A fund category refers to a classification system used to group investment funds based on their primary investment strategies, asset types, and objectives. These categories help investors understand the general nature of a fund's investment approach and its associated risks and returns.
Investing in mutual funds can be daunting for beginners who are just getting introduced to this investment option. This is primarily because there are many different categories of mutual funds depending on the asset classes they focus on. To choose the ideal mutual fund for your portfolio, you must become familiar with the different mutual fund categories and what they entail.
In this article, we take a look at the meaning of fund categories and how mutual funds are classified in India.
Breaking down fund categories
Fund categories are different ways to group investment funds based on their goals and strategies. Investors, whether they are individuals or professionals, use these categories to build their investment portfolios.
Managed fund of funds
One clear example of using fund categories is a "fund of funds," where a portfolio manager selects various funds from different categories to create a diversified portfolio. This method is often used in balanced mutual fund portfolios to achieve a specific asset mix.
For example, the XYZ Growth Fund is a fund that invests mostly in growth stocks but also includes some debt securities. It aims to allocate 70% to 85% of its assets in stocks and 15% to 30% in bonds. This fund's main stock investment is the ABC Large-Cap Value Fund, while its main bond investment is the PQR Bond Fund. The average returns of this fund may range from 0% to 20%.
Investing for retail investors
Retail investors can pick funds based on their personal investment goals and preferences. To create a well-balanced mutual fund portfolio, investors often start by outlining their investment goals, risk tolerance, and interests. This can be done through managed accounts or by setting up a personal investment strategy.
There are many fund categories to choose from. Standard options focus on asset types like stocks and bonds, while managed objective funds are designed to meet specific goals, such as growth or income. These funds come in various styles, allowing investors to match their choices with their investment needs.
Targeted asset fund categories
Investors can also select funds based on specific asset types. For example, stock funds are grouped by company size (large-cap, mid-cap, small-cap), and bond funds are categorised by maturity (long, intermediate, short) and credit quality (high, medium, low). Stock funds are usually for higher-risk investments, while bond funds are more suitable for conservative strategies.
Managed objective fund categories
Beyond basic stock and bond categories, there are managed objective funds with specific goals like growth or income. Hybrid funds, which mix different asset types, also fit into this category. These funds help investors meet various objectives, whether they are short-term or long-term.
Hybrid funds can include conservative, moderate, or aggressive growth options and target-date funds that adjust their investment mix as the target date approaches, aligning with the investor’s future goals.
What is a fund category in mutual funds?
A fund category is any type of mutual fund that is differentiated from other schemes based on its investment objectives, features and the asset classes it primarily invests in. In simple terms, it is a distinct type of mutual fund. Investors use various criteria to group mutual fund schemes into different fund categories.
For example, you can classify funds into different groups based on their investment horizon, the investing style, the primary asset class, the organisation structure and more. It is important to understand what the many different fund categories are, so you can make a smart choice when it comes to investing in them.
Different categories of mutual funds?
One of the most fundamental ways to identify different mutual fund categories is to use the primary asset class in the underlying portfolio as the basis for classification. The Securities and Exchange Board of India (SEBI) identifies the following mutual fund categories based on their investment portfolios.
1. Equity schemes
These mutual funds invest primarily in the equity market and equity-related instruments. They carry higher risks than other types of mutual fund categories but also have the potential to generate significant returns over the long term. Equity mutual fund schemes can further be classified into different smaller fund categories as outlined below:
- Small-cap funds: With a minimum of 65% invested in small-cap companies
- Mid-cap funds: With a minimum of 65% invested in mid-cap companies
- Large-cap funds: With a minimum of 80% invested in large-cap companies
- Large and mid-cap funds: With a minimum of 35% invested in mid-cap companies and large-cap companies each
- Multi-cap funds: With a minimum of 75% invested in equity stocks of different market capitalisations
- Flexi-cap funds: With a minimum of 65% invested in equity stocks of different market capitalisations
- Dividend yield funds: With a minimum of 65% invested in equity stocks, focusing mainly on dividend-paying companies
- Value funds: With a minimum of 65% invested in equity, focusing primarily on undervalued companies
- Equity Linked Savings Schemes (ELSS): With a minimum of 80% invested in equity stocks (the investment amount can be claimed as a tax deduction up to Rs. 1.5 lakhs)
- Contra funds: With a minimum of 65% invested in equity stocks, focusing primarily on companies that meet the criteria of a contrarian investment strategy
- Sectoral and thematic funds: With a minimum of 80% invested in the stocks of companies that fit a specific theme or belong to a particular sector
- Focused funds: With a minimum of 65% in equity and related instruments, where the portfolio is limited to a maximum of 30 stocks
2. Debt schemes
Debt mutual funds are schemes that invest predominantly in debt instruments like bonds, government securities, treasury bills, debentures and the like. Like equity funds, schemes in this fund category are also classified into different smaller groups by SEBI, as outlined below.
- Overnight funds: Which mature within 1 day
- Liquid funds: With maximum maturities of 91 days
- Ultra-short duration funds: With a Macaulay duration between 3 and 6 months
- Low duration funds: With a Macaulay duration between 6 and 12 months
- Money market funds: Which invest in money market securities with maturities of up to 1 year
- Short duration funds: With a Macaulay duration between 1 and 3 years
- Medium duration funds: With a Macaulay duration between 3 and 4 years
- Medium-to-long duration funds: With a Macaulay duration between 4 and 7 years
- Long-duration funds: With a Macaulay duration greater than 7 years
- Dynamic bond funds: Which invest in bonds with varying maturities and Macaulay durations
- Corporate bond funds: With at least 80% invested in corporate bonds rated AA+ or higher
- Credit risk funds: With at least 65% invested in corporate bonds rated AA or lower
- Gilt funds: With at least 80% invested in government securities
- Floater funds: With at least 65% invested in instruments with floating rates of interest
3. Hybrid schemes
Hybrid funds invest in a combination of both debt and equity investments. Depending on the proportion of assets allocated to equity and debt, hybrid funds can be conservative, balanced or aggressive.
4. Solution-oriented schemes
Solution-oriented funds are designed to meet specific goals or financial requirements. Some examples of schemes in this fund category include retirement funds (with a lock-in of 5 years or till retirement) and children’s funds (with a lock-in of 5 years or till the child becomes a major).
5. Other mutual fund schemes
In addition to the above-mentioned fund categories, the SEBI also recognises other schemes like index funds, fund of funds and Exchange-Traded Funds (ETFs).
Conclusion
This concludes our broad overview of what a fund category is and how mutual funds are classified in India. You can choose one or more categories of mutual funds based on what your objectives are and how much risk you can afford to take. Your choice of mutual fund categories will vary as you progress along your investment journey and your goals change.
The Bajaj Finserv Mutual Funds Platform can help you find the ideal category of mutual funds for your portfolio. You can check out 1,000+ mutual fund schemes and start a SIP investment or make a Lumpsum investment in any fund you choose.
