Equity Funds — Value, Contra, Dividend Yield, Focused
Definition
Under SEBI categorization, strategy-based equity funds include: Value Fund (follows a value investment strategy), Contra Fund (follows a contrarian investment strategy), Dividend Yield Fund (invests in dividend-yielding stocks), and Focused Fund (invests in a maximum of 30 stocks with minimum 65% in equity). Under the current 36-category framework, an AMC can offer either a Value Fund OR a Contra Fund — not both. However, under the SEBI (Mutual Funds) Regulations 2026 (effective April 1, 2026), AMCs can now offer BOTH Value and Contra funds, subject to a maximum 50% portfolio overlap. Additionally, the minimum equity allocation for Dividend Yield, Value, and Contra funds has been raised from 65% to 80% under the new rules.
In Simple Words
Industry experience shows that fund managers who consistently deliver strong long-term results tend to be either deep value investors or sharp contrarians. Understanding these strategy-based categories from a practical perspective is essential. A Value Fund manager is like a patient bargain hunter at a wholesale market — they look for stocks trading below their intrinsic value. They use metrics like Price-to-Earnings (P/E), Price-to-Book (P/B), and dividend yield to find companies the market has undervalued. The key word is "patience" — value investing can underperform for years before the market recognizes the true worth. A Contra Fund manager goes one step further — they deliberately buy what everyone else is selling. When the entire market is dumping pharma stocks because of a US FDA issue, the contra manager is buying. The logic is simple: panic creates opportunity. Under the current 36-category framework, SEBI recognized that value and contra strategies overlap significantly, which is why an AMC must choose one or the other. However, under the SEBI (Mutual Funds) Regulations 2026 (effective April 1, 2026), AMCs can now offer BOTH Value and Contra funds, subject to a maximum 50% portfolio overlap cap. This is a significant change — the overlap restriction ensures the two funds remain genuinely differentiated. An important nuance often overlooked is that in practice, a good value fund and a good contra fund hold many of the same stocks. The difference is more philosophical than practical, which is precisely why the overlap cap was introduced. Additionally, the minimum equity allocation for Value, Contra, and Dividend Yield funds has been raised from 65% to 80%. A Dividend Yield Fund focuses on companies that consistently pay high dividends — think of companies like Coal India, ITC, or Power Grid. These funds suit investors who want regular income potential along with equity participation. And then there is the Focused Fund — maximum 30 stocks, minimum 65% equity. This is a high-conviction play. The fund manager picks only their best 25-30 ideas. If they are right, the concentrated portfolio delivers outsized returns. If they are wrong, the losses are amplified. It is not suitable for every investor.
Real-Life Scenario
Consider the case of Kavitha, a retired teacher in Chennai, who received ₹20 lakh from her pension commutation and wanted equity exposure with lower volatility. A financial advisor structured her portfolio as follows: ₹8 lakh was allocated to a Dividend Yield Fund (ICICI Pru Dividend Yield Equity Fund). The rationale: the fund invests in companies like Coal India (dividend yield 7%+), ITC (dividend yield 3%+), and Power Grid. These companies have strong cash flows and a history of paying dividends. Even in a market fall, the dividend income provides a cushion. ₹7 lakh went into a Value Fund (ICICI Pru Value Discovery). The fund manager buys companies that the market has temporarily ignored. Such funds may underperform in a roaring bull market, but historically, value funds have tended to protect capital better in corrections. For her son Karthik (age 28, aggressive investor), ₹5 lakh was recommended in a Focused Fund (HDFC Focused 30). This fund holds only 25-30 stocks. If the fund manager's picks work out, a concentrated portfolio can beat most diversified funds. But higher swings are expected — focused funds have been observed to fall 15% more than diversified funds in sharp corrections. Two years later, during the 2020 COVID crash, Kavitha's Dividend Yield Fund fell only 22% while the Nifty fell 35%. Karthik's Focused Fund fell 38%. Both recovered, but the experience illustrated the importance of matching fund strategy to investor temperament.
Key Points to Remember
Frequently Asked Questions
Test Your Knowledge
4 questions to check your understanding
Under the original SEBI 2017 categorization, an AMC can offer:
Summary Notes
Value Fund (undervalued stocks) and Contra Fund (out-of-favor stocks) — currently either/or, but both allowed from April 2026 with max 50% portfolio overlap
Focused Fund = maximum 30 stocks, minimum 65% equity — high conviction, higher concentration risk
Dividend Yield, Value, and Contra funds: minimum equity raised from 65% to 80% under 2026 rules
For NISM: The Value/Contra rule is evolving — know both the current restriction and the upcoming 2026 change
Strategy-based funds (Value/Contra) may underperform for years — suitable for patient investors with 5+ year horizons
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What you’ll learn in Types of Mutual Fund Schemes
Master the complete SEBI categorization of mutual fund schemes — equity, debt, hybrid, and passive funds. Understand the current 36-category framework and the upcoming 40-category expansion effective April 2026. Essential for recommending the right fund to every client.
Frequently asked questions
Why did SEBI limit schemes to 36 categories?
Before 2017, AMCs launched schemes with fancy names that made it nearly impossible for investors to compare funds. Two "large-cap" funds from the same AMC could have completely different mandates. SEBI's 36-category framework ensures clear definitions, prevents scheme proliferation, and allows investors to make genuine comparisons across AMCs. For distributors, this is a significant advantage — it enables confident communication to clients about what a fund will and will not do. Note: From April 2026, the framework expands to 40 categories under the new SEBI (Mutual Funds) Regulations.
Can an AMC launch two Large Cap funds?
No. Under SEBI categorization, each AMC can offer only one scheme per category. The exceptions are Index Funds, ETFs, and Fund of Funds where multiple schemes tracking different indices are permitted. So an AMC can have one Nifty 50 Index Fund and one Nifty Next 50 Index Fund, but only one actively managed Large Cap fund.
What happened to existing schemes that did not fit the 36 categories?
AMCs were given time to either merge non-conforming schemes into the defined categories or wind them up. This led to a massive wave of scheme mergers in 2018-2019. For example, an AMC that had three separate large-cap-style funds had to merge them into one. Investors were given exit options without exit load during the merger period.
What is the AMFI market cap list and how often is it updated?
AMFI (Association of Mutual Funds in India) publishes a list classifying all listed stocks into Large Cap (top 100 by full market capitalization), Mid Cap (101st to 250th), and Small Cap (251st and below). This list is updated semi-annually based on average market capitalization data. All AMCs must follow this list for determining compliance with category-wise allocation norms.
Does the 36-category rule apply to passive funds and ETFs?
Index Funds, ETFs, and Fund of Funds are exceptions to the one-scheme-per-category rule. An AMC can offer multiple Index Funds tracking different indices (Nifty 50, Nifty Next 50, Nifty Midcap 150, etc.) and multiple ETFs. However, each actively managed category is still limited to one scheme per AMC.
What is the difference between Flexi Cap and Multi Cap?
This is the most commonly confused topic. Flexi Cap requires minimum 65% in equity with NO mandatory split across market caps — the fund manager has complete freedom. Multi Cap requires minimum 75% in equity with a MANDATORY minimum of 25% each in large cap, mid cap, and small cap. Flexi Cap = freedom; Multi Cap = forced diversification. Remember this distinction — it appears in almost every NISM mock test.
Why was Multi Cap introduced separately when Flexi Cap already existed?
In September 2020, SEBI noticed that most Multi Cap funds were holding 70-80% in large caps and very little in small caps, defeating the purpose of diversification. SEBI then mandated the 25-25-25 rule for Multi Cap funds. AMCs that did not want to increase small cap exposure reclassified their schemes as Flexi Cap. This is why Flexi Cap became a separate category — it was born out of the Multi Cap controversy.
Which is more suitable for a new investor — Large Cap or Flexi Cap?
For a new investor with limited market experience, starting with a Large Cap fund is generally advisable because the portfolio is anchored in well-established companies with lower volatility. Once the investor is comfortable with market fluctuations (usually after experiencing one correction), Flexi Cap can be introduced for its dynamic allocation. A common mistake distributors make is putting first-time investors directly into small cap funds — the first 20% drawdown panics them out of mutual funds entirely.
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