SEBI has come out with the much-anticipated circular on scheme mergers. In order to bring uniformity in the categories of schemes across industry, SEBI has come out with clear cut definitions in each scheme categories. It has broadened the categories in equity and debt fund categories. For instance, equity schemes will have ten categories while debt funds will have 16 categories.
The ten types of equity schemes will be - multi cap, large cap, large & mid cap, mid cap, small cap, dividend yield, value fund/contra fund, focused fund, sectoral/thematic and ELSS. Debt schemes will have 16 categories - overnight fund, liquid fund, ultra-short, low duration, money market, short duration, medium duration, medium to long duration, long duration, dynamic bond, corporate bond, credit risk, banking and PSU, gilt, gilt fund with 10-year constant duration and floater fund.
Hybrid schemes will have six categories– conservative hybrid fund, balanced hybrid fund/aggressive hybrid fund, dynamic asset allocation or balanced advantage, multi asset allocation, arbitrage fund and equity savings.
SEBI has come out a new category called solutions oriented schemes - retirement fund and children’s fund. Index fund and fund of fund schemes fall under ‘other scheme categories’. The circular is applicable all existing open- end funds including those for which offer documents have been filed with SEBI.
Barring index funds/ETFs, fund of funds and sectoral/thematic funds, SEBI will now allow only one scheme per category. SEBI has given AMCs two months’ time to send their proposals to it on rationalizing their existing schemes.
Definition of large cap, mid cap and small cap:
- Large cap: 1st -100th company in terms of full market capitalization
- Mid Cap: 101st -250th company in terms of full market capitalization
- Small Cap: 251st company onwards in terms of full market capitalization
Mutual funds would be required to adopt the list of stocks prepared by AMFI based on the following points:
- If a stock is listed on more than one recognized stock exchange, an average of full market capitalization of the stock on all such stock exchanges, will be computed;
- In case a stock is listed on only one of the recognized stock exchanges, the full market capitalization of that stock on such an exchange will be considered.
- This list would be uploaded on the AMFI website and the same would be updated every six months based on the data as on the end of June and December of each year. The data shall be available on the AMFI website within 5 calendar days from the end of the 6 months period.
Fund houses will be required to rebalance portfolios within a period of one month based on the updated list put out by AMFI.
Industry officials welcomed SEBI’s move. G Pradeep Kumar, CEO, Union Mutual Fund believes that it is a far-reaching move which will create a level playing field in the industry. “We tell investors it is difficult to choose from 1000 stocks so you invest in mutual funds. But mutual funds have more than 1000 open end schemes which only ends up confusing investors. Fund houses which have multiple schemes with similar looking strategies will have to merge their schemes. This will bring down the number of schemes in the industry. Some fund houses have more than 16 categories of schemes within the debt category so the schemes will come down even in this category. Just because SEBI has created more categories in debt, it does not mean that all AMCs will launch 16 schemes in fixed income category. It is an AMC’s call.”
Aashish Somaiyaa, MD and CEO, Motilal Oswal AMC seconded Pradeep Kumar’s views. “The regulatory direction is supportive of our belief that for investors to make optimal choices, the industry needs to offer fewer well defined choices rather than a plethora of clones.”
In an interview with Morningstar, Anup Maheshwari, CIO- Equities, DSP BlackRock MF said that having fewer schemes makes it a lot easier to focus on fewer products and grow existing funds rather than keep growing through new fund offers. “From a pure cost point of view, it makes more sense for AMCs to consolidate schemes. Many new funds were launched by AMCs with very different definitions of what is large cap, small and mid-cap. Now there will be better consistency in comparing the right type of products with similar products. You could pick out from a plethora of funds and there was something always performing well. Now you can see the performance in a much sharper manner.”
