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:
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:
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.
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:
|
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.
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.