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 scheme categorization
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.
How will SEBI’s scheme categorization and rationalize affect your investments?
- If one or more schemes in your portfolio have merged with other schemes, you would have received a communication from the AMC. If you were not comfortable with the merger then you could have redeemed the units of the merged scheme within the deadline mentioned by the AMC in their notice. If you have an SIP / STP / SWP in a merged scheme and wish not to continue it, you should contact us or your financial advisor.
- If the name of one or more schemes in your portfolio has changed, you would have received a communication from the AMC. Going forward account statements will reflect the new scheme name. If you are using a third party portfolio tracker or getting portfolio statement from us, it is likely that the new scheme name will be reflected therein. If you are in doubt, you should contact us or your financial advisor.
- Fundamental characteristics of some schemes may have undergone change, e.g. large cap fund becoming a multi-cap fund, thematic fund becoming a midcap fund, balanced fund becoming an equity savings fund or a midcap fund becoming a large and midcap fund. You should discuss with us or your financial advisor, if the changed characteristics are aligned with your investment needs / risk appetite and make suitable changes if necessary.
Example of some popular schemes merging or changing the name / category or characteristics –
- HDFC Prudence Fund, earlier a Balanced Fund is now merged with HDFC Balanced Advantage Fund, Dynamic Asset Allocation Fund
- Mirae Asset Emerging Bluechip Fund, earlier a top performing Midcap Fund has now become a Large and Midcap Fund
- Canara Robeco Emerging Equities Fund, earlier known as a top performing mid cap fund has now become a Large and Midcap Fund
- HDFC Top 200 Fund (a popular Large Cap Fund) has now become HDFC Top 100 Fund as a Large Cap Fund can now invest only in 1st – 100th company in terms of full marker capitalization.
- ICICI Prudential Monthly Income Plan has been merged with ICICI Prudential MIP 25 and the new name is ICICI Prudential Regular Savings Fund
- Aditya Birla Sun Life Top 100 fund, earlier a large cap fund is now renamed as asAditya Birla Sun Life Focused Equity fund fundand has become a Focused Fund (a new category introduced by SEBI)
- Some investors may find certain category definitions to be too technical, particularly debt scheme categories, but do not worry – these categories may not even be relevant for your needs. In our view, a maximum of 7 to 8 categories can suffice for a range of investment purposes of most investors. However, if you have special investment needs, then some of the new mutual fund categories defined by SEBI can provide suitable investment solutions. You should contact us or your financial advisor, if you need clarity on the new mutual fund categories and investment advice.
Conclusion
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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