On October 6, 2017, the market regulator, SEBI, issued a circular for Asset Management Companies (AMC) with regards to Categorization and Rationalization of Mutual Fund Schemes.The over-arching objective of this reform is to enable investors to make informed decisions when investing in mutual funds.
One of the main reforms instructed by SEBI in the circular to the AMCs was to classify schemes into categories defined by the regulator. The other important reform instructed by SEBI was to rationalize schemes by winding up schemes, merging schemes or changing fundamental so that each AMC hasonly one schemeper category. Exception to the one scheme per category rule was granted for certain types of funds like index funds / ETFs, Sectoral / Thematic funds and Fund of Funds.
Over the past few months, AMCs have worked on scheme re-categorization and rationalization. The exercise has been completed for all AMCs now and investors can now see the result of this work in all Mutual Fund Research Website including Eastern Finance Mutual Fund Research Section.
We at Easter Finance, think that these reforms will have far reaching long term consequences for the mutual fund industry and we welcome these reforms because they are beneficial for the investors. The biggest benefit for the investor is that these reforms will bring more clarity about scheme characteristics and enable the investor to evaluate different options before selecting a fund which is best suited for the investor’s requirements. Let us explain this in more details.
You would have noticed that currently some AMCs, especially the larger ones have number of schemes of similar types – e.g. a Top 100 Fund,Bluechip Fund and Select Large Cap Fund, all from the same AMC. Many a times, it can be difficult to distinguish between the characteristics of the schemes of seemingly similar nature for the layman investors - for instance, in the above example, all the schemes seem to be large cap equity funds. How will you, as an investor, decide which scheme to invest in, if you want to invest in a large cap fund? Investors, in such a case, usually look at past performance before investing. But different funds outperform one another, in different time periods and market conditions. In the past your financial advisor may have helped you select the right scheme, but SEBI’s guideline of having one scheme per category will greatly simplify the fund selection process, both for you and your financial advisor.
Prior to scheme categorization, as per SEBI defined categories, there were no standard scheme categories. Most AMCs would describe their equity schemes loosely as diversified equity funds – in some cases, more details were provided in fine print and in many cases, additional details were not available. The third party mutual fund research firms did a great service to investors by classifying schemes as large cap, multi-cap, midcap etc., but different third party firms had different categories and the category definitions also differed from one research firm to another.
SEBI in its circular has clearly defined what is large cap (top 100 companies in terms of market cap), midcap (next 150 companies in terms of market cap) and small cap (251st company onwards in terms of market cap).
SEBI has also clearly defined the conditions for schemes to be classified in a particular category. Before re-categorization one large cap scheme may have had 20% exposure to midcap, while another may have had 40% exposure to midcap – clearly, the risk characteristics of these two schemes are different, but from the investor’s perspective, both were large cap funds. The definitions of scheme categories and standardization of categories across the industry, will clarify understanding of risk characteristics of each category and simply investment decision making for investors based on their risk appetites.
We have explained the beneficial effects of SEBI’s scheme categorization and rationalization guidelines in the context of equity funds because these funds are usually more popular with retail investors and also easier to understand, but these guidelines will bring even greater clarity in the case of debt and hybrid funds, where there were confusions galore from the viewpoint of the average retail investor. For example, some AMCs had 4 or even 5 hybrid schemes and the differences between some hybrid schemes were not very apparent to the average retail investors.
SEBI’s scheme categorization circular is very exhaustive and we will not be able discuss all the details in this article, but we will summarize the key categories for the benefit of our investors:-
Source: SEBI
As discussed earlier, characteristics of each category have been defined by SEBI in its circular. You can get a soft copy of the circular on the SEBI website or you can contact us, to understand these categories.
Example of some popular schemes merging or changing the name / category or characteristics –
In this article, we discussed some main features of SEBI’s mutual funds categorization and rationalization initiative. As mentioned earlier, in the long term, these reforms will be beneficial for investors. An initiative of this magnitude, will invariably impact some investors. We are there to hand hold you through this change and make sure that your mutual fund investments are aligned appropriately with your financial goals.
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