By Dalal Street Investment Journal (DSIJ)
SEBI updates mutual fund classification by retaining five broad groups: Equity, Debt, Hybrid, Life Cycle, and Other Schemes. The new guidelines also address overlapping rules for sectoral and thematic funds, ensuring that no more than 50% of the portfolio overlaps with other schemes in the same category. This aims to provide a clearer structure and enhance transparency for investors.
The Securities and Exchange Board of India (SEBI) has established a structured framework for mutual fund schemes under its circular, aimed at enhancing transparency and aligning investor expectations with mutual fund offerings. The categorisation and rationalisation of schemes bring clarity to the investment choices available for mutual fund investors.
SEBI has broadly classified mutual fund schemes into several categories, with a primary focus on Equity, Debt, Hybrid, Life Cycle, and Other Schemes.
Equity Schemes are primarily aimed at investments in equity and equity-related instruments.
Debt Schemes predominantly invest in debt and debt-related instruments.
Hybrid Schemes combine investments across asset classes like equity, debt, and commodities.
Life Cycle Funds offer a glide path investment strategy, with a predefined allocation between equity, debt, and other assets depending on the target maturity date.
Other Schemes include Fund of Funds (FoF) and Passive Schemes like Index Funds and ETFs.
Within the Equity Schemes category, SEBI has defined allocation bands for various types of schemes to ensure consistency in their investment strategies.
Below are some key equity schemes and their allocation guidelines:
Multi-Cap Fund
Minimum 75% of total assets must be invested in equity and equity-related instruments across large, mid, and small-cap stocks.
Allocation: 25% each in large, mid, and small-cap stocks.
This scheme invests across all market caps: large-cap, mid-cap, and small-cap stocks.
Large Cap Fund
A minimum of 80% of total assets must be invested in large-cap stocks.
An open-ended equity scheme predominantly invests in large-cap stocks.
Large & Mid Cap Fund
A minimum of 35% in large-cap stocks and 35% in mid-cap stocks.
This fund is designed to balance investments between large-cap and mid-cap stocks.
Mid Cap Fund
A minimum of 65% of total assets must be invested in mid-cap stocks.
An open-ended equity scheme predominantly investing in mid-cap stocks.
Small Cap Fund
A minimum of 65% of total assets must be invested in small-cap stocks.
An open-ended equity scheme predominantly investing in small-cap stocks.
Flexi Cap Fund
A minimum of 65% must be invested in equity and equity-related instruments.
An open-ended dynamic equity scheme investing across large-cap, mid-cap, small cap stocks.
Dividend Yield Fund
Invests predominantly in dividend-yielding stocks, with at least 80% of assets in equity and equity-related instruments.
An open-ended equity scheme predominantly investing in dividend-yielding stocks.
Value Fund
Follows a value-investment strategy and must invest at least 80% in equity and equity-related instruments.
An open-ended equity scheme following a value investment strategy.
Contra Fund
Follows a contrarian investment strategy, where the minimum investment in equity and equity-related instruments is 80% of total assets.
An open-ended equity scheme investing in a maximum of 30 stocks (mention where the scheme intends to focus, viz., multi-cap, large cap, mid-cap, small cap).
Focused Fund
Focused on a concentrated portfolio, investing in no more than 30 stocks, with a minimum of 80% invested in equity and equity-related instruments.
This scheme may focus on large, mid, or small-cap stocks, depending on the scheme's objective.
Sectoral Fund
A minimum of 80% of total assets must be invested in a specific sector.
An open-ended equity scheme investing in the sector.
Thematic Fund
A minimum of 80% in equity and equity-related instruments of a specific theme, such as consumption, technology, etc.
An open-ended equity scheme investing in a specific theme.
13. ELSS – Tax Saver Fund
A minimum investment in equity & equity-related instruments - 80% of total assets.
An open-ended scheme with attributes in accordance with the Equity Linked Saving Scheme, 2005, notified by the Ministry of Finance.
For sectoral and thematic funds, SEBI has specified that no more than 50% of the portfolio should overlap with other equity schemes within the same category. Mutual funds are required to ensure that the portfolio overlaps between different schemes within the same category are monitored and controlled, which helps in reducing the risk of concentrated investments.
The overlap condition shall be computed on a quarterly basis using the daily portfolio overlap values, i.e., the average of daily portfolio overlap values over a quarter.
Additionally, SEBI has introduced specific timelines for mutual funds to comply with these standards. Existing schemes that do not meet the portfolio overlap criteria will need to be merged within three years of the circular's issuance.
Debt schemes predominantly invest in debt and debt-related instruments. The allocation bands for various types of debt schemes are as follows:
Overnight Fund
Investment in overnight securities having a maturity of 1 day.
May deploy up to 5% of the net assets in government securities (G-secs) or T-bills with a residual maturity of up to 30 days for margin purposes.
An open-ended debt scheme investing in overnight securities.
Liquid Fund
Investment in debt and money market securities with a maturity of up to 91 days.
An open-ended liquid scheme
Ultra Short Term Fund
Investment in debt and money market instruments with a Macaulay duration between 3 months and 6 months.
Ultra Short to Short Term Fund
Investment in debt and money market instruments with a Macaulay duration between 6 months and 12 months.
Money Market Fund
Investment in money market instruments with a maturity of up to 1 year.
Short Term Fund
Investment in debt and money market instruments with a Macaulay duration between 1 year and 3 years.
Medium Term Fund
Investment in debt and money market instruments with a Macaulay duration between 3 years and 4 years.
Portfolio Macaulay duration under anticipated adverse situations is 1 year to 4 years.
Medium to Long Term Fund
Investment in debt and money market instruments with a Macaulay duration between 4 and 7 years.
Portfolio Macaulay duration under anticipated adverse situations is 1 year to 7 years.
Long Term Fund
Investment in debt and money market instruments with a Macaulay duration greater than 7 years.
Dynamic Term Fund
Investment across duration.
Corporate Bond Fund
Minimum investment of 80% of total assets in corporate bonds rated AA+ or above.
Credit Risk Fund
Minimum investment of 65% of total assets in corporate bonds rated AA or below (excluding AA+ rated corporate bonds).
Banking and PSU Debt Fund
Minimum investment of 80% in debt instruments of banks, PSUs, public financial institutions, and municipal bonds.
Gilt Fund
Minimum investment of 80% of total assets in G-secs across various maturities.
10-year Constant Maturity Gilt Fund
Minimum investment of 80% of total assets in G-secs with a constant maturity of 10 years.
Floating Interest Rates Fund
Minimum investment of 65% in floating-rate instruments or fixed-rate instruments converted to floating using derivatives.
Sectoral Fund
Minimum investment of 80% in debt and debt-related instruments of a particular sector. Sectoral Debt Funds may be launched in the following sectors: Financial Services, Energy, Infrastructure, Housing, and Real Estate.
The sectoral debt scheme shall be offered after ensuring that there is sufficient availability of investment-grade paper in the market for the sectors in which the sectoral debt fund is offered by the respective AMC.
Hybrid schemes invest across asset classes like equity, debt, and sometimes other assets. The allocation bands for hybrid schemes are as follows:
Conservative Hybrid Fund
Equity & Equity Related Instruments: 10% to 25% of total assets.
Debt Instruments: 75% to 90% of total assets.
Primarily invests in debt instruments.
Balanced Hybrid Fund
Equity & Equity Related Instruments: 40% to 60% of total assets.
Debt Instruments: 40% to 60% of total assets.
No arbitrage is permitted in this scheme.
Aggressive Hybrid Fund
Equity & Equity Related Instruments: 65% to 80% of total assets.
Debt Instruments: 20% to 35% of total assets.
Primarily invests in equity instruments.
Dynamic Asset Allocation Fund
Investment in both equity and debt instruments, with dynamic asset allocation managed by the fund manager.
Multi Asset Allocation Fund
Invests in at least three asset classes, with a minimum allocation of 10% in each asset class.
Arbitrage Fund
Equity & Equity Related Instruments: Minimum of 65% of total assets, primarily invested in arbitrage opportunities.
Debt Instruments: Exposure to government securities with a maturity of less than 1 year and repos of government bonds.
No investment in InvITs permitted.
Equity Savings Fund
Equity & Equity Related Instruments: Minimum 65% of total assets.
Net Equity Exposure: 15% to 40% of total assets.
Debt Instruments: Minimum 10% of total assets.
Arbitrage exposure is also considered and will be mentioned in the scheme document. Minimum hedged & unhedged exposure to be stated in the SID. Asset Allocation under defensive considerations may also be stated in the Offer Document.
In the hybrid category schemes, Mutual Funds may invest residual portions in InvITs (except for arbitrage funds), ETCDs, Gold ETFs, and Silver ETFs, subject to the ceilings laid out in MF regulations w.r.t the respective asset class.
Solution-Oriented Schemes: Solutions oriented scheme category is being discontinued w.e.f the date of the circular. Existing schemes in this category shall stop all subscriptions with immediate effect. Such schemes shall be merged with any other scheme having a similar asset allocation and risk profile, with prior approval from SEBI.
Life Cycle Funds invest across multiple asset classes with a "glide path" strategy.
Scheme following glide path strategy based investing across various asset classes, i.e., Equity, Debt, InvITs, ETCDs, Gold & Silver ETF.
Mutual Funds may launch Life Cycle Funds with a minimum tenure of 5 years and a maximum tenure of 30 years. Such a fund may be launched for tenures in multiples of 5 years, and a maximum of 6 funds by a Mutual Fund can be active for subscription at any given point in time. Additionally, as each fund reaches less than 1 year to maturity, such a fund may be merged with the nearest maturity Life Cycle Fund with the consent of the unitholders.
Index Funds/ETFs
95% of total assets must be invested in securities of a particular index being replicated/tracked.
FoFs (Fund of Funds)
Minimum investment in the underlying fund- 95% of total assets. An open-ended fund of fund scheme investing in funds (mention the underlying funds)
SEBI Registered Research Analyst (INH000006396).
Founded in 1986, Dalal Street Investment Journal (DSIJ) brings decades of experience in India’s equity markets. DSIJ's research combines fundamental analysis with price action, guided by disciplined risk management and capital preservation. They follow a structured, data-driven approach designed to help investors and traders make informed decisions beyond short-term market noise.
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