SEBI recently released a circular on "Categorization and Rationalization of Mutual Fund Schemes" asking Mutual Fund Companies to standardize scheme categories and to close down or merge schemes that are very similar to their other schemes ("only one scheme per category would be permitted").
This is being done with the aim of making it easier for retail investors to select and invest in Mutual Funds by:
a) ensuring that all Mutual Fund schemes within a fund house are sufficiently distinct from each other in terms of strategy, asset allocation etc so that there is less confusion
b) standardizing Mutual Fund scheme categories so that it is easier to compare Mutual Fund schemes across fund houses
It is a good idea but as usual the devil lies in the details. How much of an impact will this really have on the number of Mutual Fund schemes that we have today?
Let’s break it down.
As per the latest AMFI data (Sep 2017) there are about ~2000 primary Mutual Fund schemes.
[Each primary Mutual Fund scheme (eg ICICI Prudential Value Discovery) will have several variants (Regular, Direct, Growth, Dividend Payout, Dividend Reinv etc). So the total number of scheme-variant combinations is as high as 10–12k or even more.]
The SEBI circular is aimed at reducing the number of primary schemes (the number of variants they can have remains unchanged) and it is only applicable to open-ended Mutual Fund schemes which are about 830 in number (less than half of total number of primary schemes).
In the circular, SEBI has defined the following groups and categories of MF schemes:
1. Equity Schemes - 10 categories
2. Debt Schemes - 16 categories
3. Hybrid Schemes - 6 categories
4. Solution oriented schemes - 2 categories (one each for retirement planning and children’s future)
5. Other schemes - 1 category for each index funds/exchange-traded funds (ETF) and fund of funds (FOF)
Also the rule for categorisation and rationalisation of Mutual Fund schemes is:
Only one scheme per category would be permitted, except:
i. Index Funds/ ETFs replicating/ tracking different indices;
ii. Fund of Funds having different underlying schemes; and
iii. Sectoral/ thematic funds investing in different sectors/ themes
So you can see this still permits a lot of Mutual Funds schemes per Mutual Fund company ~ 30-40 primary schemes easily. Given there are 42 Mutual Fund houses with the top 20 of them being the most active ones that still means we can have 600–800 primary schemes - not very different from where we started - may be 10–15% fewer.
It is definitely a step in the right direction but if SEBI wants to make a real dent in the number of schemes then they should reduce the number of categories further especially in the Debt group where anyway there are not huge differences between strategies of mutual funds.
Apart from this, the circular also lays down, for the first time, the definition of large cap, mid-cap and small-cap companies, so this will bring a much-needed uniformity in classification of Equity Mutual Funds (till now each Mutual Fund was free to use its own definition).
For the curious, here are the definitions adopted by SEBI:
a) Large Cap: 1st-100th company in terms of full market capitalization
b) Mid Cap: 101st-250th company in terms of full market capitalization
c) Small Cap: 251st company onwards in terms of full market capitalization
Mutual Fund companies have been given 2 months to review all their Mutual Funds and submit their proposals as to how they plan to align them to the said categorisation (merger/altering the nature of fund/closure) and they have been exhorted by SEBI to follow the circular not only in its word but also its spirit while doing so. Let’s see what they come up with.
Just in case you are wondering whether the Mutual Funds you have invested in on Goalwise might get the axe - that's not likely since the funds recommended by Goalwise are usually leading funds of their respective fund house with good assets under their management (AUM). This is more likely to affect smaller funds which will probably get merged into bigger funds at their company. In any case, as an investor your investment value remains unchanged even if your mutual fund scheme gets merged into another.
Here is a summary of the SEBI circular from the Telegraph:
Have questions? Let us know in the comments. We will keep you posted on this.
Link for the SEBI circular: Categorization and Rationalization of Mutual Fund Schemes