Before 2018, two funds with identical names could hold completely different things. SEBI then imposed a categorisation framework: defined categories with defined rules, and generally only one scheme per category per AMC.
The result: a fund's category now tells you what it must hold.
Equity funds
Invest primarily in shares. AMFI publishes the market-cap ranking used for classification, updated half-yearly.
| Category | Must invest in |
|---|---|
| Large cap | Mainly the top 100 companies by market cap |
| Mid cap | Mainly companies ranked 101–250 |
| Small cap | Mainly companies ranked 251 onwards |
| Large & mid cap | A defined minimum in each of large and mid |
| Multi cap | A defined minimum in each of large, mid and small |
| Flexi cap | Mainly equity, with the manager free to move across sizes |
| ELSS | Equity, with a 3-year lock-in; eligible for the specified-savings deduction under the old tax regime (Section 123 read with Schedule XV of the Income-tax Act, 2025 — the provision formerly known as Section 80C) |
| Sectoral / thematic | A single sector or theme |
| Focused | A limited maximum number of stocks |
| Value / contra / dividend yield | A stated investment style |
Debt funds
Invest in bonds, government securities, treasury bills and money market instruments. Categories are defined largely by duration and credit quality.
| Category | Broadly |
|---|---|
| Overnight | 1-day maturity instruments — the lowest risk |
| Liquid | Very short maturity, used for parking cash |
| Ultra short / low duration / money market | Short maturities |
| Short / medium / long duration | Progressively longer maturities |
| Corporate bond | Mainly the highest-rated corporate paper |
| Credit risk | Mainly lower-rated paper, for higher yield and higher risk |
| Gilt | Government securities, no credit risk, but price sensitive to interest rates |
| Dynamic bond | The manager varies duration actively |
Two distinct risks live here, and beginners often notice neither:
Interest rate risk. Bond prices fall when interest rates rise. Longer duration means a larger fall. A gilt fund has no credit risk whatsoever and can still lose money.
Credit risk. The borrower may default or be downgraded. Credit risk funds carry this deliberately. Indian investors have seen real losses from this.
Hybrid funds
Hold both equity and debt.
- Aggressive hybrid — predominantly equity with a debt component
- Conservative hybrid — predominantly debt with a small equity component
- Balanced advantage / dynamic asset allocation — the equity share moves with a model
- Multi asset allocation — a defined minimum in each of at least three asset classes
- Arbitrage — captures price differences between cash and futures; equity-taxed, low volatility
Index funds and ETFs
Passive funds. No manager picking stocks. They simply hold the index constituents in index proportion.
Index fund — an ordinary open-ended mutual fund. Bought and redeemed at NAV. No demat account required.
ETF (Exchange Traded Fund) — listed on the exchange and traded through the day like a share. Requires a demat account. The market price can drift slightly from NAV, so check the spread before placing a large order.
Why passive funds matter: their expense ratios are a fraction of active funds', and cost is the one variable in investing you can control with certainty. Over long periods, a large share of active funds do not beat their benchmark after costs.
Two things to check in a passive fund:
- Tracking error — how closely it follows the index
- Traded volume, for an ETF — a thinly traded ETF can be expensive to enter and exit
Other categories
- Solution-oriented — retirement and children's funds, with a lock-in
- Fund of funds (FoF) — invests in other funds, including overseas funds
- Gold and silver ETFs / FoFs — commodity exposure without holding metal
NFO: a new fund offer
An NFO is a new scheme opening for subscription, usually at ₹10 per unit.
That ₹10 is not a discount. It is an arbitrary starting number, exactly like NAV level generally.
Key takeaways
- SEBI's categorisation means a fund's category now defines what it must hold.
- Equity categories are set by AMFI's market-cap ranking: top 100, 101–250, 251 onwards.
- Debt funds carry interest rate risk and credit risk — a debt fund is not a fixed deposit.
- Above 65% equity, a fund is taxed as equity; above 65% in debt and money-market instruments, gains are taxed at your slab rate; other mixes follow their own rules.
- An NFO at ₹10 is not cheap and has no track record — an established fund usually tells you more.
Check your understanding
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