Under the categorisation and rationalization of mutual fund schemes, market regulator Securities and Exchange Board of India (SEBI) has made mutual funds reclassification, re-categorisation, and merger mandatory. It was necessitated to eliminate confusions and chaos in the capital market for investors. Fair enough!
The number of schemes offered by the Indian mutual funds is over 2000. Each scheme has a direct and regular plan and dividend and growth option fund. Fund houses used to have multiple schemes with different names, but with the same structure and essence. The objective of this reform was to clearly demarcate the portfolios for investors to choose from.
This re-categorisation will certainly make you re-evaluate your holdings. Here are our 10 takeaways from SEBI-backed new mutual funds show:
1) As per the new SEBI mandate, a fund house can offer 10 types of equity funds, 16 categorisations of bond schemes and 6 categories of hybrid fund schemes. In addition to these funds, they are allowed to issue index funds, funds of funds and other solution-based schemes.
2) The new category very precisely defines the tenure or type of security a fund can invest in. For example, a short-term duration fund can invest in a scheme with a maturity of 1-3 years, while a medium duration fund can invest in securities with a duration of 4-7 years.
3) A corporate bond fund can invest in securities in a manner that at least 80% of the fund is in corporate bonds rated AA, whereas a credit risk fund must have at least 65% invested in corporate bonds of rating AA and below.
4) A short-term income fund can hold 10-20 year maturity government securities if the overall duration is within 3 years.
5) With the precise definition of the tenure, fund managers now have less flexibility in managing a scheme. For example, a short-term income fund with a portfolio duration of 2.8 years won’t be able to add too much of a new security with a duration of, let’s say, 3.5 years because it has a potential to push the overall duration beyond 3 years.
6) Earlier the balanced funds never used to be balanced. According to the name, the funds were supposed to invest 65-70% in the equities and the rest in debt. At the end of May 2018, its size was 24% of all pure equity funds, up from 10 per cent just two years ago. SEBI has given approvals to only those new balanced funds if they manage to hold equities and debt in almost equal proportions.
7) After the re-categorisation, in a Balanced Hybrid fund, the percentage of equities can be 40-60 per cent of the total assets and the rest in debt.
8) An Aggressive Hybrid fund, on the other hand, can have 65-80% of the assets in equities and 20-30 per cent in debt. The earlier balanced funds have to become aggressive hybrid fund, sacrificing the name balanced fund.
9) A new category of a hybrid fund is called Dynamic Asset Allocation or Balanced Advantage Fund. The fund manager can swing between equities and debt. If equities are down, then the manager has an option to switch completely to debt. If the equities market has bottomed up, one has the flexibility to acquire more equity funds.
10) A Conservative Hybrid Fund allows investing 10-25 % in equities and the rest in debt. Earlier, fund houses used to call these funds fixed monthly/quarterly returns.