We have more than 14,000 Mutual Fund Schemes that are currently available in the market (Equity & Debt Schemes as on Sep, 2017). The Mutual funds are broadly classified as Equity based mutual funds and Debt oriented mutual fund schemes.
Equity funds are further classified into different categories like Large-cap, Mid-cap, Small-cap, Multi-cap, ELSS (Tax saving), Balanced funds etc.,
Whereas, Debt funds are further classified into Liquid funds, Ultra-short term funds, Short term funds, Gilt Funds, Dynamic bond funds, Hybrid Debt oriented funds, MIS funds etc.,
At times, it can be so confusing for a retailer investor to pick a right mutual fund scheme from these various categories. It is often observed that a mutual fund house offers multiple schemes that belong to same fund category, with similar investment objective and investment style.
For example : As queried by one of my blog readers (as above), equity fund schemes like Aditya Birla Sun Life Advantage Fund & Birla Equity Fund have similar investment style and profile, both of them are old horses which have been performing decently and belong to same the fund category i.e., Mutli-cap. In such a scenario, a mutual fund investor / advisor can find it tough to pick a right mutual fund scheme.
We can find lots of examples like these. If AMCs keep on launching multiple schemes with no clear distinction in terms of asset allocation, investment objective, investment strategy etc., then it can be a challenging task to evaluate the different options and take informed decision.
All these years, SEBI/AMFI has been allowing multiple funds under same fund categories from same AMCs, in order to bring the desired uniformity across mutual funds and to standardize the various MF scheme categories, the SEBI through Mutual Fund Advisory Committee has issued new guidelines on ‘new Categorization of Mutual Fund Schemes.’
Mutual Fund Schemes Categorization – SEBI’s latest Guidelines
Below are the key reforms announced by the Securities and Exchange Board of India (SEBI) ;
New Classification of Mutual Funds
- Henceforth, the mutual fund schemes would be broadly classified in the following groups;
- Equity Schemes
- Debt Schemes
- Hybrid Schemes
- Solution Oriented Schemes (for example : Retirement oriented / Pension oriented schemes)
- Other Schemes
- Only one scheme per category would be permitted, except ;
- i. Index Funds/ ETFs replicating/ tracking different indices
- ii. Fund of Funds having different underlying schemes &
- iii. Sectoral/ thematic funds investing in different sectors/ themes
- In case of Solution oriented schemes, there will be specified period of lock in. However, the said lock- in period would not be applicable to any existing investment by an investor, registered SIPs and incoming STPs in the existing solution oriented schemes .
- Mutual Funds will be permitted to offer either Value fund or Contra fund.
Definition of Large cap, Mid-cap & Small-cap Funds
- In order to ensure uniformity in respect of the investment universe for equity schemes, it has been decided to define large cap, mid cap and small cap as follows:
- Large Cap : 1st – 100th company in terms of full market capitalization.
- Mid Cap : 101st – 250th company in terms of full market capitalization.
- Small Cap : 251st company onwards in terms of full market capitalization.
(What is Market Capitalization? – Equity Mutual Funds primarily invest in stocks (company shares) and they are often grouped by the size of the companies they invest in – big, small or tiny. By size we mean a company’s value on the stock market which is known as ‘Market Capitalization’ (or) Cap size. (‘Cap’ or ‘market-cap’ here simply stands for Market Capitalization)
Market Capitalization = Current Market Price of share x Total no of Shares outstanding
Outstanding shares = total number of shares in circulation (held) by shareholders. So if a company has ’10,000’ shares outstanding that are trading at current market prices of say Rs 50 per share, the company’s market cap as of today is Rs 5 Lakh.)
- Mutual Funds would be required to adopt the list of stocks prepared by AMFI in this regard.
- This list would be uploaded on the AMFI website and the same would be updated every six months based on the data as on the end of June and December of each year. The data shall be available on the AMFI website within 5 calendar days from the end of the 6 months period.
- Subsequent to any updation in the list, Mutual Funds would have to rebalance their portfolios (if required) in line with updated list, within a period of one month.
Types of Mutual Fund Schemes – New Categorization & Definition
Let’s now go through the characteristics of each category of MF schemes ;
(Click on the above image to open it in a new browser window)
Mutual Funds will be permitted to offer either an Aggressive Hybrid fund or Balanced fund. Under Multi Asset Allocation category, Foreign securities will not be treated as a separate asset class.
Latest update (06-Dec-2017) : SEBI has proposed below new amendments.
- Corporate Bond Fund : An open ended debt scheme predominantly investing in AA+ and above rated corporate bonds.
- Credit Risk Fund : An open ended debt scheme predominantly investing in AA and below rated corporate bonds (excluding AA+ rated corporate bonds).
Words/ phrases that highlight/ emphasize only the return aspect of the scheme shall not be used in the name of the scheme (for instance Credit Opportunities Fund, High Yield Fund, Credit Advantage etc.).
(Related Article : ‘What is Macaulay duration‘?)
- Other Schemes
- I believe that there is no clear-cut definition for Multi-cap and ELSS fund categories.
- There are way too many scheme sub-categories under Hybrid category.
- Classification of hybrid funds like MIP schemes can be a tricky one. These may be classified as ‘Conservative Hybrid fund’ or Multi Asset Allocation fund. For example : Birla MIP Wealth 25 plan can invest in 3 asset classes (Equity, Debt & REITs), hence we need to wait and see how the existing schemes are going to be re-classified.
- To meet these new guidelines all the mutual fund houses may have to merge, modify or close their available schemes.
- We will see significant reduction in the number of mutual fund schemes that are available for investment.
- In case multiple funds get merged into one scheme, there won’t be any Exit load or tax implications in case you continue with your existing mutual fund units with the newly formed scheme. (Related Article : ‘Mutual Fund Taxation rules‘)
- If an AMC closes a scheme, you have to redeem the units, no exit load will be levied, but you have to watch out for tax implications though.
- If an AMC switches your existing units to another scheme, I believe that there won’t be any tax implications. (In case, the switching happens from the investor side, taxes (if any) are applicable).
- If you are an existing mutual fund investor, do watch out for any emails / SMS from your fund houses, CAMS etc., for the latest updates on the re-classification, scheme mergers, closures etc.,
Do you believe that this new Mutual Fund Schemes Categorization will be beneficial to all the stakeholders? Kindly share your views.
(Image courtesy of Stuart Miles at FreeDigitalPhotos.net) (Source & references : SEBI’s circular, valueresearchonline.com) (Post published on : 07-October-2017)