Categorisation of Mutual Funds by SEBI

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The recent re-categorization of some of the mutual funds in India by SEBI has evoked concern among many investors. This is mainly because new schemes have undergone major changes in recent years to fit within SEBI’s guidelines. While it has brought a big change in the industry, it has also stirred some confusion amongst investors.

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Why are mutual funds being re-categorized?

The capital market regulator, Securities and Exchange Board of India [SEBI], came up with the idea of categorizing and rationalizing the functioning of Asset Management Companies [ASC]. Under this regulation, SEBI did two things

First, it divided the industry into 36 categories of fund. This was done to bring about uniformity in functioning, and allow every fund house to have only one scheme in each category. Fund houses can accordingly place their funds in respective categories. Experts believe that this breakdown will make the process extremely organized and clutter-free.

Prior to this, mutual fund companies were releasing too many new schemes that replicated older ones. These duplicate options eventually led investors down the same road, causing confusion.

Secondly, SEBI tightly detailed and defined the 36 categories to the fund houses. Many believed that this move was necessary, as the old business practices were outdated and in dire need of change.

Further, SEBI also classified stocks in categories such as ‘large cap’, ‘mid-cap’ and so on. It has even predefined the percentage of stocks that a balanced fund can hold. To put it simply, SEBI has cleaned up a big, cluttered house and placed things in neatly labelled boxes.

Where are these norms applicable?

SEBI has identified specific circumstances where these new norms will be applied

  • All open-ended schemes of all prevalent mutual funds.
  • All open-ended schemes wherein the fund house is going to file a draft of the scheme document.
  • All open-ended schemes for which SEBI has sent out the final recommendation, but is yet to be implemented by the fund house.
  • All open-ended schemes wherein the fund house have already filed a draft of scheme as required by SEBI.

What are the latest schemes in the market?

The newest categories along with their classifications, based on the regulations of SEBI, are listed below:

  • Equity funds – These types of funds are divided in ten categories – small-cap fund, mid-cap fund, large-cap fund, large and mid-cap fund, multi-cap fund, value fund, contra fund, dividend yield fund, sectoral or thematic fund, focussed fund and ELSS.
  • Debt funds – These types of funds are divided in sixteen categories – liquid fund, short duration fund, low duration fund, long duration fund, medium duration fund, overnight fund, credit risk fund, corporate bond fund, dynamic bond fund, ultra-short duration fund, money market fund, banking and PSU fund, floater fund, Gilt Fund and Gilt fund with ten year constant duration.
  • Hybrid funds – These types of funds are divided in six categories – equity savings fund, aggressive hybrid fund, conservative hybrid fund, balanced hybrid fund, multi-asset allocation fund, balanced advantage fund and arbitrage fund.
  • Solution oriented funds – These are divided in two categories – children’’s fund and retirement fund. Generally, these funds come with a 5-year lock-in term.
  • Other funds – These types of funds are divided in two categories – fund of funds and index funds.

After this change was brought into effect, fund-advisors have continually spoken about how it’s been able to bring an exceptional change in the system. It has not only minimized confusion, but also made the entire process transparent for investors. Now that you’re familiar with these mutual funds basics, and the several types of funds available, you too can make an informed decision while investing.