Has SEBI’s Mutual Fund Categorization Made Selecting Schemes Easy? Know Here…
Oct 12, 2017

Author: PersonalFN Content & Research Team

The Securities and Exchange Board of India (SEBI) has finally issued a circular to rationalise the process of classification of mutual fund schemes. While the majority of experts are hailing the classification norms issued by SEBI, PersonalFN has a slightly different view on the subject. It believes the capital market regulator has missed a golden opportunity to streamline the mutual fund offerings.

About a month ago, PersonalFN wrote an article titled, “Standard Classification For Mutual Funds In The Offing”, to highlight the need to revive the reclassification of schemes and potential pitfalls the SEBI should consider. It seems the regulator has stubbornly gone ahead with the recommendations of a committee it had appointed.

As per the new rules, the mutual funds will have to broadly classify their offerings into categories mentioned below:

  • Equity Schemes;
  • Debt Schemes
  • Hybrid Schemes
  • Solution Oriented Schemes
  • Other Schemes

So far no problem.

The real trouble is with subcategories. SEBI has allowed mutual funds to offer a scheme each across 36 subcategories. The recommended subcategories are:

  • 10 in equity – Multi cap, large cap, large & midcap, midcap, small cap, dividend yield, value, contra, focused, sectoral/thematic, ELSS (Equity Linked Savings Scheme)
  • 16 in debt – Overnight, liquid, ultra-short duration, low duration, money market, short duration, medium duration, medium to long duration, long duration, dynamic bond, corporate bond, credit risk fund, banking and PSU, gilt, gilt fund with 10-year constant duration, floater
  • 6 in hybrid – conservative hybrid, balanced hybrid, aggressive hybrid, dynamic asset allocation/balanced advantage, multi-asset allocation, arbitrage, equity savings
  • 2 in solution-oriented schemes – goal of retirement and children benefit
  • 2 in other schemes – Index fund, ETF (Exchange Traded Fund), FoF (Fund of Fund—overseas/domestic)

Looking at these subcategories, a novice investor may simply decide not to invest in mutual funds.

At present, 42 fund houses, collectively, have over Rs 20 lakh crore worth Assets Under Management (AUM). Therefore, if they offer a scheme each, under permitted subcategories, the total scheme count would still be at least 1,512. The actual scheme count could rise even higher. Are you wondering how?

The logical interpretation of the prescribed categorisation is this — a fund house can offer more than a scheme in the sectoral and thematic category. The only barrier would be to run more than a scheme within each sector/theme subcategory. For example, one can offer banking sector fund, FMCG fund, pharma fund, and so on. But, offering two different schemes within the pharma category won’t be permitted. The same applies to thematic funds, FoFs, index funds/ETFs. In effect, the actual count of schemes would be higher than 1,512.

The new rules are applicable only to open-ended schemes. In other words, the fund houses can get away with their scheme duplication under the close-ended category. In the interest of investors, SEBI should clarify why the same norms aren’t applicable to close-ended schemes as well as with the prospective effect?

Any positives?

The SEBI has unequivocally defined the market capitalisation criteria for equity-oriented schemes. So far the fund houses were arbitrarily defining large caps, mid caps, and small caps, among other schemes. The new norms will bring uniformity in the operations of all mutual funds. Thus, comparing the performance of two schemes within the same subcategory will reflect an accurate picture of competence, in the future.

The capital market regulator has also prohibited fund houses from emphasising only on the “return” aspect of the offering while naming the scheme. For example, “High-yield Fund” can mislead the investors. Hence, such words and phrases can’t be used in isolation in the name of the schemes.

There are a few areas which need more clarity

The SEBI circular says, “Mutual Funds will be permitted to offer either Value fund or Contra fund.”

And also this, “Mutual Funds will be permitted to offer either an Aggressive Hybrid fund or Balanced fund.”

Since the new rules are applicable only to open-ended funds, can a fund house offer an open-ended scheme for “contra” and a close-ended scheme for “value”? Or vice-versa? The same needs to be clarified for “Aggressive Hybrid” and “Balanced.”

It seems the new regulations have been structured in such a way that, the existing product offerings of mutual funds will remain fairly undisturbed. Following the implementation of new classification rules, the possibility of scheme mergers can’t be ruled out. However, their incidence won’t be strikingly high.

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Add Comments

Apr 13, 2018

When you say Balanced fund could be Aggressive Hybrid fund or Balanced fund If we take example of HDFC HDFC Balanced fund could be Balanced one & HDFC Prudence could be Aggresive one Am i right?

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