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Aditya Birla Sun Life AMC Limited

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    Aditya Birla Sun Life AMC Limited

    Mutual Funds Categorization - A Primer

    Jun 27, 2018
    3 mins
    5 Rating

    The mutual fund news making the rounds these days is the recategorization and rationalization of various mutual fund schemes as per new SEBI norms.

    The questions you might be asking as an investor are:

    • Why are mutual funds doing it?
    • Why did SEBI ask them to do so?
    • Is this a good thing or bad thing for the investors?
    • What should you do?

    Let’s look for some answers.

    Why are mutual funds doing it?

    The Mutual fund industry has been in existence for close to 25 years now. As investors took to mutual fund investing, various fund houses too offered multiple choices to cater to a wide variety of investor categories.

    This was all good till only a few fund houses were in operation and the total number of schemes on offer were limited too. However, as the industry grew, more fund houses joined in leading to a huge increase in the number of mutual fund schemes.

    There were times when it was difficult to tell the difference between two schemes, sometimes even from the same fund house. The small, retail investor was left confused.

    Why is SEBI doing it?

    SEBI, as the regulator of mutual fund industry, issued a set of guidelines in October & December 2017. It laid out specific categories under which mutual funds schemes had to operate with a single scheme per category. It also defined the universe of opportunity for these various categories. In cases where more schemes were found to be overlapping, these were required to be merged with similar schemes.

    By doing this recategorization and rationalization, SEBI intends to work with the MF industry and make life simple for the retail investor.

    For example, a large cap fund can now invest 80% of its money only in the Top 100 companies by market capitalisation. Any large cap fund has to adhere to this guideline.

    In debt funds, a short duration debt fund category will invest in fixed income instruments such that the Macaulay portfolio duration is between 1 & 3 years.

    This was not the case earlier. Every scheme defined its own mandate and its own universe.

    No more. See the new categories below.

    1. Equity – 10 types of schemes including large, large and mid cap, mid cap, small cap, multi cap, value, etc. and sectoral/thematic
    2. Debt – 16 types of schemes including liquid, money market, ultra short term, short term, medium term, dynamic, gilt, etc.
    3. Hybrid – Conservative Hybrid, Aggressive Hybrid, Dynamic Asset Allocation, etc.
    4. Solution oriented funds – Retirement fund and Children’s fund are counted under this category
    5. Other Schemes
      1. Fund of Funds – invests in other funds (Domestic or International), minimum 95% investment in underlying fund
      2. ETFs or Exchange Traded Funds – which mirror a particular chosen index, minimum 95% investment of funds in the underlying index.

    Makes it simple to understand, right!

    It is quite like defining the rules of a race. The distance to be covered in a 100 meter dash, 400 meter dash and a marathon are quite clear.

    Is this a good thing or a bad thing?

    It looks like there is more good coming out of this exercise.

    Comparing various funds by category and making a choice is expected to become easier for the investor. 

    What If you are planning to invest in large cap funds, you can now compare all large cap funds and find out, which has delivered the best performance in terms of returns as well as risk taken.

    You should evaluate the experience of the fund house, the fund manager and the quality of their performance before deciding which funds to invest in.

    The difference will be purely in terms of the quality of stock picking and construction of the portfolio by the fund manager. This is the reason you gave your money to the fund manager.

    Finally, Mutual Funds are a simple investment vehicle for a retail investor. The changes are one step forward towards that objective.

    Aditya Birla Sun Life Mutual Fund has welcomed this move from SEBI and recategorized and restructured its product bouquetfor your benefit.

    What are the changes and what should you do? Watch out for our further posts in this series.

    Mutual Fund investments are subject to market risks, read all scheme related documents carefully.

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