come with high exit loads. | Equity tax rules apply when the fund is equity-oriented. Otherwise, debt tax rules apply |
| Children’s fund | Invest in equity, debt, or a combination. Investments are locked in for 5 years or the child attains majority, whichever is earlier | Suit investors who want to invest in their child’s name. Other family members can also make investments in these funds in a child’s name. | Equity tax rules apply when the fund is equity-oriented. Otherwise, debt tax rules apply |
| Index Funds/ETFs | Tracks a particular stock market or bond market index. | Suits investors who want to hold a particular index without taking the risk of a fund manager’s active calls | Index funds/ ETFs tracking domestic indices are taxed like equity funds. Else, debt fund tax rules apply. |
| Fund of Funds (overseas/ domestic) | Invest in other domestic equity or debt funds, or in international funds | Suit investors who are looking for dynamic allocations to different funds or want international exposure. | Taxed like debt funds, even if underlying funds are equity funds |
See different funds and fund categories here.
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