A Comprehensive Guide to Equity Mutual Funds and Their Categorization

Introduction

Equity Mutual Funds are one of the most popular investment vehicles in India for individuals seeking capital appreciation over the long term. These funds primarily invest in shares of publicly listed companies, offering investors a diversified portfolio managed by professionals. In an effort to simplify the investment process and enhance transparency, the Securities and Exchange Board of India (SEBI) introduced a circular on October 6, 2017, that aimed to categorize and rationalize mutual fund schemes.

This blog explores Equity Mutual Funds in depth and explains SEBI's categorization framework to help investors make informed decisions.

What Are Equity Mutual Funds?

Equity Mutual Funds are mutual fund schemes that invest at least 65% of their assets in equity and equity-related instruments. These funds are best suited for investors with a high-risk appetite and a long-term investment horizon. The main objective is capital growth, although the risk is higher compared to debt or hybrid funds.

Key Features:

• Professional fund management

• Diversification across companies and sectors

• Potential for high returns

• Best for long-term goals like retirement, education, or wealth creation

Choosing the Right Equity Mutual Fund

When selecting an Equity Mutual Fund, consider the following:

• Investment Horizon: Long-term funds like ELSS and Multi Cap Funds suit 5+ years.

• Risk Tolerance: Small Cap and Sectoral Funds carry high risk.

• Tax Benefits: ELSS offers deductions under Section 80C.

• Diversification Needs: Multi Cap and Focused Funds provide varied exposure.

Understanding Market Cap Definitions

SEBI also defined the scope of what constitutes large, mid, and small cap companies to maintain consistency across the mutual fund industry. These are based on market capitalization rankings:

• Large Cap: Top 1st to 100th companies

• Mid Cap: 101st to 250th companies

• Small Cap: 251st company onwards

These classifications are updated semi-annually by AMFI (Association of Mutual Funds in India).

SEBI's Categorization of Equity Mutual Funds

To bring uniformity and clarity, SEBI mandated that mutual funds must clearly distinguish their schemes based on asset allocation and investment strategy. Under the new norms, only one scheme per category is allowed per AMC (Asset Management Company), with a few exceptions.

Below is a detailed table outlining SEBI's categorization of Equity Mutual Funds:

Category	Minimum Equity Allocation	Key Strategy and Description
Multi Cap Fund	65%	Invests across large, mid, and small cap stocks
Large Cap Fund	80% in large-cap	Predominantly large-cap equity investments
Large & Mid Cap Fund	35% in large-cap, 35% in mid-cap	Balanced exposure to large and mid cap equities
Mid Cap Fund	65% in mid-cap	Focused on mid-sized companies
Small Cap Fund	65% in small-cap	Focused on small-sized, high-growth companies
Dividend Yield Fund	65% in dividend-yielding stocks	Targets high-dividend paying companies
Value Fund	65%	Follows value investing strategy (undervalued stocks)
Contra Fund	65%	Contrarian approach, investing against prevailing trends
Focused Fund	65% (max 30 stocks)	Concentrated investments with a focused strategy
Sectoral/Thematic Fund	80% in sector/theme	Specialized in a specific sector or theme (e.g., IT, Pharma)
ELSS	80%	Tax-saving scheme with 3-year lock-in under 80C

Note: Mutual funds can offer either a Value Fund or Contra Fund, not both.

Benefits of Categorization

• Clarity for Investors: Easy comparison across mutual fund schemes.

• Elimination of Redundancy: No duplication of schemes by AMCs.

• Uniformity: Standard definitions lead to consistent expectations.

• Better Portfolio Alignment: Investors can match schemes to their risk appetite and goals.

The Bottom Line

Navigating the world of Equity Mutual Funds becomes more straightforward with SEBI's structured categorization. By understanding the distinct features and investment strategies of each fund type, investors can align their choices with personal financial goals and risk appetites. Whether you're aiming for long-term wealth creation, tax savings, or sector-specific investments, there's an equity fund category tailored to your needs.​

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We offer:

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At VR Financial Services, we are committed to guiding you through your investment journey. Our state-of-the-art technology and AI-driven platform are designed to manage your wealth effectively, providing you with customized solutions across various financial products. We specialize in helping individuals, families, businesses, and trusts manage assets, set goals, and access research tools with comprehensive reporting and customized solutions.

Disclaimer

Mutual Fund investments are subject to market risks. Please read all scheme-related documents carefully before investing. The information provided herein is intended solely for educational and informational purposes and should not be construed as investment advice, a recommendation, or an offer to buy or sell any securities or financial products. Past performance is not indicative of future results. Investors are strongly advised to conduct their own due diligence and consult with certified financial advisors before making any investment decisions. Ensure your KYC compliance is completed through SEBI-registered intermediaries only. VR Financial Services does not guarantee any returns and does not offer fixed or assured return schemes—any such claims are misleading and prohibited by SEBI. All investment transactions must be carried out through official channels; do not share personal credentials or OTPs with anyone. We do not solicit funds or investment commitments through social media platforms, which are used strictly for educational outreach and investor awareness.