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Financial adviser Dick Mody discusses SEBI’s new guidelines for mutual funds

 
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:

  • Rationalisation of schemes into below categories and subcategoriess:

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)

  • Each fund house can have only one scheme in each category. So only one large-cap fund, only one tax-saving fund, etc with the exception being sector funds, exchange traded funds and fund of funds.
  • Once such a scheme has been classified to a category, it cannot change the same and the fund manager has to comply with the mandate.
  • Unlike the past, now SEBI has clearly set the definition for each category and each fund house does not have the authority to change it.

The advantages

The new guidelines bring in several advantages for investors, namely:

  • Fund categories are simpler to understand.
  • Risks and rewards associated with each category is easier to explain, helping in quicker decision making.
  • Ambiguity and chaos created by “unnecessary and high-pitch” advertisement campaigns gets substantially reduced.
  • Onus on the fund manager for his performance increases several-fold.
  • Long list of duplicate schemes will now be merged or reclassified.
  • Easier to compare similar schemes across fund houses.

WHAT SHOULD BE AN INVEST OR’S STRATEGY?

STEP 1

Carefully understand the changes in the schemes held in the portfolio (in case of doubt, contact us or your financial advisor)

STEP 2

Status quo if the change is only in the name

STEP 3

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

EXAMPLES OF A FEW SIGNIFICANT CHANGES IN MF SCHEMES

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:

EQUITY FUNDS

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

HYBRID FUNDS

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

Photo: iStock
Featured in Harmony — Celebrate Age Magazine
June 2018