Mutual Fund Reclassification – Impact on Mutual Fund Investors
By: Joydeep Dass
Faculty – Finance
Email: Joydeep@isme.in
Mobile: +91-9175360870
Overview – The Securities & Exchange Board of India (SEBI) has reclassified the MF schemes vide its circular dated 6/10/2017. The objective is to ensure uniformity in schemes launched by mutual funds. This classification was further required to enable the investors to make an informed decision before investing. Mutual funds would have to pick from the list of stocks prepared by Association of Mutual Funds in India (AMFI) on a periodic basis before investing
All mutual fund scheme are been classified under five baskets:-
Equity schemes (11)
Debt schemes (16)
Hybrid schemes (7)
Solution Oriented schemes (2)
Other schemes (2)
Classification under Equity Schemes
Multi cap fund – Scheme should invest 65% of total assets in equities
Large cap fund – Scheme should invest 80% of total assets in equities
(Large Cap = 1-100th Company in terms of full market capitalization)
Large & Mid cap fund – Scheme should combine 35% investment each i.e. 70% in total in mid and large cap companies
Mid cap fund – Scheme should invest 65% of total assets in equities
(Mid Cap = 101-250th Company in terms of full market capitalization)
Small cap fund – Scheme should invest 65% of total assets in equities
(Small Cap = 251th Company onwards in terms of full market capitalization)
Dividend Yield fund – Scheme should invest in dividend yielding stock limited to 65% of total assets in equities
Value Fund – Scheme should invest in funds which creates value limited to 65% of total assets in equities
Contra fund – Scheme should adopt contrarian strategy limited to 65% of total assets in equities
Focused fund – Scheme should invest in 30 stocks limited to 65% of total assets in equities
Sectoral fund – Scheme should invest 80% of total assets in equities of a particular sector, e.g. power, telecom, Infrastructure
ELSS fund – Scheme should invest 80% of total assets in ELSS as notified by the Ministry of Finance. Essentially this is a tax saving fund
Classification under Debt Schemes
Overnight fund – Scheme should invest in 1-day overnight securities
Liquid fund – Scheme should invest for 90 days or 3 months in debt & money market securities
Ultra short duration fund – Scheme should invest in debt & money market instruments subject to the Macaulay duration of the portfolio is in the range of 3-6 months
Low duration fund – Scheme should invest in debt & money market instruments subject to the Macaulay duration of the portfolio is in the range of 6-12 months
Money market fund – Scheme should invest in money market instruments subject to maturity not exceeding beyond 1 year
Short duration fund – Scheme should invest in debt & money market instruments subject to the Macaulay duration of the portfolio is in the range of 1-3 years
Medium duration fund – Scheme should invest in debt & money market instruments subject to the Macaulay duration of the portfolio is in the range of 3-4 years
Medium to long duration fund – Scheme should invest in debt & money market instruments subject to the Macaulay duration of the portfolio is in the range of 4-7 years
Long duration fund – Scheme should invest in debt & money market instruments subject to the Macaulay duration of the portfolio is more than 7 years
Dynamic bond – Scheme should invest in stocks regardless of duration no limit of percentage prescribed
Corporate bond fund – Scheme should invest in corporate bond up to 80% of the total assets
Credit risk fund – Scheme should invest in lower rated corporate bond up to 65% of the total assets
Banking & PSU fund – Scheme should invest in public sector undertakings, public financial institutions up to 80% of the total asset
Gilt funds – Scheme should invest in Government securities up to 80% of the total assets irrespective of maturity
Gilt funds-10Years – Scheme should invest in Government securities up to 80% such that the Macaulay duration of the portfolio is equal to 10 years
Floater funds – Scheme should invest in floating rate instruments up to 65% of the total assets
Classification under Hybrid schemes
Conservative hybrid fund – Scheme should invest in equities between 10% & 25% & 90% & 75% in debts of total assets
Balanced hybrid funds – Scheme should invest in equities between 40% & 60% & 60% & 40% of debts of total assets
Aggressive Hybrid funds – Scheme should invest in equities between 65% & 80% & 20% & 35% of debts of total assets
Dynamic asset allocation or balanced funds – Scheme should invest in equities and debts as decided by the fund manager i.e. they have the authority to decide investment strategy
Multi asset allocation fund – Scheme should invest at least in three-asset class with the minimum amount being 10% in each class
Arbitrage fund – Scheme can invest in various equites & debts to take advantage of price differentials of stocks and can follow arbitrage investment strategy
Equity savings – Scheme should invest minimum 65% in equities and 10% in debts of the total assets of the fund
Classification under Solution Oriented schemes
Retirement fund – Scheme should have a lock-in period of 5 years or the retirement age whichever is earlier.
Children’s fund – Scheme should have a lock-in period of 5 years or until the child attains maturity whichever is earlier
Other schemes
Index or Exchange traded funds – Scheme should invest 95% of total assets in a particular index or an exchange
Fund of Funds – Scheme should invest 95% of total assets in domestic or overseas funds
Impact – An investor would be able to select the right MF scheme based on his investment capacity. Selection and identification will be easier for the investors avoiding confusion & uncertainty. An investor should revisit his holdings in the portfolio. If there is no change in the fund scheme than he has nothing to worry. For If, a fund is merged, consolidated or a scheme has changed a category than the investor would have to review or realign their existing investments. There will not be any significant impact on returns or on the tax liability.
MF within the same scheme will now have similar characteristics. An investor would be able to compare his investments and analyze as to the performance. Earlier, a fund used to deviate from the investment objective with an aim to outperform other funds in the same category to attract the investors. Now, with the reclassification a fund cannot divert funds and portray a good performance than the benchmark index.
Previously, all active funds used to have different definitions. Now that the standardization have been done, an investor would not be required to do a proper due diligence, check and understand the definitions before investing All offer documents of the MF scheme would be consistent in terms of terminology. There will be increased uniformity & general understanding across the industry.
This reclassification will also weed out bad schemes from the market. Poor mutual fund scheme proliferation leads to bad product selling resulting in bad buying with misplaced expectations. SEBI has ended this malpractice with the right regulatory intervention at the right time for the betterment of the Industry.
References
1. Sebi.com
2. Amfiindia.com
3. Indiainfoline.com
4. Motilaloswal.com
5. Valueresearchonline.com
