Everything you Need to Know About the New Categorization of Equity Mutual Funds

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SEBI introduced the definitions of various categories of mutual funds. How will it affect the equity funds? Why are the names getting changed? What are its impacts? Many more questions must be popping up in the minds of investors. Well, here are your answers!

Mutual fund investors might be aware of the changes made in the names and categories of some of the funds recently. The changes have created an uncertainty among the investors who have invested in the schemes which are to be re-categorized, while some discern this as an opportunity to extend their profit margin. This rationalization has a vital mission, and it can affect the investors as well as mutual funds’ asset management companies in multiple ways.

New Categorization of Equity Mutual Funds

SEBI released the new categorization of equity mutual funds on October 6, 2017. According to it, every category of equity mutual funds has been strictly defined with following criteria:-

• Large Cap Funds – At least 80% of the corpus in large cap companies
• Large & Mid Cap Funds – At least 35% of the corpus, each in large and mid cap companies
• Mid Cap Funds – At least 65% of the corpus in mid cap companies
• Small Cap Funds – At least 65% of the corpus in small cap companies
• Multi Cap Funds – At least 65% of the corpus in equity instruments & no market-cap wise restriction
• Dividend Yield Funds – At least 65% of the corpus in equity instruments of dividend yielding stocks
• Value / Contra Funds – At least 65% of the corpus in equity instruments but, a fund house can either offer a value fund or a contra fund but not both
• Focused Funds – At least 65% of the corpus in equity instruments but can have a maximum of 30 stocks
• Sectoral / Thematic Funds – At least 80% of the corpus in chosen sector stocks
• ELSS - At least 80% of the corpus in equity instruments

What was the Reason?

Some investors are still not clear of what forced SEBI to take such a drastic decision to rationalise and categorise mutual funds, which has affected the present and future of a lot of schemes. The definitions were not voluntary, but it was the demand of the situation. The aim is to make the investments in mutual funds a more straightforward task for the investors, but the reasons were multiple:-

• Drifting Mandate: Many of the mutual funds were roving away from their aim with which they originated.
• Easier Aiming: As the mutual funds were free to manage the corpus, investors were unable to match their investment goals with that of funds.
• Increasing Complexity: Mutual Fund companies were increasing the number of schemes by offering many funds in the same category, which was increasing the tension of which one to pick among investors.

Are the Impacts Positive or Negative?

The re-categorization will not only change the names of the schemes but will have multiple effects on investors as well as mutual fund companies. But how? Let’s discuss it one by one.

1. Fewer Options: The categories are strictly defined. Hence, there will be less complexity in deciding the scheme which is oriented to the goal of the investor. The fund houses, on the other hand, will have to merge or re-categorise the similar schemes which can decrease the growth due to higher AUM.
2. No Freedom: The fund managers can no longer place the corpus according to their wish and have to follow certain guidelines. This in turn, may or may not slow down the growth of NAV depending on the category of the fund. Investors, in this case, need not worry about the allocation of their corpus.
3. Easier Comparison: Since there will be schemes offered by different AMCs of the same category and the same goal, it will become easier to compare them from each other and their benchmark. This will lead to a rise in the competition among AMCs and provide a better investment option to the investors.
4. Mandate Review: There will be a lot of changes in names, categories, portfolio, goals of the schemes. Hence, the investor needs to recheck the portfolio and mandate of the fund and make a decision either to move away or stick with the fund. This will not affect the AMCs majorly, but the investor might suffer from the hustle and bustle.

Hence, we can infer that the majority of impacts are positive on the investor side and is more burdening for the mutual fund houses. SEBI aims to strengthen every individual with financial stability by attracting more investors to the mutual fund industry and providing them more natural investment strategies.

We hope you are clear about the rules and regulations which are imposed recently. To get more information on this or clear any of your doubts concerning mutual fund investments, connect with the experts of MySIPonline at the drop of a hat.