MF Reclassification
The Maze Of
Mutual Funds
Saravana Kumar
Market regulator SEBI’s plan to standardise and classify mutual funds
under different categories will allow investors to take informed decisions
T
he mutual fund industry has grown over the
years. However, the industry still remains
a maze for the novice investor, given the
large number of schemes and absence of
standardisation in the offerings. In October 2017, the
Securities and Exchange Board of India (SEBI) released
a circular on ‘Categorisation and Rationalisation of
Mutual Fund Schemes’ to help investors take informed
decisions.
The market regulator is seeking to bring uniformity in
the functioning of asset management companies (AMCs)
and standardising attributes of mutual fund schemes
across specific categories. It is indeed difficult for the
investor to choose the right scheme for investing from
the large pool of available schemes. Hence, the schemes
offered by mutual funds need to be different from each
other in terms of core characteristics like investment
objectives and asset allocations. This will help mutual
fund investors to examine a mutual fund scheme before
taking a decision to invest in it.
We believe that SEBI has taken a positive step, and
this action will act as a catalyst for the growth of the
industry. Mutual fund schemes have been broadly
classified in the following groups: Other Schemes: Includes schemes such as Exchange
Traded Fund, Index Funds, and Fund of Funds.
Equity Schemes: Invest in equity and equity-related
instruments
Debt Schemes: Invest in debt and money market
instruments
Hybrid Schemes: Invest in both equity and debt
instruments
Solution Oriented Schemes: Goal-based solutions for
retirement planning and for creating a children’s fund.
SEBI has introduced a lock-in period in case of Solution
Oriented Schemes. How does this impact the stakeholders?
Categorisation will allow
investors to identify the right
schemes for comparison
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Outlook Money July 2018 www.outlookmoney.com
The market regulator has further classified 10
categories under Equity funds, 16 in Debt funds, two
each in the Solution-Oriented and Other funds. It
has also come up with portfolio characteristics with
respect to large-cap funds, mid-cap funds and small-cap
funds. Large-cap funds can invest in the top 100 listed
companies based on the average full market capitalisation
of the previous six months while mid-cap funds can
invest in the 101st to 250th company, and small-cap funds
in the 251st company onwards.
Debt fund categorisation will now have to be done
based on the duration of the portfolio or credit quality.
Within debt funds, there are six categories based on
portfolio duration. So, an Ultra-Short Duration Fund
will have a Macaulay duration of between three and
six months, and the Medium to Long Duration Fund
will have a Macaulay duration between four to seven
years while a Long Duration Fund will have a Macaulay
duration of over seven years. Also, Hybrid Equity Funds
are now demarcated based on asset allocation into
conservative, balanced and aggressive hybrid funds.
Investors: A lot of investors are misled into buying
schemes which do not suit their requirements.
Categorisation will help investors to identify and
understand the schemes. Initially the investors might find
it difficult to understand the reclassification. Scheme name
changes and changes in fundamental attributes will impact
the portfolio of investors. If the proposed change causes
a significant shift in the way the fund will be managed,
investors need to take a call on whether they agree with
the change. If not, they should exit and re-allocate to funds
that are better aligned with their objectives.
Investors might have to bear the burden of capital
gains tax when they opt to exit from schemes in case of
mergers. However, in the long run, the standardisation and
reclassification will help investors to have a greater clarity
when investing in equity, debt or hybrid funds.