New Classification Of Mutual Fund Will Help Investors

Mutual Funds’ Scheme Merger Will Have Positive Impact 

It is quite a cumbersome task to select an appropriate mutual fund scheme for investment out of almost 2000 mutual fund schemes of more than 40 fund houses. And this selection is tougher when you find that a company has launched similar schemes with slightly different names in the market. But now this problem will ease out in coming days after capital market regulator SEBI’s announcement of new classification of mutual fund schemes.

What Are New Classification Of Mutual Fund Schemes 

SEBI has clarified on 6th October that now mutual fund schemes will be classified in five segments only. These segments are Equity, Debt, Hybrid, Solution Oriented and Others. Under these broad five segments, there will be several categories. For example, there will be 10 categories in equity segment which include Multi cap, Large cap, Mid cap, Small cap and ELSS (Equity Linked Savings Scheme). Similarly, there will be 16 categories in debt segment which include Liquid, Ultra Short Duration, Money Market and Dynamic Bond. There will be 6 categories in Hybrid segment and two categories in Solution Oriented. Each fund house can operate only one scheme in each category. Though index fund, ETF (Exchange Traded Fund), Fund of Funds and thematic schemes will be out of purview of this rule.

How Will New Classification Of Mutual Fund Benefit Investors 

SEBI has asked fund houses to respond by 6 December 2017 with forward plan. In this plan, fund houses will have to explain how will they consolidate their existing mutual fund schemes. After having SEBI approval, fund houses will have to carry out the necessary changes in 3 months. This means that by mid-2018, the mutual fund industry will look different. But how will this new classification of mutual fund will help you, let’s see.

New Classification Of Mutual Fund: Confusion will be less

According to the AMFI- Association of Mutual Funds in India, there are 41 asset management companies or mutual fund houses in country. These houses are running 830 open end and 1095 close end mutual fund schemes. So much schemes create confusion in the mind of a common investor. After the New Classification Of Mutual Fund, the schemes will be decreased by 20-25%, which will make life easy for investors.

New Classification Of Mutual Fund: No Duplicacy 

Many a time, it happens that a mutual fund house launches more than one scheme under same category and those schemes are no much different from each other. I will make this clear by two examples. First example is of large cap fund category by SBI mutual fund. There are two large cap fund scheme launched by SBI MF- SBI Nifty Index Fund & SBI Magnum Equity Fund. Nifty 50 is benchmark for both the funds. And, if you see the share portfolio of these two schemes, you will find minimal difference. (See Table Below)

Head- Top 5 Stocks Of Portfolio 

SBI Nifty Index Fund                              SBI Magnum Equity Fund 

HDFC Bank                                             HDFC Bank

HDFC                                                     HDFC 

ICICI Bank                                             Reliance Industries

Bharti Airtel                                           ITC

Reliance Industries                                 ICICI Bank 

Source- Company Website 

Also Read: Guru Mantras For First Time Investors 

Similarly, in the midcap category there are two schemes by L&T mutual fund- L&T Midcap Fund & L&T Emerging Businesses Fund. You will find too much similarities in the stock’s portfolio of these two funds. The difference lies in the fact that in one scheme the investment in a particular sector varies from other. (See Table Below)

Head- Top 5 Sectors  Of Portfolio 

L&T Midcap Fund                              L&T Emerging Businesses Fund

Consumer Non-durables                      Industrial Products 

Industrial Products                             Bank

Finance                                             Chemicals 

Cement                                             Cement

Construction Project                           Consumer Non-durables 

Source- Company Website 

You can find such examples in almost all mutual fund houses’ one or another scheme.     

New Classification Of Mutual Fund: Large Cap Means Large Cap 

SEBI has defined the large cap, mid cap and small cap companies as well. This definition is according to the market capitalisation of listed companies. According to SEBI, the stocks of top 100 companies by market capitalisation will be called large caps. Companies having market cap ranking between 101 and 250 will be termed mid caps. And stocks of companies beyond the top 250 will be categorised as small caps. This list will be updated twice in a year on AMFI website- in June and September. After this the mutual fund houses will not be able to define the stocks as per their own definition. And they would have to invest in those shares only according to the mandate of the fund. It will not only help to rate the schemes but will also make it easy to compare the performance of different schemes under same category.

New Classification Of Mutual Fund: Return Will Be More 

After new classification of mutual fund, there are high chances that the return will improve. In fact, the expenses of mutual fund schemes are fixed as per the size of their AUM (Asset under Management). Fund houses can’t expend more than 2.5% on the asset of first 100 crores in case of equity funds, more than 2.25% on the next 300 crores, more than 2% on the next 300 crores and after that more than 1.75%. After merger of schemes and new classification of mutual fund, the AUM will be larger and expense ratio will be lowered. And, if expense ratio will be less, it will result in better return to mutual fund investors.

 

New Classification Of Mutual Fund: What Investors Should Do 

It is unlikely that any of the existing mutual fund schemes will be closed down, even then the investors should be in touch with their respective MF house. In order to meet SEBI norms, there would be some merger of schemes and new classification of mutual fund schemes. It is likely that some of the schemes will become bigger. After that, the existing investor should check whether the new scheme suits their comfort or not. If not, they will have to opt out of the merged scheme and reinvest that in other appropriate fund. But remember that the investor may have to pay tax on their investment according to the holding period and category of fund.

I hope that this article will help you to decide about your future investment decisions. If you do have any question regarding New Classification Of Mutual Fund schemes, please let me know. I will be happy to help you.

 

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