{"id":12236,"date":"2017-10-09T11:59:38","date_gmt":"2017-10-09T06:29:38","guid":{"rendered":"https:\/\/blog.fundsindia.com\/blog\/?p=12236"},"modified":"2019-06-06T18:05:47","modified_gmt":"2019-06-06T12:35:47","slug":"what-sebis-circular-on-scheme-category-definitions-implies-2","status":"publish","type":"post","link":"https:\/\/www.fundsindia.com\/blog\/mf-research\/mutual-funds\/what-sebis-circular-on-scheme-category-definitions-implies-2\/12236","title":{"rendered":"What SEBI\u2019s circular on scheme category definitions implies"},"content":{"rendered":"

For all open-ended schemes, SEBI has issued a circular that defines the characteristics of each mutual fund category across equity, debt, and hybrid schemes. Following is the background leading up to SEBI\u2019s decision, the circular\u2019s proposals, and the impact on investors.<\/p>\n

Background<\/h3>\n

The number of open-ended funds has been rising over the years, as investor interest picked up and AMCs sought to increase options for investors. This led to an increase in the number of funds offered by each AMC. This led to the following issues:<\/p>\n

To which category does the fund belong?<\/strong> Each fund needs to be bucketed into a particular category \u2013 that is, equity large-cap, equity mid-cap, equity multi-cap, liquid, ultra short-term debt, short-term debt, equity-oriented hybrid, debt-oriented hybrid, and so on. But there was no clear or single definition for a large-cap stock or a mid-cap stock or a small-cap stock. Consequently, there was also no definition of a large-cap fund, or a multi-cap fund, or a mid-cap fund and so on. Similarly, there was no definition of high credit risk or low credit risk, no clear distinction between the various types of hybrid funds and so on. Each AMC \u2013 and analysts and rating agencies such as Value Research or FundsIndia\u2019s own research \u2013 had their own definitions.<\/p>\n

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What is the difference between each fund? <\/strong>Funds follow a specific strategy to manage their portfolios. However, with a single AMC having several funds, this strategy clarity and the differences between each scheme was usually unclear. Some AMCs had portfolios that were very similar. Many funds also tended to change strategies depending on the market and thus the fund\u2019s category also was apt to change. AMCs acquiring other AMCs also led to duplicity of funds.<\/p>\n

This meant that there was no uniformity in category definitions. Therefore, comparison of funds became difficult for retail investors especially in the light of several hundred funds.<\/p>\n

SEBI\u2019s proposals<\/h3>\n

In order to address this issue, SEBI has defined both stock market capitalisations and fund categories. These proposals apply to only open-ended funds and not close-ended funds. Broadly, there are five main fund types and sub-categories within each, as follows<\/p>\n\n\n\n\n\t\n\n\t\n\t\n\t\n\t\n\t\n\t\n\t\n\t\n\t\n\t\n\t\n\t\n\t\n\t\n\t\n\t
Equity schemes<\/th>Debt schemes<\/th>Hybrid schemes<\/th>Solution-oriented<\/th>Other schemes<\/th>\n<\/tr>\n<\/thead>\n
Multi-cap<\/td>Overnight<\/td>Conservative hybrid<\/td>Retirement fund<\/td>Index\/ ETFs<\/td>\n<\/tr>\n
Large-cap<\/td>Liquid<\/td>Balanced hybrid\/ aggressive hybrid<\/td>Children\u2019s fund<\/td>FOF (Domestic\/ overseas)<\/td>\n<\/tr>\n
Large-and-midcap<\/td>Ultra-short duration<\/td>Dynamic asset allocation\/ balanced advantage<\/td><\/td><\/td>\n<\/tr>\n
Midcap<\/td>Low duration<\/td>Multi asset allocation<\/td><\/td><\/td>\n<\/tr>\n
Smallcap<\/td>Money market<\/td>Arbitrage<\/td><\/td><\/td>\n<\/tr>\n
Dividend yield<\/td>Short duration<\/td>Equity Savings<\/td><\/td><\/td>\n<\/tr>\n
Value\/Contra<\/td>Medium duration<\/td><\/td><\/td><\/td>\n<\/tr>\n
Focused<\/td>Medium to long duration<\/td><\/td><\/td><\/td>\n<\/tr>\n
Sectoral\/ thematic<\/td>Long duration<\/td><\/td><\/td><\/td>\n<\/tr>\n
ELSS<\/td>Dynamic bond<\/td><\/td><\/td><\/td>\n<\/tr>\n
<\/td>Corporate bond<\/td><\/td><\/td><\/td>\n<\/tr>\n
<\/td>Credit risk<\/td><\/td><\/td><\/td>\n<\/tr>\n
<\/td>Banking & PSU debt<\/td><\/td><\/td><\/td>\n<\/tr>\n
<\/td>Gilt<\/td><\/td><\/td><\/td>\n<\/tr>\n
<\/td>Gilt with constant 10-year duration<\/td><\/td><\/td><\/td>\n<\/tr>\n
<\/td>Floater<\/td><\/td><\/td><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n\n

Each category is now defined by SEBI. For example, a large-cap equity fund should have 80% of its portfolio in large-cap stocks. A small-cap fund should have 65% of its portfolio in small-cap stocks. A corporate bond fund should have at least 80% in highest-rated corporate debt. You can refer to the circular<\/a> for the full list of definitions of each category and stock market capitalisations.<\/p>\n

Importantly, each AMC can have only one fund in each category<\/strong> \u2013 except index funds\/ ETFs, Fund-of-funds, sector, and thematic funds where they can have as many as they wish.<\/p>\n

What\u2019s the impact?<\/h3>\n

AMCs have 2 months to fit their funds into each of these categories. It will involve working out which schemes to merge and which to retain, the strategy to follow, and adapting the portfolio in order to comply with the rules. AMCs need to submit this rationalisation of their schemes to SEBI, which will vet and approve of the changes. Once this approval is done, AMCs have 3 months to complete the realignment.<\/p>\n

For you, this is what it means:<\/p>\n