The Category Label and the Benchmark
Every scheme carries a category label from SEBI's categorisation and a benchmark to be compared with. This lesson explains what the label fixes, how company size is defined, and how Tier 1, Tier 2 and Total Return Index benchmarks work.
What the category label fixes
SEBI's categorisation sorts schemes into defined categories, so that a label means the same thing at every fund house. Since the circular of 26 February 2026 there are 40 categories: 13 equity, 17 debt, 7 hybrid, 1 life-cycle and 2 other. A scheme's name must match its category.
The label says what kind of securities the scheme must mainly hold. A Large Cap Fund, for example, must keep at least 80% in large-cap companies. The label does not say how the scheme will perform, and two schemes with the same label can still hold different securities.
How company size is defined
Labels such as Large Cap Fund and Mid Cap Fund rest on a single list that ranks companies by market capitalisation. The 100 largest companies are large cap, those ranked 101 to 250 are mid cap, and those ranked 251 onwards are small cap.
The Association of Mutual Funds in India (AMFI) publishes the list every six months, from end-June and end-December data. Because every fund house uses the same list, a company is classified the same way everywhere. A company's rank can change from one list to the next, and its class changes with it.
The benchmark as a yardstick
A benchmark is an index against which a scheme's performance is compared. Every scheme has a Tier 1 benchmark that reflects its category. A fund house may add a Tier 2 benchmark that reflects the scheme's own investment style; this is optional.
Performance is compared with the Total Return Index (TRI) version of the benchmark, as has been required since 1 February 2018. A price index tracks only changes in share prices. A Total Return Index also counts the dividends paid by the companies in the index, so it is the fuller yardstick.
A benchmark is for comparison only. It does not determine the scheme's NAV or its riskometer level, and a scheme can lose value whether or not it does better than its benchmark.
Rules at a glance
Price index and Total Return Index (illustrative figures)
Suppose that over a year a price index rises by 8%, and the companies in it pay dividends worth about 1.5% of the index. The Total Return Index for the same period rises by roughly 9.5%, because it counts those dividends.
A scheme that returned 9% in that year did better than the price index and worse than the Total Return Index. Since the scheme itself receives dividends on the shares it holds, the Total Return Index is the like-for-like comparison, and it is the one the rules require.
Key points
- SEBI's 2026 categorisation has 40 categories, and a scheme's name must match its category.
- The label says what a scheme must mainly hold, not how it will perform.
- Large cap is rank 1 to 100 by market capitalisation, mid cap 101 to 250, small cap 251 onwards; AMFI updates the list every six months.
- Every scheme has a Tier 1 benchmark reflecting its category; a Tier 2 benchmark reflecting its style is optional.
- Performance is compared with the Total Return Index of the benchmark, which counts dividends as well as price changes.
Common misunderstandings
- A category label is not a statement about performance: it fixes what the scheme must mainly hold.
- Two schemes with the same label are not the same portfolio: they can hold different securities, and both can lose value.
- A Tier 2 benchmark is not compulsory: only the Tier 1 benchmark is required for every scheme.
Questions people ask
Who decides whether a company is large cap, mid cap or small cap?
The classification follows a list published by AMFI every six months, which ranks companies by market capitalisation. Fund houses do not make their own lists.
Why is a Total Return Index used and not a price index?
Because it also counts dividends paid by the index companies. A price index leaves them out and so understates what the index delivered.
Does the benchmark affect the scheme's NAV?
No. It is a yardstick for comparing performance. The NAV depends on the scheme's own portfolio.
What this lesson relies on
- SEBI Master Circular for Mutual Funds, 20 March 2026 (Chapter 3, categorisation from the circular of 26 February 2026; benchmarks)
- AMFI half-yearly list of companies ranked by market capitalisation
This lesson was reviewed independently against these sources on 8 October 2026. Rules change: check the current regulation, scheme document or policy wording before relying on any figure. This is education, not advice.