3.2 Classification of Mutual Funds
Key Takeaways
- Schemes are classified by structure as open-ended, close-ended or interval.
- SEBI's revised categorisation circular of 26 February 2026 restructured the category framework substantially.
- The revised framework groups schemes as equity, debt, hybrid, life cycle funds and other schemes.
- Life Cycle Funds are a new glide-path category, and the solution-oriented group has been discontinued.
- Minimum equity allocation was raised to 80% for focused, contra, value, dividend-yield and ELSS schemes.
Classification by Structure
Open-Ended Schemes
Units may be bought from and sold back to the fund on any business day at the applicable NAV. There is no fixed maturity, and the corpus expands and contracts continuously with subscriptions and redemptions. This is the dominant structure in India because it provides liquidity directly from the scheme.
Close-Ended Schemes
Units are issued only during the New Fund Offer and the scheme has a fixed maturity. The fund does not repurchase units, so SEBI requires close-ended schemes to be listed on a stock exchange to give investors an exit route. That exit is at the market price, which frequently trades at a discount to NAV — the practical drawback the exam expects you to identify.
A fixed corpus is the compensating advantage: the manager faces no redemption pressure and can hold less liquid assets to maturity.
Interval Schemes
A hybrid of the two. The scheme is close-ended in structure but opens for purchase and redemption during pre-specified transaction periods at defined intervals. Units must also be listed.
| Feature | Open-ended | Close-ended | Interval |
|---|---|---|---|
| Maturity | None | Fixed | Fixed with periodic windows |
| Ongoing sale/repurchase | Yes, any business day | No | Only in transaction periods |
| Listing | Not required | Required | Required |
| Corpus | Variable | Fixed | Largely fixed |
| Exit price | NAV | Market price, often at a discount | NAV during window |
Classification by Asset Class and Strategy
SEBI first standardised scheme categories in 2017 to stop AMCs running many near-identical schemes under different names. That framework was substantially revised by SEBI's circular of 26 February 2026 on categorisation and rationalisation of mutual fund schemes, which took effect immediately with a phased compliance window for existing schemes — broadly six months, extending to three years for thematic schemes.
Under the revised framework, schemes fall into five groups:
- Equity schemes
- Debt schemes
- Hybrid schemes
- Life Cycle Funds (new)
- Other schemes — index funds, ETFs and fund of funds
Equity Schemes
Categories remain organised by market capitalisation and by strategy: large cap, mid cap, small cap, large and mid cap, multi cap, flexi cap, focused, value, contra, dividend yield, sectoral and thematic, and ELSS.
The revised circular tightened these in three ways:
- Minimum equity raised to 80% for dividend yield, value, contra, focused and ELSS schemes, up from 65%, so that each stays true to its label.
- Portfolio overlap capped at 50% for value, contra, sectoral and thematic schemes against other equity schemes of the same AMC, with monthly disclosure of overlap levels.
- An AMC may now offer both a value fund and a contra fund, which the earlier framework did not permit.
Market-capitalisation definitions continue to follow AMFI's half-yearly list: the top 100 companies by full market capitalisation are large cap, the next 150 are mid cap, and the remainder are small cap.
Debt Schemes
Duration-based classification continues — overnight, liquid, ultra short, low duration, money market, short, medium, medium-to-long and long duration — alongside credit-based and issuer-based categories such as corporate bond, credit risk, banking and PSU, gilt, and floater.
The revised circular adds Sectoral Debt Funds, requiring at least 80% investment in debt of a single sector such as financial services, energy, infrastructure, housing or real estate, and holding predominantly high-rated paper.
Hybrid Schemes
Conservative hybrid, balanced hybrid, aggressive hybrid, dynamic asset allocation or balanced advantage, multi asset allocation, arbitrage and equity savings. The revised rules allow limited residual allocation to gold and silver ETFs for diversification.
Life Cycle Funds — the new group
Open-ended schemes built for long-horizon goal-based investing. They carry a target maturity year and follow a glide path that reduces equity and increases debt as maturity approaches.
- Tenures from 5 to 30 years, in multiples of five years
- Each AMC may launch up to six such schemes
- Graded exit load of 3% in year one, 2% in year two and 1% in year three
Solution-Oriented Schemes — discontinued
The solution-oriented group has been discontinued. Existing retirement and children's schemes must stop accepting fresh subscriptions and are to be merged into schemes of similar asset allocation and risk profile with SEBI's approval. Life Cycle Funds are the intended replacement for goal-linked long-horizon investing.
Other Schemes
Index funds and ETFs track a stated index passively. Fund of funds invest in units of other schemes. Both are grouped under other schemes rather than by asset class.
Naming Rules
The revised circular requires scheme names to align strictly with the category and prohibits names that emphasise return potential alone, so that a name cannot imply an outcome the scheme does not promise.
Under SEBI's revised categorisation framework effective from February 2026, what happened to solution-oriented schemes?
An investor in a close-ended scheme needs to exit before maturity. What is the position?
Which change did SEBI's revised categorisation make to focused, contra, value and dividend-yield equity schemes?