Ads Top

Mutual Funds Re-categorization & Rationalization - What it means for you?

mutual-fund-recategorization-rationalization

SEBI released a circular for all asset management companies in Oct -2017 stating all mutual funds offered by AMC need to comply as per the new categories.

A very important change as per the SEBI circular is that all fund houses can have only one mutual fund scheme across a single category. Which basically means, all existing mutual fund schemes need to be either modified, merged or discontinued.

Why Re-Categorization?

This change was long overdue. SEBI wants to bring uniformity in the characteristics of similar type of schemes across fund houses. Since mutual funds have become a popular investment instrument, many fund houses had launched multiple schemes which offered similar kind of portfolio. Confusing naming conventions used by AMC's will be a thing of the past and mutual fund scheme names will now reflect an investor’s underlying objective.


SEBI also wants to empower the investor to easily understand what they are investing into. The reduced number of schemes will lead to better transparency & ease in comparison of schemes across different fund houses.

What are the changes?

All schemes offered by the fund house need to be categorized into 5 major categories - Equity, Debt, Hybrid, Solution Oriented & others. The guidelines also state that each mutual fund must be renamed to reflect the objective of the fund. For e.g. The existing SBI Small & Mid Cap fund has been renamed to SBI Small cap fund since as part of the new SEBI circular, small & midcap category does not exist. Read more about equity fund categories - Equity mutual fund categories for your portfolio

SEBI has also made very clear the definition of a large, small, midcap funds and what category of equities they can invest into. Here is the new definition -

Large Cap:1st-100thcompany in terms of full market capitalization
Mid Cap:101st-250thcompany in terms of full market capitalization
Small Cap:251stcompany onwards in terms of full market capitalization

The list of companies falling under each category will be listed by AMFI every 6 months & each fund house needs to adhere to the list to ensure the selected equity falls under the correct category.

You can read the SEBI circular to understand detailed attributes of each category for mutual fund - Categorization and Rationalization of Mutual Fund Schemes

How does it impact an Investor?

Many investors would have received a notification from the Fund houses regarding the changes that have been made as part of their investments. It is mandatory for each fund house to intimate the investors & list the changes on their websites.

Here is an example of the communication received from Reliance Mutual Fund. As an investor, you would need to understand the fundamental changes made to the schemes that you have invested into.

















You should need to identify whether as an investor you are aligned with the changed fund attributes. Take for example if you were invested in a small & midcap fund, and as part of the re-categorization, the fund is now changed to a small cap fund - you need to understand the risk component of the investment increases further. Now, based on your risk appetite & investment horizon - you can either decide to stay invested in the fund or move to a pure Midcap fund.

A word of advise

There is no need to panic & redeem your existing mutual fund investments. Mutual funds are a long term wealth creation instrument & the recent change by SEBI empowers the investors to easily identify what they want to invest into. Although the change restricts the flexibility of the fund houses to some extent, the mutual fund managers are expert enough to manage the funds as per the new change. Shift the funds only when you see a major change in the fund attributes, which does not align to your style of investment. Still wondering if mutual funds suit your investment style? Here's your answer - Are Mutual Funds right for ME?

Mutual funds as an investment instrument has been gaining popularity over the years, thanks to the wide range of options available and the ease of KYC process. To know more about them, check out The Mutual Funds Sahi Hai campaign, launched by The Association of Mutual Funds in India (AMFI) at www.mutualfundssahihai.com

Still have any questions or feedback on the article, don't forget to share it in the comments section below.

No comments:

Powered by Blogger.