Mutual fund investors will now find uniformity and clarity as Securities and Exchange Board of India (Sebi) has issued a circular for rationalisation of schemes. It has defined 10 categories of equity funds, 16 of debt funds, six of hybrid funds, two of solutions-based like retirement and children’s fund and one each for other category which includes index funds/ exchange-traded funds and fund of funds (overseas/domestic).
Rationalisation of schemes
All asset management companies (AMCs) will have to analyse their schemes and submit the merger or winding up or fundamental change proposals to the markets regulator within two months. The regulator will give its observations regarding the proposals and the fund houses will then have to carry out the changes within three months. Fund houses will have only one scheme per category except index funds/exchange-traded funds tracking different indices, fund-of-funds and sectoral funds.
The regulator has underlined that the schemes designed should not result in duplication or minor modifications of other schemes offered by the fund houses. “The regulatory direction is supportive of our belief that for investors to make optimal choices, the industry needs to offer fewer well-defined choices rather than a plethora of clones,” says Aashish Somaiyaa, MD and CEO of Motilal Oswal AMC.
Brijesh Damodaran, managing partner of BellWether Advisors LLP, says investing should be simple and making the choices and options to invest should be simpler and easier. “The regulator’s decision on the merger of schemes and the categorisation being limited to five is a welcome investor-friendly move,” he says.
Large, mid and small-cap funds
Now, there will be uniformity in equity schemes. The large cap funds will be the first 100 companies in terms of full market capitalisation. The mid-cap category will be 101 to 250 companies in terms of full market capitalisation and small-cap will be from companies in the order of 251 onwards in terms of market capitalisation.
The Association of Mutual Funds in India (AMFI) will have to draw up the list of the stocks based on the parameters defined in the Sebi circular. For one, if a stock is listed on more than one recognised stock exchange, an average of full market capitalisation of the stock on all such stock exchanges will be computed. In case a stock is listed on only one of the recognised stock exchanges, the full market capitalisation of that stock on such an exchange will be considered.
The list of the stocks according to the categories will have to be uploaded on AMFI website and it will be updated every six months—end June and December. Fund houses will have to adopt the list of stocks prepared by AMFI and rebalance the portfolio according to the updated list within a period of one month.
Multi-cap funds will be open ended equity schemes investing across large, mid and small cap stocks and the minimum investment in equity and equity-related instruments will be 65% of the total assets. In large-cap funds, the minimum equity investment will be 80% of the total assets. In mid and small cap funds, the minimum equity investment will 65% of the total assets.
The debt category will have 16 types of schemes, right from underlying investments with maturity of one day to 10 years. Dynamic bond funds, which have become very popular these days, can invest across duration. Open ended liquid funds will invest in debt and money market securities with maturity of up to 91 days only. Ultra-short duration fund will invest in investment maturing between three to six months.
Lock-in for solutions oriented schemes
The two open ended solutions oriented schemes—retirement fund and children’s fund—will have a lock-in period of three years. For children’s fund, it will be at least five years or till the child attains age of majority, whichever is earlier. However, the lock-in will not be applicable to any existing investment by an investor, registered systematic investment plans, and systematic transfer plans in any solutions-oriented schemes.
Analysts say large fund houses will have to merge some of their schemes and they have two to three schemes in various categories.