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New Fund Classification

The asset management business is changing and calls for some radical thinking. We present the all new fund classification that is more objective and actionable

New fund classification
We have been deliberating the need for a more robust classification system, which does justice to funds in the peer set when being compared. The new classification, on which will rest our Scorecard and fund rating henceforth, has been back-tested with data and fund behaviour over the past decade. Three broad categories still exists; equity, debt and hybrid. Overall 25 new fund categories emerge; 12 are pure equity, 5 are hybrids (equity and debt), and 7 are pure debt, with the last one being gold. We have taken utmost care in arriving at these classifications that have been back-tested for accuracy and precision. We have also observed, especially within the equity diversified category, the need to observe fund behaviour over both bull and bear phases, to track its behaviour in line with the stated objective.

Equity
The equity funds are split into four sub-categories based on the exposure to the market-cap these funds are identified with over the past three years. These include large cap, large- & mid-cap, multi-cap, mid- & small-cap. There are five sector funds based on their stated objective; Banking, FMCG, Infrastructure, Pharma and IT. Of the remaining three; ELSS and international funds are based on their stated objective, with the last category comprising of funds that do not fit into any of these categories, such as JM Agri and Infra, Sahara R.E.A.L and LIC Systematic Asset Allocation. Though there seem to be a lot many categories; it is the best way to scout funds to invest, analyse and compare peer groups.

Debt
The two prime factors to arrive at seven categories within the debt funds were maturity periods and the kind of securities they invested in. Based on these factors, funds that can widely vary their average maturity are Income and Gilt: Medium & Long Term. Next, based on the average maturity tracked over the past 18 months of 1-4.5 years we have Short-term and Gilt: Short-term funds. We classified funds with average maturity of less than one year over the past 18 months as ultra-short term. That left us with liquid funds, which do not invest any part of their assets in securities with a residual maturity of more than 91 days and Fixed Maturity Plans (FMPs), which have defined fixed maturities.

Hybrid
There are five hybrid category funds in all; equity-oriented has over 60 per cent exposure to equity funds in the past one year. There are two-debt oriented hybrid funds, which are classified aggressive and conservative depending on the quantum of their equity exposure. Next, come arbitrage funds, which technically seek returns from arbitrage opportunities, but also have the option to remain in debt in the absence of arbitrage. And finally, asset allocation funds that switch between equity and debt depending on market conditions.

Gold
Ever since the launch of gold Exchange Traded Funds (ETFs), the yellow metal has found many takers in the paper form over physical gold. Though, there is little to compare gold funds; the fact that there are 9 Gold ETFs is a compelling reason for this category to exist, however, there is little when it comes to comparing them, they all have fared equally.

We live in times when the stock markets and government policies are equally dynamic. Take for instance, the Direct Tax Code (DTC) that comes into play in 18 months; it renders the ELSS category useless once the DTC kicks in. Today, there are many situations that we cannot predict, but will impact this classification of 25 fund categories. It will be for us to flag any such changes that will impact this classification and make life more efficient and to be able to draw comparison across funds.


VALUE RESEARCH FUND CLASSIFICATION SNAPSHOT
EQUITY  DEBT  HYBRID
Large-cap (Funds with more than 80 per cent of assets in large-cap companies over the last three years) Income (Funds which can vary their average maturity widely, as per declared objective) Equity-oriented (Hybrid funds whose average equity exposure over the last one year is greater than 60 per cent)
Large & Mid-Cap (Funds with between 60 to 80 per cent of assets in large-cap companies over the last three years) Gilt: Medium & Long-term (Funds which invest in gilt securities and can vary their average maturity widely, as per declared objective) Debt-oriented Aggressive (Hybrid funds whose average equity exposure over the last one year is between 25-60 per cent)
Multi-Cap (Funds with between 40 to 60 per cent of assets in large-cap companies over the last three years) Short-Term (Funds whose average maturity over the last 18 months is between 1 year and 4.5 years) Debt-oriented Conservative (Hybrid funds whose equity exposure over the last one year is less than 25 per cent)
Mid & Small-Cap (Funds with at least 60 per cent of assets in small and mid-cap companies over the last three years) Gilt: Short Term (Funds which invest in gilt securities and whose average maturity over the last 18 months is between 1 year and 4.5 years) Arbitrage (Funds which seek returns from arbitrage opportunities between equity and derivatives, and invest in debt when no arbitrage is possible)
Tax Planning (Funds which offer a tax rebate under section 80C of the Income Tax Act) Ultra Short Term (Funds whose average maturity over the last 18 months is less than 1 year, but which are not liquid funds) Asset Allocation (Funds which may invest fully in equity or debt depending on the market conditions)
International (Funds with more than 65 per cent of assets invested abroad) Liquid (Funds which do not invest any part of assets in securities with a residual maturity of more than 91 days) 
Sector Funds FMPs (tenure fixed by the issuer) 
Banking sector funds, as per declared objective  
FMCG funds, as per declared objective  
Infrastructure sector funds, as per declared objective  
Pharma sector funds, as per declared objective  
Technology, IT sector funds, as per declared objective  
Miscellaneous (Other funds, which cannot be classified in any of the existing categories and which do not have the numbers to warrant a separate category)