MF Schemes become transparent following categorization and rationalization directive by SEBI
Mutual Fund houses are in the process of reviewing and revising the fundamental characteristics of various MF schemes. Some of the schemes are renamed, similar schemes are being merged and some are re-categorized. The process is undertaken to ensure that the features of the schemes are in line with the directives issued by the Securities Exchange Board of India (SEBI) on categorization and rationalization of mutual fund schemes, last year.
SEBI directive issued last year required MF schemes to be categorized under five groups and defined characteristics of scheme types. Norms were also put in place to define large caps, mid-caps and small caps.
Mutual fund investment has been becoming one of the most sought after investment options in India for some time. Mutual fund houses have been leveraging this interest by announcing different schemes to lure investors. But many of the schemes offered same product with minor variations. This has been in effect creating confusion among investors making it difficult for them to select appropriate schemes. Mutual funds invest mainly in equity and in capital market, return and risk are interlinked. More the risk, more the return. Lack of transparency in scheme details may lead to investors selecting schemes not matching with their risk profile and risk appetite. The resultant mis-selling can bring bad name to mutual fund industry in long run there by affecting the confidence of investors.
For this reason, industry experts have welcomed the timely intervention of SEBI. Securities Exchange Board of India is the regulator of mutual fund industry. Through the directive, SEBI has tried to bring uniformity and transparency in categorization of schemes. This in turn empowers investors to have better comparison of different schemes.
Major aspects covered by the SEBI directive
Through the directive, SEBI has tried to bring better clarity on the following aspects.
a. Defines five categories for classification of all schemes. The five categories are
• Equity schemes
• Debt schemes
• Hybrid schemes ( a mix of equity and debt),
• Solution-oriented schemes ( For special purposes like education, retirement etc) and
• Other schemes (index funds, exchange-traded funds etc).
b. Defined sub-categories like large caps, mid-caps and small caps.
c. Defines the individual attributes of each of the scheme types and portfolio composition to be named under said scheme. For example, presence of 80% of large cap shares in the portfolio is required to classify the scheme as large cap fund.
MF houses are required to comply with the directive of the regulator. To fall in line with the directive, they have been making revisions in their schemes, renaming the schemes, regrouping categories or merging some of the schemes. They have also been communicating the changes to individual investors. It is expected that minimum 30% of schemes may be affected in some manner.
While SEBI has done their part, investors also are required to be vigilant. Investors must go through the communication forwarded by MF houses, analyze the changes, assess the composition post revision and ensure that the scheme features match with their risk appetite. All MF companies are publishing the changes in their websites too. Anyways, transparency of schemes and healthy competition among mutual fund houses will benefit the investor in long run.
