How SEBI has redefined mutualfunds

Having a hard time comparing and selecting the right mutual fund as per your needs? Well, SEBI has just fixed your problem. Security and Exchange Board of India issued a circular that defines clear characteristics of categories for mutual funds across Asset Management Companies (AMCs) and limits the number of open-ended schemes available. According to the new circular, AMCs will not be allowed to have more than one scheme under each category (with a few exceptions) and mutual funds in a specified category will not be allowed to go out of its defined limits.

Why was this needed?

With the peaking interest of Indian investors in mutual funds and AMCs trying to increase options for investors, the number of open-ended mutual funds schemes kept rising. This caused AMCs to start many mutual funds with similar investment style and no clear distinction, which in turn, lead to confusion for even knowledgeable investors to compare between similar schemes.

Till now, there was no clear definition of a large cap, mid cap or small cap stock. Similarly, there was no clear distinction between low credit risk and high credit risk debt funds. All research companies, AMCs and rating agencies had their own rough definition of under which category a mutual fund should be classified. Fund houses were allowed to have more than one fund under the same category and depending on market conditions, a mutual fund’s category and risk profile were apt to change. Also, AMCs acquiring other AMCs lead to duplicity of funds.

With the rising number of mutual funds, vague categories, and unclear definitions, investment management was becoming more and more tedious for investors.

The Solution

SEBI’s circular includes the following guidelines for AMCs:

  1. Each mutual fund scheme has to be broadly classified into one of the 5 defined categories : Equity, Debt, Hybrid, Solution Oriented and Other schemes.
  2. AMCs will not be allowed to have more than one scheme under each subcategory with exceptions such as Index funds, ETFs, Sector funds and fund of funds.
  3. Equity funds will not be allowed to invest more than a defined limit in stocks out of their specified category.

AMCs have been given 2 months to fit their funds in defined categories, merge the schemes, and defining a strategy to follow for each scheme. AMCs need to submit the rationalization to SEBI. Once approved, they will have 3 months to implement the suggested changes.

Full list of newly defined categories

Equity FundsDebt FundsHybrid FundsSolution Oriented FundsOther Funds
Multi cap fundsOvernight fundsConservative hybridRetirement fundFOF (Domestic/ overseas)
Large cap fundsLiquid fundsBalanced hybrid/ aggressive hybridChildren’s fundIndex/ ETFs
Large and midcap fundsUltra short term fundsDynamic asset allocation/ balanced advantage
Mid cap fundsLow duration fundsMulti asset allocation
Small Cap fundsMoney market fundsArbitrage
Dividend yield fundsShort duration fundsEquity Savings
Value fundsMedium duration funds
Contra fundsMedium to long duration funds
Focused fundsLong duration funds
Sector fundsDynamic bond funds
ELSS fundsCorporate bond funds
Credit risk funds
Banking & PSU debt funds
Gilt funds
Gilt with constant 10 year duration funds
Floater funds

What does it mean for you as an investor?

  1. We will see a significant reduction in the number of available schemes to invest in.
  2. Mutual funds in your portfolio might merge into other funds or be closed. Look out for emails or notifications from your AMC regarding such changes.
  3. If the fund you hold gets closed, there will not be any exit load but you have to look out for tax implications.
  4. Funds you hold may see a change in their investment strategy and risk profile.

As of now, investors need not take any actions regarding the new guidelines and can continue with their existing investments and SIPs. If you have any questions, concerns or views regarding this step, please drop a word in the comments section or write to us at advisory@fundexpert.in

About the author

Sourabh Bajaj

Sourabh is the Product Lead on FundExpert and looks over development and growth aspects of the product.

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