Sebi Norms On Categorisation Of Funds To Be A Game-Changer

The Securities and Exchange Board of India (SEBI) recently came out with a circular on categorisation and rationalisation of mutual fund schemes.

- Sudipta Mitu

The thrust of this circular is that the schemes launched by fund houses should be very distinct from each other in terms of asset allocation and investment strategy. Another aim of the circular is that schemes belonging to the same category from different fund houses should have similar characteristics.  This circular is expected to have a major impact on the mutual fund industry and its investors.

Key provisions of the circular

SEBI has classified mutual funds into five categories: equity, debt, hybrid, solution oriented, and other schemes. These five categories have been further into 36 sub-categories. Fund houses have been given two months from the date of the circular to bring all the schemes in line with the categories created by SEBI. The circular clearly states where each category of funds can invest. Large-cap funds, for instance, can invest in the first to 100th company by market capitalisation; mid-cap funds in 101-250th company by market capitalisation; and small cap funds in the 251st company onwards by market capitalisation.

Fund houses will be allowed to have only one scheme per category. Older and bigger fund houses in particular have many funds within each category. They will have to merge their schemes into one. Some exceptions have been allowed. In the case of index funds and exchange traded funds (ETFs), fund houses have seen allowed to launch multiple products tracking various indices. In the case of fund-offunds, fund houses can launch multiple products with different underlying schemes. In the case of sector and thematic funds also, fund houses have been allowed to launch multiple schemes that will invest in various sectors and themes.