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The schemes a mutual fund introduces should be clearly distinguished from one another in terms of asset allocation, investing approach, etc. Also, there is a need to standardise the traits of comparable sorts of schemes introduced by various Mutual Funds. It would guarantee that a mutual fund investor has the ability to assess the various possibilities before making a well-informed choice to invest in a scheme.
The problem was discussed in the Mutual Fund Advisory Committee[1] (MFAC) to bring about the desired uniformity in the practice across Mutual Funds and standardise the scheme categories and characteristics of each category.
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A customer’s capacity to select a mutual fund that best suits his needs and circumstances should be made simple by SEBI. The regulator claims that AMCs use these names as marketing strategies to attract clients, and many of the new customers could not fully understand the programme. Thus, SEBI expects mutual fund firms to differentiate between various plans regarding asset allocation and investing approach. The regulator also seeks to establish consistency among comparable plans introduced by other mutual funds so that buyers can compare goods more easily.
Because of this, in its circular mutual fund classification from October 6, 2017, SEBI not only established the types of schemes but also described each scheme. The regulator required fund houses to divide all of their current and upcoming projects into five main categories and 36 subcategories.
A mutual fund company is only allowed to have ten categories and must select between value and contra, even though SEBI has determined that there are 11 categories under equity schemes. Still, ten categories seem excessive, but it is reasonable to have potential differences in the strategy. To help with this, SEBI has also clarified what Mid Cap, Large Cap and Small Cap are.
A total of 16 categories for debt schemes have been decided by SEBI. Sixteen categories is a high number for debt funds, especially when you consider how close their risk and returns are to those of retail investors. Overnight Funds and Liquid Funds are two similar categories. The same is true for the categories of money market and ultra-short-term debt funds.
A mutual fund business is limited to 6 categories and must pick between the balanced hybrid fund and the aggressive hybrid fund out of the total categories that SEBI has determined for hybrid schemes. Moreover, SEBI has classified arbitrage funds as hybrid funds.
Investors’ minds will be made clearer by SEBI’s categorisation and rationalisation of mutual fund schemes, which will also make it easier for them to choose a fund that meets their investment needs. We have outlined below how the categorisation has affected the mutual fund industry as a whole.
Shuffle in portfolios – Many current schemes’ portfolios will need to be reorganised, which will inevitably cause short-term agitation in the mutual fund industry.
Improved awareness of risk – Due to the clearly specified characteristics of each scheme, investors can now match their return expectations with their level of risk tolerance to determine which fund they should invest in.
Reduced mis-selling – The categorisation of products will reduce mis-selling because, in the past, many investors were tricked into participating in schemes that did not suit their needs. Now, even inexperienced investors may recognise, understand, and choose the best fund for their needs.
Rise under Assets Under Management (AUM) fund – Assets under management of the fund will rise as a result of the new categorisation, which will result in the merger of numerous schemes. This is due to the fact that the target plan will consolidate the assets of the previous scheme. As a result, fund managers will need to use their knowledge to manage the scheme’s rapidly increasing asset base.
Short-term results could be affected – Many funds would need to reshuffle their assets in order to comply with SEBI regulations. This would lead to a larger turnover, which would then have an effect on the short-term returns provided by the funds.
Overall, the SEBI decision to reclassify mutual funds is a positive step. It forces fund managers to present investors with a distinct value proposition genuinely. The new categories may cause short-term disruption, but they are a step in the direction of educating investors and introducing uniformity to the mutual fund business in the long run.
Also Read:How Does a Mutual Fund Operate?Procedure for Mutual Funds Registration in IndiaRegistration and Regulation of Mutual Funds – SEBI
I am a driven and meticulous professional who completed B.Com BL (Hons) from Tamil Nadu Dr. Ambedkar Law University and completed Master of Laws in specialization (Criminal Law with Cyber Crimes). I have extensive experience in Criminal Litigation and want to utilise my legal knowledge in writing also I have proficiency in writing legitimate content with comprehensive research. My core areas of interest are Business Law, Intellectual Property Rights, and Cyber crimes.
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