Compared to its global peers, India ranks high when it comes to domestic savings rate and overall savings pool. Yet, being a conservative society, the dominance of traditional financial instruments such as bank deposits and public provident fund (PPF) over modern tools such as mutual funds (MF) and unit-linked insurance plans (ULIP) still prevails.
The lack of enthusiasm for modern financial instruments can be attributed to a dearth of market awareness and confusion created by scores of schemes and strategies. Moreover, terminologies used while marketing these products can be confusing too. Adding fuel to the fire, sometimes MFs try to re-brand with a fancy name.
ENTER SEBI
Financial gurus, distributors, asset management companies and industry associations have long debated and tried to resolve the above issue without much success. However, we see a ray of hope in the form of market regulator Securities and Exchange Board of India’s (SEBI) guidelines to mutual funds to categorise and rationalise their schemes by June 2018.
Here is a summary of SEBI’s announcement:
Equity (10 subcategories)
Debt (16 subcategories)
Hybrid (six subcategories)
Solution-oriented (two subcategories)
Others include index funds, exchange traded funds and fund of funds (two subcategories)
(See Appendix 1 for more details)
The advantages
The new guidelines bring in several advantages for investors, namely:
WHAT SHOULD BE AN INVEST OR’S STRATEGY?
Carefully understand the changes in the schemes held in the portfolio (in case of doubt, contact us or your financial advisor)
Status quo if the change is only in the name
If the key attributes have changed and don’t meet your financial goals any longer, you need to reallocate your portfolio
Important: There is no need to panic as the changes seen so far are in a few funds, whereas most schemes continue to get only consolidated.
In short, investments should be based on well-researched facts, a fair understanding of the schemes and not rumours. In case you have any query regarding long-term investing, feel free to write to me at dhm@ethicaladvisers.in
Current scheme name | Current category | New scheme name | New scheme category |
HDFC Multiple Field – Plan 2005 | Hybrid debt: Conservative | HDFC Multi-Asset | Multi-Asset Allocation |
ICICI Prudential MIP 25 | MIP/Debt | To be merged with ICICI Prudential Regular Savings | Credit Risk Fund |
DSP BlackRock Treasury Bill Fund | Debt: Gilt short-term | DSP BlackRock Savings Fund | Debt: Money Market Fund |
UTI Equity Fund | Equity: Large cap | UTI Equity Fund | Equity Multi-Cap Fund |
Reliance NRI Equity Fund | Equity: Large cap | Reliance BalancedAdvantage | Hybrid: Dynamic Asset Allocation |
Franklin India Opportunities Fund |
Equity: Diversified | Franklin India Opportunities Fund | Equity: Sectoral/ThematicFund |
Appendix 1
Details of major equity and hybrid categories as proposed by the SEBI circular:
Category | Portfolio construction | SEBI defines stocks as | Stocks with market capitalisation |
Large cap | Minimum 80% assets in large-cap stocks |
1st – 100th company by market capitalisation |
1st Reliance Industries (₹ 5.4 lakh cr) 100th Vakrangee Ltd (₹ 29,304 cr) |
Mid cap | Minimum 65% assets in mid-cap stocks |
101st – 250th company by market capitalisation | 101st – Colgate-Palmolive (India) Ltd (₹ 29,255 cr) 250th – Manappuram Finance Ltd (₹ 8,584 cr) |
Small cap | Minimum 65% assets in small-cap stocks | 251st company onward by market capitalisation | V-Guard Industries Ltd (₹ 8,580 cr) |
Multi cap | Minimum 65% assets in equity across market capitalisation | NA | — |
Large and mid cap | Minimum 35% in large-cap and 35% in mid-cap companies | NA | — |
Focused fund | Maximum number of stocks 30 irrespective of market capitalisation | NA | — |
*Stocks are as per AMFI’s list of average market capitalisation of listed companies during the six months ended 31 December 2017
Category | Portfolio construction | Description |
Conservative hybrid | Equity – 10 to 25% and debt – 75% to 90% | These funds will be considered as debt-oriented for tax purpose. MIPs will be categorised under this category |
Mid cap | Equity – 40 to 60% and debt – 40% to 60% | These funds will be considered as debt-oriented for tax purpose. No arbitrage would be permitted in
this scheme |
Small cap | Equity – 65 to 80% and debt – 20% to 35% | These funds will be considered as debt-oriented for tax purpose. Current balanced funds would come under this category |
Multi cap | Equity – 65% and debt – 10%, and rest in hedged & unhedged instruments | These funds will be considered as debt-oriented for tax purpose |
*Mutual funds will be permitted to offer either balanced hybrid or aggressive hybrid
Dick Mody, a 25-year veteran in the Indian equity markets, is the founder-CEO of Ethical Advisers. Write to us with your financial queries at contact.us@harmonyindia.org and Mody will answer them in this column. You can also reach him directly at dhm@ethicaladvisers.in or visit www.ethicaladvisers.in
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