Sebi classifies mutual fund schemes to help investors

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Mumbai: The Securities and Exchange Board of India (Sebi) has asked mutual fund houses to classify their schemes under five broad categories to cut through the clutter and make it easier for investors to compare plans with similar characteristics. The move is expected to force fund houses to merge schemes and reduce their number by half.

In a circular on Friday, Sebi proposed that mutual fund schemes be divided into debt, equity, hybrid, solution-oriented (such as retirement and children’s funds) and “other” schemes. This differentiation is based on their investment strategy.

Every class is further finely divided, making for a total of 36 different scheme categories such as Dividend Yield Equity Fund, which would focus on dividend-yielding stocks, or Banking and PSU Debt Fund, which invests a minimum 80% of its corpus in debt paper issued by state-owned firms and lenders.

A fund house will be allowed to have only one scheme per category to ensure that there is no duplication.

Sebi has asked asset managers to submit proposals to the regulator for merging similar schemes or winding up any which do not fall in the prescribed categories within two months. After Sebi issues observations, fund houses would need to complete the exercise within three months.

“It is desirable that different schemes launched by a mutual fund are clearly distinct in terms of asset allocation, investment strategy, etc. Further, there is a need to bring in uniformity in the characteristics of similar type of schemes launched by different mutual funds,” it said in the circular.

India has 42 fund houses managing around Rs20.4 trillion at the end of September in 2,000 mutual fund schemes.

“It is the beginning of scheme mergers and the regulator has spelt out clearly how a scheme will be defined. This will usher in clarity for investors and distributors who used to get confused due to similar schemes,” said Swarup Mohanty, chief executive officer at Mirae Asset Global Investments (India) Pvt. Ltd.

“As far as the industry is concerned, there will an impact in the short term, but it is manageable,” he added.

Equity funds are allowed to have 10 subcategories such as large cap, small cap, midcap and so forth.  on 11 September that if a fund is called a large-cap equity fund, then 80% of its assets will need to be invested in large-cap firms. Debt funds have 16 subcategories and hybrid funds (which invest in equity and debt) six.