Classifying MFs

SEBI moves in to streamline Mutual Fund schemes…

The SEBI move to streamline mutual fund schemes in India was always on the anvil. Over the last few months the regulator had expressed concerns over the plethora of schemes in the market and the unnecessary duplication of schemes among the mutual funds. SEBI has finally moved in to take the first step to streamline the mutual fund industry. Here is how…

Only 5 categories of schemes… 

SEBI has stipulated that henceforth there shall be only 5 categories of MF schemes viz. Equity, Debt, Hybrid, Special Solutions and Others. Any AMC will only be allowed to launch one such scheme per category. If an AMC has 3 schemes, all of them being diversified equity schemes, then two will have to be either closed out or merged with the third scheme. The same rule will apply to sector funds and theme funds too.

Focus on scheme characteristics… 

The second big shift proposed by SEBI is that the classification of the schemes should be based on the specific features of the scheme. SEBI will not permit having the same category of schemes under different names. The focus will shift from nomenclature to scheme features. This will be beneficial for investors as they will not be carried away by old wine in new bottles, as is normally the case with NFOs. This will apply to all existing schemes too!

How about Special Solutions…

Over the last few years we have seen many mutual fund schemes launched that have special solutions as their theme. For example there are schemes that are designed to help you plan for your retirement. Then there are schemes that are aimed at planning for your child’s education for the distant future. In addition there are also schemes like dynamic funds that actually help you to have a rule-based approach to your portfolio. SEBI has now made it compulsory that all such special solutions schemes must now come with a necessary lock-in period. This is a very progressive move as such customized plans need to time to play out and a lock-in will automatically instill the long-term discipline in the investor.

Classifying on market cap…

The mutual fund industry has unique schemes based on market cap like large cap funds, mid cap funds and small cap funds. However, there was no acceptable framework for classifying stocks as large cap, mid cap or small cap. Now SEBI is taking a percentile approach to market caps. From now on, the top-100 by market cap will be classified as large caps while 101st to 250th will be mid-caps. The rest of the stocks will be small caps. This clear demarcation will bring about a lot more uniformity in investors’ understanding of available mutual fund schemes!  ©

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