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Other Schemes – SEBI Classification

  • Akshatha Sajumon
  • 12 Jan
  • 7 minutes

Investment in the mutual fund market or in individual stocks of the companies is governed by a central governing body in India known as SEBI. The Securities and Exchange Board of India lays down various rules and guidelines from time to time that has to be followed by all the participants involved in the securities trade and investment. Recently, SEBI has modified the various categories under which mutual funds can be classified. The main purpose of this reclassification is to help the investors make better and sound investment decisions. 

There are several broad categories of Mutual funds as per SEBI. Given below are the details of the other schemes classified as per SEBI recategorization.  

What are the revised categories as per SEBI?

The revised categories as per SEBI are mentioned below.

Equity Schemes

Schemes that primarily invest in equity and equity-related schemes are classified under equity schemes. Furthermore, there are 10 sub-categories under equity schemes. These schemes are mentioned below.

  1. Large-cap funds
  2. Large & mid cap funds
  3. Mid cap funds
  4. Small cap funds
  5. Multicap funds
  6. Dividend yield funds
  7. Value funds
  8. Contra funds
  9. Focused funds
  10. Sectoral/ Thematic funds
  11. ELSS

Debt Schemes

Schemes that primarily invest in debt and debt-related schemes are classified under debt schemes. Furthermore, there are 16 sub-categories under debt schemes. These schemes are mentioned below.

  1. Overnight funds
  2. Liquid funds
  3. Ultra short term funds
  4. Low duration funds
  5. Money market funds
  6. Short duration funds
  7. Medium duration funds
  8. Medium to long-duration funds
  9. Long duration funds
  10. Dynamic bond
  11. Corporate bond fund
  12. Credit risk fund
  13. Banking and PSU fund
  14. Gilt fund
  15. Gilt fund with 10-year constant duration 
  16. Floater fund

Hybrid Schemes

Hybrid funds are the funds that invest in equity as well as debt instruments. SEBI has further classified hybrid schemes into 7 sub-categories which are mentioned below.

  1. Conservative hybrid funds
  2. Balanced hybrid funds
  3. Aggressive hybrid funds
  4. Dynamic asset allocation or balanced advantage funds
  5. Multi asset allocation funds
  6. Arbitrage funds
  7. Equity savings

Solution-oriented Schemes

Apart from the above categories, mutual funds that are for specific purposes are categorized under solution-oriented schemes. The two sub-categories under this head are,

  1. Retirement fund
  2. Children’s fund

Other Schemes 

The balance funds are categorized under other schemes by SEBI. These categories are mentioned below.

  1. Index funds/ ETFs
  2. Fund of Funds 

What are the other schemes as per SEBI Classification?

After recategorizing all the schemes under various main categories, the balance funds are recategorized under other schemes. The details of the same are mentioned below.

Index funds/ETFs

Index funds are mutual funds that are based on the index for their performance. The underlying securities in index funds are in the same proportion as the index they track. ETFs (Exchange Traded Funds) also are funds that track an underlying index, commodity, bonds, or a basket of assets. Unlike index funds, ETFs can be traded on the stock exchange like ordinary stocks. Given below are a few details of these funds. 

Advantages of Index Funds/ETFs

Few advantages of index funds and ETFs are mentioned below.

  1. Index funds and ETFs are considered to be passive funds, hence, they are ideal for new investors or risk-averse investors, or simply as a balancing factor in a high-risk portfolio.
  2. These funds are free from any fund manager bias and their performance does not depend solely on the fund manager’s experience and expertise.
  3. Index funds and ETFs are relatively less expensive than actively managed funds. 
  4. The returns of Index funds and ETFs are more or less predictable as they track the underlying index or asset for their performance. There may be some deviations while tracking the index or the asset. These deviations are known as tracking errors and are quite nominal.

Taxation of Index funds/ETFs

The taxation of index funds and ETFs are tabled below.

Type of schemeShort term capital gainsTax rateLong term capital gainsTax rate
Equity ETFsPeriod of holding – Maximum 12 months15% (plus Cess) under section 111APeriod of holding – 12 months and more10% (plus cess) on gains exceeding Rs. 1,00,000
Other ETFs (Debt ETFs, Gold ETFs, International ETFs) Period of holding – Maximum 36 monthsSlab ratesPeriod of holding – 36 months and more20% with the benefit of indexation
Index FundsPeriod of holding – Maximum 12 months15% (plus Cess) under section 111APeriod of holding – 12 months and more10% (plus cess) on gains exceeding Rs. 1,00,000

Fund of Funds

Fund of funds is the final category of mutual funds as per SEBI recategorization. These funds invest in other mutual funds of the same fund house or different fund houses within the country or outside. The fund manager can select the mutual funds based on their investment goals and investment strategies. 

Advantages of Fund of Funds

Few advantages of fund of funds are mentioned below.

  1. While diversification is the key to any mutual fund, investing in different mutual funds provides the enhanced benefit of diversification in the fund of funds. 
  2. These funds are ideal for investors with a lower risk appetite who are looking to maximize their returns at relatively lower risk and expenses as well as lower investment capital. 
  3. Investors get to invest in various types of fund of funds based on their risk profile and returns expectations like gold funds, ETF fund of funds, International fund of funds, multi-manager fund of funds, or asset allocation funds.
  4. The expertise of the fund managers allows the investors to aim for good returns in domestic as well as international markets and at the same time minimize the risk to the best possible extent.

Taxation of Fund of Funds

The taxation of funds depends on the composition of the fund. 

  • If the fund is equity-oriented (majority investment in equity and equity-related funds), the taxation will be in line with equity funds.
  • If the fund is debt-oriented (majority investment in debt and debt-related funds), taxation will be in line with that of the debt funds.
  • The taxation of hybrid funds is based on the dominant investment of the fund. Equity-oriented hybrid funds are taxed in line with equity mutual funds. On the other hand, debt-oriented hybrid funds are taxed in line with debt mutual funds.   

Conclusion

The other schemes as per SEBI classification are passive funds that do not require active fund manager participation. These funds depend on other securities or indexes or mutual funds for their performance and hence are assumed to be of relatively low risk. These fund schemes are ideal for new investors or investors who do not want too much exposure in the mutual fund market and at the same time are looking for more or less stable returns. 

FAQs

 How are the dividends of the other schemes taxed?

Dividends received through any of the other schemes as per SEBI recategorization are taxed in the hands of the investors. The applicable tax rate will be as per the current slab rates of the taxpayer

Does the investor need a Demat account for investment in other schemes?

Investment in index funds and fund of funds is like any other mutual funds where the investors can directly buy or sell units through registered brokers or AMCs. However, investment in ETFs requires the investors to open a trading account and a Demat account as the investment in ETFs is held and traded like ordinary shares

What are tracking errors?

Tracking errors are encountered in passive investment options like index funds, ETFs and fund of funds, these investments track the underlying security or index for their performances and try to match it to the maximum possible extent. While trying to match such performance, there may be some deviations. Such deviations are known as tracking errors. These errors are quite minimal and nominal

Why are the other schemes under SEBI recategorization known as passive investments?

The other schemes under SEBI recategorization directly track a particular asset or index for their performance. The weightage of the securities is also in the same composition as the underlying security they track. Hence, this does not involve active fund manager participation in selecting and nurturing assets. Therefore, these investments are known as passive investment options.

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Akshatha Sajumon

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