Unit 9 · 10% of the paper
Mutual Fund Scheme Selection
SEBI's scheme categories, how to compare within one, and the things that look like selection criteria but are not — the NAV level chief among them. Ten per cent of the paper.
In short
- SEBI's 2017 categorisation: large cap is companies 1–100 by full market cap, mid cap 101–250, small cap 251 onwards.
- The bands are defined by rank, not by a rupee value, and AMFI publishes the list half-yearly.
- Compare schemes only within the same category. Across categories you are comparing asset classes.
- A lower NAV does not make a scheme cheaper. It is not a share price.
- Expense ratio is a certainty; outperformance is not. It is the one input entirely knowable in advance.
Before 2017 two funds could both be called 'equity opportunities' and hold entirely different things. SEBI's categorisation circular ended that by defining the categories and requiring every scheme to sit in exactly one — which is why this unit is really about comparing like with like.
How does SEBI define large, mid and small cap?
By rank, not by size in rupees. Companies are ordered by full market capitalisation, and the first 100 are large cap, the 101st to the 250th are mid cap, and the 251st onwards are small cap. AMFI publishes the list, and it is revised half-yearly.
Two consequences follow, and both make good questions. A company can move from one band to another without doing anything unusual, simply because others around it moved. And the bands are relative, so 'small cap' in India is not defined by an absolute value that could be memorised.
Why categories matter for comparison
A category is what makes a comparison meaningful. Ranking a small-cap scheme against a large-cap one over a period when small companies did well tells you about small companies, not about either fund manager. Within a category, the schemes face broadly the same opportunity set, so the difference between them is closer to being the manager's doing.
The same logic applies to benchmarks and to time periods. Like for like, over the same window, or the comparison is measuring something other than what it appears to.
What is worth looking at within a category?
- Performance across several periods and market phases, not one flattering window.
- Consistency — whether the scheme keeps turning up near the top of its category or occasionally spikes.
- The risk taken to get there: two schemes with the same return did not necessarily do the same thing.
- The expense ratio, which comes out of the return every year regardless of how the year went.
- Portfolio turnover, which says how much the manager trades, and the costs that implies.
- How long the current fund manager has been running it, since the record belongs partly to whoever produced it.
The expense ratio deserves a line of its own. It is the only one of these inputs that is knowable in advance with certainty. Every other item is an inference from the past; the expense ratio is a fact about the future.
What is not a selection criterion
The level of the NAV. A scheme at 15 is not cheaper than one at 300, and buying the lower one does not get you more of anything that matters. NAV is a per-unit value of a pool, not a share price set by demand — a point Unit 1 makes and this unit tests.
Nor is the size of a recent dividend, or a scheme being new. A new fund offer has no record to judge, which makes it harder to assess rather than more attractive, and the ten-rupee starting NAV is a convention rather than a discount.
What the examination tends to ask here
About ten questions. The categorisation bands are asked almost every time and are worth knowing exactly. Beyond that, expect questions on what makes two schemes comparable, on the expense ratio's certainty against performance's uncertainty, and at least one on the NAV-level trap.