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Rationalization of Mutual Fund Schemes – June 2019 Review
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In a circular dated October 6th, 2017, SEBI ordered to rationalise and categorise open-ended mutual fund schemes aimed at de-cluttering the industry by enhancing comparability within the schemes offered. The SEBI circular indicated to ensure that schemes named differently are clearly distinct in features like asset allocation, investment strategy and risk appetite. SEBI wanted to bring uniformity within the aspects of similar schemes to make sure investors can evaluate various options before making any investment decisions.

The major points of proposal by SEBI are summarised below:

  1. Categorisationof large, mid and small cap categories of stocks
    • Large Cap: Companies ranked 1st -100th on the basis of market capitalization.
    • Mid Cap: Companies ranked 101st - 250th on the basis of market capitalization.
    • Small Cap: Companies onwards rank 250th, i.e. 251st and beyond on the basis of market capitalization.
  2. Grouping of schemes into five categories: Equity, debt, hybrid, solution-oriented and others
  3. Nomenclature of convention of schemes as per the risk level of end investments
  4. Categorisation of balanced funds into three types: Conservative hybrid, balanced hybrid and aggressive hybrid

 Categorisation of Equity Fund Schemes

Category of Schemes

Scheme Characteristics

Type of scheme

 

Multi Cap Fund

Minimum investment in equity & equity related instruments- 65% of total assets

An open ended equity scheme investing across large cap, mid cap, small cap stocks

 

Large Cap Fund

Minimum investment in equity & equity related instruments of large cap companies- 80% of total assets

An open ended equity scheme predominantly investing in large cap stocks

 

 

Large & Mid Cap Fund

Minimum investment in equity & equity related instruments of large cap companies- 35% of total assets

Minimum investment in equity & equity related instruments of mid cap stocks- 35% of total assets

An open ended equity scheme investing in both large cap and mid cap stocks

 

 

Mid Cap Fund

Minimum investment in equity & equity related instruments of mid cap companies- 65% of total assets

An open ended equity scheme predominantly investing in mid cap stocks

 

Small Cap Fund

Minimum investment in equity & equity related instruments of small cap companies- 65% of total assets

An open ended equity scheme predominantly investing in small cap stocks


 

How does it impact investors?

Following could be some of the benefits for investors after re-classification of the schemes:

  1. Ease in comparing and analysing mutual fund schemes offered by different asset management companies
  2. Better transparency to make sure that investors have their financial goals in mind and make investment decisions accordingly
  3. Different schemes getting merged might bring alikeness in commission paid by asset management companies (AMCs)
  4. Scheme merger will bring down the number of portfolios to be managed, thereby giving time to fund managers to focus more on their core competencies and reduce burden of handing a huge number of funds

However, there are some limitations which investors might have to suffer with the change in the funds’ classification move:

  1. Investors might have to bear the pressure of capital gains tax whenever they opt to exit from schemes in case of mergers, leading to unnecessary outflow of cash
  2. Fund managers may have to restructure scheme portfolios every six months, which will increase their costs and impact their returns, ultimately impacting the investors themselves
  3. The nature of risk carried by debt schemes may still not be understood well by investors as simply changing the name might not highlight the potential of risk element in the schemes.

 How would it affect Fund Houses?

  1. Reshuffling: Every six months, fund managers may be required to churn their portfolios based on investment categorisation (large, mid and small) published by the Association of Mutual Funds in India (AMFI). This may lead to higher portfolio turnover and an increase in transaction costs, directly impacting fund returns.
  2. Risk of tail-gating: Re-categorisation of certain stocks from large to mid, mid to small or vice versa on a half-yearly basis may result in the tail-gaiting of these stocks.
  3. Shrinking of the mid-cap universe: Post SEBI’s regulation, there are only 150 companies categorised under the mid-cap sector as compared to the earlier 400 stocks, as a result of which fund managers have limited options to invest under the mid-cap category.
  4. Full market capitalisation instead of free float for ranking: The new guideline categorises stocks based on full market cap instead of free float. This will create liquidity impact among stocks. Certain stocks which may rank high in case of free float might rank low under the full market cap method. 

In the table given below, AMFI has updated the list of stocks whose index have changed in the last 6 months, i.e. from January to June 2019 based on six month average market cap. 

MF..

 

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