On 6th October another landmark circular has been issued by SEBI, which will Rationalize & Categorize the mutual fund schemes in India. After around 25 serious years (Post UTI only phases) of MF industry, SEBI finally nailed it. Here is how your MF Schemes are going to change now.
Why Rationalization?
You tell me is it rational to have around 740 Open-Ended schemes offered by just 42 Mutual Fund companies? This is nuts that you can have as many numbers of schemes you want. This MFs are are not FMCGs or mobile phones that you need a new model every month.
Why Categorization?
Your planner advised you to invest 50% in Large Cap funds and 50% in Mid Cap funds. You choose 2 funds to invest. 
But the smart fund manager of your large caps, ventured into midcaps to make returns. And the fund manager in mid-cap fund took exposure in small-cap funds claiming them as mid-cap stocks as “their” definition of the small-cap fund is not breached.
There is absolutely no definition of Large Cap or Small Cap. There is no exact portfolio limitation for low duration fund to become medium-term funds.
All this will go in coming 5-6 months.
What does the Rationalisation & Categorization of Mutual Funds Circular say?
- Overall there would be 5 categories of MFs. These are the basic broad categories.
-
Equity Schemes will be of 10 types. These are:
The characteristic of these 10 schemes will be:
-
There will be 16 types of Debt Schemes. These are:
The characteristic of these schemes will be:
-
There will be 6 types of Hybrid Schemes. These are:
The characteristic of these schemes will be:
-
Solution Oriented Schemes will of 2 types. These are:
The characteristic of these 2 schemes will be:
-
There will be 2 types of Other Schemes. These are:
The characteristic of these 2 schemes will be:
What else?
The circular has defined the meaning of Large Caps, Mid Caps, Small Caps. Now the universal definition will be:
- 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
- AMFI will declare universe quarterly.
- MFs will realign portfolio with-in one month of change in the universe.
And finally the Hydrogen Bomb !!!
ONLY ONE SCHEME PER CATEGORY ALLOWED
(Except Index Fund, Fund Of Funds & Sectoral Funds)
Mutual Funds would be required to analyze each of their existing schemes in each off the list of categories stated herein and submit their proposals to SEBI after obtaining due approvals from their Trustees as early as possible but not later than 2 months from the date of this circular.
MFs have to decide whether they will merge, close or change the fundamental attributes in next 2 months.
After SEBI’s approval, the fund has to rationalize & categorize within 3 months from approval. (In case your invested scheme get merged or changed you will have an option to redeem it without paying the exit load)
The circular will be applicable to all open-ended MFs launched till date or in the pipeline.
Verdict on rationalization categorization mutual funds
- It is really a welcome move for the investors.
- Selecting and understanding scheme will be easy
- The funds will be true to label & true to the spirit.
- The comparison would be real between categories.
- Debt Funds will have more option as new categories are introduced with different horizons.
Let’s see how MF companies follow this circular in true spirit.
Will wait for your comment and observations below. Do share the article using the social media option on this page.
