Also, there was no set of definition for the fund houses to design a portfolio. Many times it was observed where portfolio of a large cap fund was holding mid and small cap shares in majority. This was possible because there were no set of guidelines for fund houses.
Thus on October 6, 2017 SEBI (Security and Exchange Board of India) issued a notification about mutual fund scheme categorisation and rationalisation. The motive behind bringing the change is to let investor easily understand and evaluate the schemes by himself in terms of Category and Rationale.
SEBI has classified mutual fund schemes mainly into 5 categories (as shown in below chart). Each category then can have specified scheme with specified structure. (Explained after chart)
- Large Cap – The 1st -100th Company in terms of full market capitalisation.
- Mid Cap – The 101st – 250th company in terms of full market capitalisation.
- Small Cap – 251st company onwards in terms of full market capitalisation.
Structure of schemes under Debt Funds – Under this funds are categorised based on the maturity of the underlying securities.
- Fund Houses are allowed to have only 1 scheme per category which means now only 1 Large Cap or 1 Small Cap scheme will be managed by every fund house.
- Fund houses can offer either Contra Fund or Value Fund.
Are these norms good for Investors?
SEBI introduced these norms for the benefit of investors. Let’s see how –
- There will be less confusion for an investor as the no. of scheme per category is restricted. For example now in the industry we’ll only see 30-35 Large Cap funds. (1 per fund house) This will simplify the selection of funds.
- Now the fund objective will not get change easily, hence one can continue investing in the fund for long term without worrying about portfolio.
- Selection of Debt fund is now much easier than before. Now one can easily see the characteristics of the scheme and decide if the scheme matches the duration with his investment objective or not.
- Mis-selling of the scheme will reduce as now it is much easier for an investor to identify the product due to its labeling.
However, due to the changes in the characteristics and structure of the schemes investors even might face problem in short term. Let’s see how:-
What if fund house decides to merge the scheme and as a result its investment objective changes? Also what if fund house decides to discontinue the scheme? For example one of the leading fund house has decided to merge one of its mid cap fund with another fund and now it will be categorised as Thematic Fund. Can an investor continue with thematic fund which has more risk than a mid-cap fund? In both the conditions investor will get chance to either redeem or switch the fund however, here capital gain will come into the picture which will certainly lower the overall return.
Moreover, to adjust with the new rules/definition of Large/mid/small cap, fund manager might churn the portfolio. This move will change the investment strategy of the fund which can be unsuitable to the investor hence portfolio re-balancing will be required by an investor.
Conclusion:-
In the last few months mutual fund industry has seen many changes. The new regulation on mutual fund is a good move by SEBI. It will definitely create confusion in the industry for few days but will benefit the investors in the long run. As a planner and Investment Adviser we’ll advice investors not to take decisions in hurry. Let the dust settle down. Sit with your planner understand the regulations and impact of the changes on your portfolio. If required revisit your goal and re-balance your portfolio.
So what are your views with regards to the regulations? Do you think this will benefit you in the long run? Let us know if you need any help.
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