[Link].
in
Categorisation of
mutual fund schemes
What SEBI’s circular means
for investors and AMCs
November 2017
What does the SEBI
guideline say?
On 6 October 2017, the Securities and Exchange Board of India
(SEBI) issued a circular in order to rationalise and categorise
open-ended mutual fund schemes in India.
SEBI’s circular on mutual fund scheme categorisation and ratio-
nalisation aims at decluttering the existing industry by simplifying
mutual fund investments for investors and enhancing comparability
within the schemes offered.
We believe that the regulator has taken a positive step towards
scheme rationalisation. This action will act as a catalyst for the
growth of the mutual funds industry.
SEBI’s objective
Create uniformity in the
01 characteristics of similar
types of schemes.
Enhance transparency and
02 standardise disclosure
requirements.
Group and name mutual fund
03 schemes based on investors’
underlying investment
objectives.
04
Offer flexibility to investors
on the nature of investments
and risk exposure.
SEBI’s proposition
Categorisation of large,
mid and small cap
categories of stocks
01
Grouping of mutual fund
schemes into five broad
categories: Equity, debt,
hybrid, solution-oriented
and others 02
Naming convention of
schemes, especially debt
03
schemes, as per the risk
level of end investments
Categorisation of balanced
funds into three types:
Conservative hybrid fund,
balanced hybrid fund and
aggressive hybrid fund 04
What’s in it for investors?
Ease in comparing mutual fund
schemes offered by different asset
management companies
Enhanced transparency to ensure
that investors align their financial
goals and make right investment
decisions
Merging of various schemes might
bring uniformity in commission
paid by asset management
companies (AMCs)
Scheme merger will bring down
the number of portfolios to be
managed, thereby giving time to
fund managers to focus their efforts
on generating alpha
What investors need to
focus on
• Investors might have to bear the burden of capital gains tax
where they opt to exit from schemes in case of mergers.
• Fund managers may have to reshuffle scheme portfolios every six
months, which will increase their costs and impact their returns.
• The nature of risk carried by debt schemes may still not be
understood well by investors as simply changing the name might
not highlight the quantum of risk element in these schemes.
• Hybrid schemes, under the current categorisation, have been
defined. However, for an investor, the scheme differentiator will
still remain a concern.
Impact on fund houses
Churn in portfolio: Every six months, fund
managers may be required to reshuffle portfolios
based on investment categorisation (large, mid
and small) published by the Association of Mutual
Funds in India (AMFI). This may lead to higher
portfolio turnover and an increase in transaction
costs, directly impacting fund returns.
Risk of front-running: Re-categorisation of
certain stocks from large to mid, mid to small or
vice versa on a half-yearly basis may result in the
front-running of these stocks.
Increased cost due to scheme mergers: The
merger of schemes will result in the renegotiation
of distributor commissions and the management
of trails, thereby increasing transaction costs.
Shrinking of the mid-cap universe: Post SEBI’s
regulation, there will be only 150 companies
categorised under the mid-cap universe as
compared to the current 400 stocks, as a result of
which fund managers will have limited options to
invest under the mid-cap category.
Full market capitalisation instead of free float
for ranking: The new guideline categorises stocks
based on full market cap instead of free float. This
will create liquidity impact among stocks. Certain
stocks which may rank high in case of free float
might rank low under the full market cap method.
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© 2017 PwC. All rights reserved
Asim Parashar
Executive Director, Financial Services
Mobile: +91 98331 41065
[Link]@[Link]
Anish Chandra
Associate Director, Financial Services
Mobile: +91 98204 23594
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