Over the past couple of months, investors have seen a flurry of email messages from various fund houses as well as research teams like ours, informing them of name or attribute changes of almost all mutual funds in the industry. While there is a general understanding that this is in response to SEBI's circular from October 2017 that calls for re-categorization of open-ended mutual fund schemes, investors are largely confused about what, if anything, they need to do.
Our largest effort in this direction is our ongoing work on preparing the Research Desk's perspective on mutual fund categorization, after which we will be releasing our recommendations on the modified schemes. Until that is done, however, we would like to assure our investors that there is no cause for immediate or knee-jerk reactions. Much information is awaited on mutual fund schemes that are still being merged or modified. Any rebalancing of portfolios should only be undertaken after understanding exactly how the attributes of all the schemes under consideration have changed.
What's Going On
Not only is there no need for panicked reactions, investors can also be assured of this being a positive change. SEBI's objective in requiring re-categorization of mutual funds is to ensure that along with singing "Mutual Funds Sahi Hai", investors can also now hum "Mutual Funds Complicated Nahi Hai"!
Until the end of 2017, the classification of mutual fund schemes was a subjective call taken by research teams based on the Scheme Information Documents (SIDs). This could be at variance with the way the fund houses would classify their fund. Also, for each category of funds, a fund house could have more than one scheme. So when teams like ours would work on models to identify recommended funds, sometimes the top three funds in a particular category would belong to the same fund house. For example, in the large cap category, the top three funds could belong to the same fund house, having three different strategies: (I) investing into the top 50 stocks of the benchmark index; (II) investing into the next 50 stocks; and (III) investing into the top 100 stocks of the benchmark index.
Such a situation presents a dilemma for us as we are of the view that if we are recommending five large cap funds, they should all belong to different fund houses. These have been longstanding issues in the Indian mutual fund industry and the regulator has finally decided to uproot the problem.
A circular was issued in October 2017 wherein SEBI has specified the different categories of open-ended mutual funds, defined with strategies as well as the type of stocks or instruments across equity and debt funds. The biggest impact of such rationalization is that a fund house can now have only one fund in each category, with the exception of Index Funds or ETFs tracking different indices; Fund of Funds having different underlying schemes; and sectoral/thematic funds investing into different sectors or themes.
Broad Classification of Mutual Funds