Equity Funds: The Category, and What Its Name Claims
Equity funds are the grouping whose schemes hold shares in companies rather than lending to them. Inside the grouping, the Securities and Exchange Board of India (SEBI) cuts sub-types two ways. One cut is by the size of company a scheme must hold, and that cut is where the market capitalisation bands come in. The other is by how narrow the permitted set is, and that cut separates a Sectoral Fund from a Thematic Fund. The Large-Cap Fund is one named sub-type, and SEBI and the Association of Mutual Funds in India (AMFI) set what qualifies.
The line that SEBI and AMFI set what qualifies carries the whole discipline of the subject. SEBI and AMFI set what qualifies. A rank, a count, a cut-off, a holding percentage or a refresh period is theirs to state, and each one is read at the address where it lives. A text that prints a classification value does not become dated when the value moves, it becomes wrong, and a reader who trusted the printed value carries the error into everything they do afterwards. The machinery has a shape worth holding, and every setting inside it lives at one of two addresses.
An equity fundA pooled scheme whose holdings are shares in companies rather than loans to them. is a scheme that holds stakes in companies. One scheme runs through this guide as a worked instance: Girnar Asset Management Limited operates the Girnar Large Cap Equity Fund, an open ended equity scheme with net assets of Rs 4,200 crore, 120.00 crore units outstanding and 3,80,000 foliosThe account records under which individual holders hold their units in a scheme.. Kalyani Bhagat manages it and Sohail Merchant heads operations. Girnar Asset Management also runs the Girnar Broad Market Index Fund, tracking a broad index, and that scheme sits in a different part of the framework, covered separately.
The equity scheme's name repays a second reading, and one thought about it holds for everything that follows. The words large cap in it are a marketing name that has to match a category, and they are never a worked definition of what large capitalisation means. Three things are covered separately and are taken as settled here: what a scheme is and who checks the person running it, what a unit is and how its value is struck, and what a purchase or an exit actually does. The sorting is the new work.
What does the equity grouping actually collect?
The equity grouping collects schemes that are holders of businesses rather than creditors of them. When the Girnar Large Cap Equity Fund puts money into a company, it receives a stake. Nobody promised to hand that money back on a date, nobody fixed an amount, and nothing is owed. The stake is worth, on any given day, whatever somebody else is willing to pay for it. The stake is finally entitled to whatever is left over after everybody with a fixed claim has been paid.
The difference is clearest at household scale. A household that lends a neighbour Rs 50,000/- for a year has a date and an amount, and the neighbour having a very good year does not make that claim any bigger. A household that instead puts Rs 50,000/- into the neighbour's tailoring shop for a share of it has no date and no amount, and is exposed to how the shop actually does. A lender is owed an amount at a date and a holder of a stake is owed nothing, and every other difference between the two groupings follows from that single line. The debt grouping is covered separately.
How is the equity grouping cut into sub-types?
Twice over, and this is the structural claim. The first cut asks what size of company the scheme must hold, and it produces the market capitalisation sub-types. The second cut asks how narrow the scheme's permitted setThe set of companies a scheme is allowed to choose its holdings from, fixed by the category it sits in. is, meaning how much of the field the scheme is allowed to pick from at all, and it produces the sector and theme sub-types.
The two cuts are independent questions, and a reader who holds both can place any equity sub-type they ever meet. That is worth more than memorising a list of sub-type names, because lists change and questions do not. Faced with an equity scheme whose sub-type is unfamiliar, the two questions come in order. Does the name commit the scheme to a segment of company size? Does it narrow the set of companies the scheme may choose from, and if so, to what? Almost every equity sub-type in the framework is a particular answer to those two questions, and how many sub-types there are at any moment is itself a SEBI matter, read at sebi.gov.in.
A scheme name says it holds large companies. What decides which companies count as large?
What is a market capitalisation band, as a device?
A cut in a ranking. A cut in a ranking is the entire idea, and everything below it is detail. Every listed company has a market capitalisationThe value the market puts on a whole company, being its share price multiplied by the number of shares in issue., which is simply what the market says the whole company is worth. Every company lined up in order of that figure, from the highest down to the lowest, forms a ranking. Lines drawn across the ranking at agreed places divide it into segments. The segments carry names, and those names are what turn up in scheme names. A bandOne segment of a ranking, bounded above and below by cut points that somebody has decided on. is that segment and nothing more.
Three things about the device are safe to carry in the head. The ranking exists. The cuts in it are set by SEBI, with the classification listThe published list a scheme's holdings are measured against when working out which segment each one sits in. published by AMFI at amfiindia.com. And the ranking is refreshed on a stated cycle rather than standing still forever. Where any cut falls, how many companies sit on either side of it, and how long the cycle runs are not safe to carry. All three are values, all three move, and repeating them from recollection is the failure the whole subject turns on.
Now the consequence that surprises almost everybody. Because a segment is a position in a ranking rather than a property of a company, a company can cross from one segment into the next without anybody buying or selling a single share of it. Other companies moved. The list was rebuilt. The line fell in a slightly different place. On the day the refreshed list takes effect, a holding that sat in one segment yesterday sits in the next segment today, and the scheme holding it did absolutely nothing.
A scheme's holdings can change segment, in the eyes of the framework, on a date on which the scheme did not transact. That is not a loophole and it is not a scandal, it is what happens when a moving population is sorted by a fixed rule. The household version is a school that streams pupils by marks each term. The other pupils moved, so a pupil whose own marks did not change can still move between streams. How often the classification is refreshed, and what the person running the scheme has to do about a holding that drifted across a line, are both SEBI and AMFI matters.
A company moves from one size segment to the next, and the scheme holding it neither bought nor sold anything. Is that possible?
What is a Large-Cap Fund, and where is its defining condition set?
A Large-Cap FundA named equity sub-type built around one segment of the market capitalisation ranking, carrying a condition on how much of the scheme must sit in that segment. is a named equity sub-type built around one segment of the ranking just described. The sub-type carries a condition on how much of the scheme has to sit inside that segment, so the sub-type is not merely a description of intent. The condition is something the scheme can be measured against. A condition that can be measured against is genuinely useful.
Large capitalisation qualifies by a definition SEBI sets and AMFI publishes, and that definition moves. Where the segment begins and ends is a value. How much of the scheme must sit inside it is a value. How often the underlying list is rebuilt is a value. All three are read at sebi.gov.in, with the classification list at amfiindia.com, on the day they are needed.
Even with all three values missing, a great deal remains, and the remainder is worth naming. The phrase in a scheme name points at a defined segment of a published ranking rather than at somebody's impression of bigness. The segment has an edge, and that edge was drawn by a regulator rather than by the person selling the scheme. And exactly two places settle it, so when somebody states confidently where the line falls, there is somewhere better to look than their memory.
The exact condition behind the sub-type this scheme sits in, down to the number: where does it come from?
What is a Sectoral Fund, and why can it not step aside?
A Sectoral FundA scheme whose permitted set is bounded by a single recognised sector, so everything it may hold sits in one part of the economy. is a scheme whose permitted set is bounded by a single sector. Everything it is allowed to hold sits inside one part of the economy, and the boundary is drawn before any choosing happens. The person running it may pick freely inside that boundary and may not step outside it. Stepping outside would put the scheme in breach of the category it is placed in rather than merely make it an unusual scheme.
A great many disappointed conversations begin here, so bluntness is worth more than tact. A Sectoral Fund is built so that it cannot step aside when its part of the economy is out of favour, and a holder who expected it to step aside has misread the constraint rather than been let down by the manager. The scheme did not fail to act. The scheme was constructed with no authority to act in that direction at all. If the whole street of hardware shops has a quiet year, a business that is only allowed to be a hardware shop cannot become a bakery for eighteen months and then change back.
The missing authority has a consequence for how such a scheme is read. Its result over any period carries the fortunes of one part of the economy inside it, and separating the part of that result that came from the boundary from the part that came from choices inside the boundary is a different exercise, covered separately. The least a Sectoral Fund must hold inside the sector it names is a SEBI condition, and which sector classification the boundary is drawn from is a SEBI matter with the industry list at AMFI.
A Sectoral Fund's part of the economy has a poor year and the person running it did not move out of that sector. Was that a failure?
What is a Thematic Fund, and who draws its edge?
A Thematic FundA scheme whose permitted set is bounded by an idea running across sectors rather than by a single sector. is a scheme whose permitted set is bounded by an idea rather than by a sector. The idea runs across parts of the economy instead of sitting inside one of them, so a theme about, say, the movement of goods around the country could take in companies that a sector classification would file in several different places. The scheme is still bounded. A Thematic Fund is simply bounded by a different kind of line.
The difference that actually matters is not about width at all. A sector is a recognised classification that somebody else maintains. A theme is a set the asset manager defines in the scheme document within conditions SEBI sets, so that document is the only place where what the theme really includes can be found. One boundary is looked up. The other has to be read. If two people argue about whether a particular company belongs inside a theme, the argument is settled by the scheme's own document and not by intuition about what the word in the name ought to mean.
The least a Thematic Fund must hold inside the theme it names, and the conditions on how a theme may be written at all, are SEBI matters read at sebi.gov.in. Two things can be settled without touching a value, namely where to look and what to look for. Find the paragraph in the scheme document that says which companies the theme takes in, and ask whether that paragraph is narrow enough to mean something or wide enough to mean almost nothing.
Two schemes both say they follow an idea rather than a sector. Predict before reading on: will their permitted sets be the same width?
How do a Sectoral Fund and a Thematic Fund actually differ?
Ask the same two questions of each and the difference falls out cleanly. How wide is the permitted set, and who decided where its edge falls. For a Sectoral Fund, the set is one part of the economy and the edge was drawn by a recognised classification that the scheme did not write. For a Thematic Fund, the set is whatever the theme takes in, and the edge was drawn in the scheme's own document inside conditions the regulator sets.
A theme can be written wide or written narrow, that is not a defect in the sub-type, and it is exactly why the theme's own definition has to be read rather than guessed from the name. Two schemes can carry very similar sounding theme words and be permitted to hold quite different sets of companies. Nothing about that is improper. Different sets are the natural result of a boundary that is written rather than looked up. Read the boundary, and do not assume that the word carries a standard meaning across the industry.
What does a scheme's name actually claim?
A name is written to be remembered. A category is a placement that binds. A name and a category are written for two different purposes, and SEBI ties the two together. A scheme name carrying a sub-type phrase is making a claim, and the claim can be checked against the category statementThe passage in a scheme's own document naming the single category the scheme is placed in. in the scheme's own document, which names the one sub-type the scheme actually sits in.
The check takes about half a minute and almost nobody performs it. The scheme document is opened at the passage that states which category the scheme is placed in, the name on the cover is read, and the two are confirmed to agree. That is it. The naming condition exists and is enforced, so most of the time the two will agree. The value of the check is not that it usually catches something. The value is that the check converts a marketing phrase into a verified statement in about the time it takes to boil water, and that the check builds the habit of treating a name as a claim rather than as a description.
The scheme name carries a sub-type phrase. What exactly is the half minute check?
What does an equity sub-type leave open?
Almost everything a reader cares about. The point is the least intuitive one in the whole subject and the most useful. A sub-type fixes the boundary of the permitted set. A sub-type says which companies may be considered and how much of the scheme must sit where. A sub-type does not say which of those companies the scheme actually holds, how much of the scheme sits in its handful of biggest positions, what the scheme costs to run, or what it returned.
A sub-type fixes a boundary and leaves everything inside the boundary to the person running the scheme. Two schemes placed in the identical equity sub-type can differ on holdings, on concentration, on cost and on result, all at once, while both remain perfectly inside their category. Two schemes described as equivalent because they share a sub-type are being described wrongly.
| What the sub-type settles | What it leaves entirely open |
|---|---|
| Which companies may be considered at all | Which of them the scheme actually holds |
| How much of the scheme must sit inside the named segment or set | How the rest is arranged, and how concentrated the whole thing is |
| That the scheme's name has to match the placement | What the scheme costs to run, covered separately |
| That the boundary can be checked against the document | What the scheme returned, and whether it suits anybody at all |
Two schemes sit in the same equity sub-type. What can still differ between them?
What does the placement card for one invented scheme look like?
The whole framework collapses into one artefact. A placement card for the Girnar Large Cap Equity Fund, filled from the scheme's own document and its own arithmetic, and left blank in every field the framework decides, with the address written inside the blank. The name serves one purpose only, as a name that has to match a category, and it is never a worked definition of the segment it mentions.
Start with what the scheme's own record settles, and reach each figure by dividing rather than by quoting it. Net assets of Rs 4,200 crore across 120.00 crore units gives a value per unit of exactly Rs 35.00. The scheme's own expense ratio is 1.65 per cent of net assets a year, and 1.65 per cent of Rs 4,200 crore is Rs 69.30 crore for the year. Rs 4,200 crore spread across 3,80,000 folios makes the average folio about Rs 1,10,526/-. None of those four figures needed anybody outside the scheme.
The card exists for one check. The words large cap sit in the scheme's marketing name, so the category statement in the scheme's own document is turned to, the sub-type the scheme is placed in is read, and the name and the placement are confirmed to agree. The match is the whole exercise, and it required no knowledge of where the segment boundary falls. A name can be matched against a placement without that knowledge.
The two result figures on the card sit on different bases, and the bases have to be named before the figures are read together. The scheme returned 13.4 per cent netA return computed from values that already carry the scheme's expenses, so no further fee is deducted from it. over the stated year, meaning the figure is already after the 1.65 per cent expense ratio and nothing is taken off it afterwards, while the stated benchmark returned 12.1 per cent for the same year and carries no costs at all, because an index is not investable and nobody pays anything to hold one. The two figures are on different bases, so the 1.3 point difference between them is not a like for like difference, and putting them on one basis is arithmetic covered separately. One year, one invented scheme, one stated benchmark, and it settles nothing about anything in general.
One sentence closes the card. Everything now established about this scheme came from its own document and its own arithmetic, and everything the framework contributed was fetched from the regulator rather than remembered. The division of labour is the method, not a limitation of it.
The scheme returned 13.4 per cent and its stated benchmark returned 12.1 per cent over the same year. What has to be said before the two are compared?
Who reaches for this on a working day, and what for?
Three people, and none of them for interest. Sohail Merchant, who heads operations at Girnar Asset Management Limited, needs the placement to be right before anything else works. The sub-type decides which conditions the scheme is monitored against, and what has to be reported when a holding drifts across a boundary on a refresh. He does not carry the values in his head. He fetches them, dates them, and files the date with the working.
A private wealth person sitting opposite a client uses the two questions from the second block as a script. Ask what size of company the scheme must hold, then ask how narrow the set it may choose from is. The two questions turn a shelf of unfamiliar scheme names into a small number of recognisable shapes, and they do it without expressing a view about any of them. Expressing no view is the only honest thing to do in that chair.
And a household reading a statement uses the half minute check. Name on the cover, category statement inside the document, do the two agree. None of the three can conclude that one sub-type is better than another, because a category describes a boundary and says nothing whatever about whether that boundary suits any particular person.
Where does every one of these conditions actually live?
Count them with me. The count is the point. The equity grouping as a defined category. The sub-types inside it. The ranking that produces the size segments and the cuts in that ranking. The least a Large-Cap Fund must hold in the segment its name mentions. The least a Sectoral Fund must hold inside the sector it names. The least a Thematic Fund must hold inside its theme, together with the conditions on how a theme may be written. How often the classification is refreshed. And the rule tying a scheme's name to the sub-type it is placed in.
Eight conditions have now been named, and every one of them is settled elsewhere. A text that prints a band is wrong the day the band moves, not merely dated, and a reader who trusted the printed band carries the error into the peer set they compare against, the description they give of what a scheme may hold, and the conclusion they act on. Seven of the eight are SEBI matters read at sebi.gov.in. The eighth, the classification list the ranking is published in and the cycle it is refreshed on, is published by AMFI at amfiindia.com. AMFI publishes; it does not make the rule.
Where does the classification list live, and who sets the framework around it?
The error that gets made, and what it costs
An adviser writes a short note explaining a client's holding. The note is a good one, clearly written, and somewhere in the middle it states, from recollection, where the boundary of a size segment falls and how much of the scheme has to sit inside it. Both figures were right at some point in the past. The framework has moved since, and the note has not.
Everything downstream inherits the error without anybody noticing. The peer set the scheme is compared against was assembled using the remembered boundary. The description of what the scheme may hold is built on it. The conclusion the client acts on rests on both. A confident specific number is the last thing anybody checks, so the client cannot detect it. The adviser does not detect it either, because nothing in the note looks wrong. A vague sentence invites a question. A precise one closes the subject.
A band must never be carried from memory. The fix is plain and takes less time than the note took to write: fetch the definition from SEBI at sebi.gov.in on the day the note is written, take the classification list from AMFI at amfiindia.com, and date it inside the note so the next reader knows exactly when it was true.
Which body decides what, and where is each of these read?
SEBI sets the equity grouping as a defined category and the sub-types inside it, the market capitalisation segments and where the boundary between one and the next falls, the least a Large-Cap Fund must hold in the segment its name mentions, the least a Sectoral Fund must hold inside its sector, the least a Thematic Fund must hold inside its theme together with the conditions on how a theme may be written, and the rule tying a scheme's name to the sub-type it is placed in. Every one of those is read at sebi.gov.in.
AMFI publishes the classification list the ranking sits in and the cycle on which that list is refreshed, read at amfiindia.com. AMFI is a publisher here and never a rule maker. Where a unit holding sits in a depository account rather than a folio with the registrar, the depositories are the National Securities Depository Limited (NSDL) at nsdl.co.in and Central Depository Services (India) Limited (CDSL) at cdslindia.com.
A category is a boundary drawn by somebody outside the scheme, and a name is a claim that has to match the boundary. The mechanism holds wherever pooled vehicles are sorted into categories, so a second market adds to the sequence rather than rewriting it.
References
| Source | Document | Where |
|---|---|---|
| Securities and Exchange Board of India | The rules defining the equity grouping and the sub-types inside it, the market capitalisation segments and the ranking they are cut from, the least a Large-Cap Fund must hold in its segment, the least a Sectoral Fund and a Thematic Fund must hold in the set each names, the conditions on how a theme may be written, and the rule tying a scheme name to its category. | sebi.gov.in |
| Association of Mutual Funds in India | The industry classification list the market capitalisation ranking is published in, and the cycle on which that list is refreshed. | amfiindia.com |
| National Securities Depository Limited and Central Depository Services (India) Limited | The depository accounts a unit holding may sit in instead of a folio with the registrar and transfer agent. | nsdl.co.in, cdslindia.com |
Girnar Asset Management Limited, the Girnar Large Cap Equity Fund, the Girnar Broad Market Index Fund, Kalyani Bhagat and Sohail Merchant are invented.
Educational material. Not advice on any investment, tax, budget or market position.