Before 2018, fund houses named and positioned schemes largely as they pleased, and two funds carrying similar names could hold very different things. SEBI’s categorisation rules changed that: schemes now sit in defined categories with rules about what they may hold, and a fund house may generally run only one scheme per category.
The practical benefit is that a category label now tells you something reliable. Learning to read the categories is more useful than memorising fund names.
Equity schemes
Equity schemes invest predominantly in shares. They fluctuate most, and are generally considered for longer horizons.
By company size
- Large cap — invests mainly in the largest listed companies by market capitalisation. Typically the least volatile equity category.
- Mid cap — mid-sized companies. More fluctuation than large cap.
- Small cap — smaller companies. The most volatile of the three, with the sharpest moves in both directions.
- Multi cap and flexi cap — spread across sizes. Multi cap must hold minimum allocations to each; flexi cap leaves the split to the manager.
By strategy or mandate
- ELSS — an equity scheme carrying a three-year lock-in and qualifying for Section 80C deduction under the old tax regime.
- Sectoral and thematic — confined to one sector or theme. Concentrated by design, which cuts both ways.
- Index funds and ETFs — track an index rather than selecting stocks, and typically carry lower expense ratios.
Debt schemes
Debt schemes invest in bonds, government securities and money market instruments. They generally fluctuate less than equity, but “less volatile” is not “no risk” — debt funds carry interest rate risk and credit risk, and their values do fall.
Categories are largely defined by the duration of what they hold:
- Overnight and liquid — very short maturities, used for parking money briefly.
- Ultra short, low duration, short duration — progressively longer.
- Corporate bond, banking and PSU, gilt — defined by the type of issuer. Gilt funds hold government securities and carry no meaningful credit risk, but remain sensitive to interest rate moves.
- Credit risk — deliberately holds lower-rated paper. Higher yield, higher chance of default.
The general pattern: longer duration means more sensitivity to interest rate changes, and lower credit quality means more sensitivity to default.
Hybrid schemes
Hybrid schemes hold a mix of equity and debt.
- Conservative hybrid — mostly debt with a small equity allocation.
- Balanced and aggressive hybrid — a substantial allocation to both.
- Dynamic asset allocation (often called balanced advantage) — shifts the mix based on the manager’s model.
- Multi asset allocation — must hold at least three asset classes, commonly adding gold.
Hybrids appeal to investors who want some equity exposure without an entirely equity-driven experience. Note that the equity-versus-debt split also determines how the scheme is taxed, which is worth checking before assuming.
Solution-oriented and other categories
- Retirement and children’s funds — carry a lock-in tied to their stated purpose.
- Fund of funds — invest in other schemes.
How to use the categories
Start with the horizon, let that narrow the category, and only then look at individual schemes. Choosing a scheme first and rationalising the category afterwards is the common error, and it is how people end up holding small cap funds for money they need in two years.
Also check what you already hold. Investors often own four or five schemes that sit in adjacent categories and hold many of the same companies — which feels like diversification and is not.
Frequently asked questions
How many schemes should someone hold?
There is no correct number, but adding schemes within the same category adds paperwork rather than diversification. What matters is whether they hold genuinely different things.
Are debt funds risk-free?
No. They are generally less volatile than equity, but they carry interest rate risk and credit risk, and their values can and do fall.
What is the difference between multi cap and flexi cap?
Multi cap schemes must maintain minimum allocations across large, mid and small caps. Flexi cap schemes leave the allocation to the fund manager.
Do index funds belong in the equity category?
Yes. An index fund tracking an equity index is an equity scheme and carries equity risk. Tracking an index rather than picking stocks reduces cost, not market risk.
Mutual fund investments are subject to market risks. Read all scheme-related documents carefully.