Adieu Mutual Funds Mayhem: New SEBI Rules To Make Investments Simpler

By | October 18, 2017

An abundance of similar Mutual Fund schemes and resistance from companies to consolidate them into a singular product heap have caused mayhem for investors in the Mutual Funds landscape in India for years. Thankfully, all this confusion will end once the new rules mandated by SEBI kick in.

Adieu Mutual Funds Mayhem: New SEBI Rules To Make Investments Simpler

Even with our curiosity about money matters and financial literacy having considerably grown over the years, it’s hard to keep up with changes being introduced in the capital market every now and then. It’s harder still, to navigate the dynamic landscape of Mutual Fund investments and to know which Mutual Fund should be your top pick among the plethora of options that companies offer you. Here’s a ready reckoner of everything that you need to know about Mutual Funds and the recent changes marking this landscape in India.

What are Mutual Funds?

Mutual Funds (MF) are market-linked funds that shore up money from a pool of investors. These are offered by companies that are registered with the Securities and Exchange Board of India (SEBI) and are thus, guided by regulations introduced by it.

Mutual Funds are operated by fund managers who invest the money in various securities depending on the nature of the fund- debt or equity. Subject to the vagaries of the market, these funds generate returns that can either be positive or negative. To redeem returns from Mutual Funds, investors can choose from two options – the growth option that funnels returns back into the fund and the dividend option where they get returns in the form of periodic payments. Here’s an A-Z guide on Mutual Funds for those who want to know more.

Additional Reading: Understanding Mutual Funds

Quick pointers before you take the Mutual Funds plunge:

Pooling your finances in any investment vehicle should be preceded by a careful analysis of the options that are available with you. Here’s a list of parameters you should consider before ploughing your finances in Mutual Funds:

  1. Returns and performance of the fund: A good way to understand if the fund will meet your investment objectives is to check the returns of the fund over a period of 5 years and its ranking among peers. Comparing the performance of the scheme with its benchmark which can be found in the Mutual Fund offer document is also helpful.
  2. Total expense ratio (TER): Total expense ratio is a measure of the total cost of a fund to the investor that may include various fees like purchase, redemption etc. The TER is calculated by dividing the total annual cost by the fund’s total assets averaged over that year, and is denoted as a percentage. Funds that do well are able to attract a lot of investors and as its assets increase, its asset management charges dip considerably. Opting for funds that have a low expense ratio is one way of securing your investment.
  3. Exit load: Exit load is the amount that the fund charges on purchase/sale/transfer of fund units by investors within a specific duration stipulated by the fund. If you decide to sell within the stipulated period, it’s a good idea to check to what degree the exit load eats into the value of your investment.
  4. Nature of fund: Understanding the nature and risk profile of the fund prior to investment is crucial. Debt funds are low-risk funds that offer low returns whereas equity funds carry high risk but tend to offer comparatively higher returns.

Additional Reading: What To Remember When Investing In Mutual Funds

Recent changes in the Mutual Funds landscape in India:

After several failed attempts at nudging Asset Management Companies (AMCs) to reduce the clutter of similar schemes under one category and to merge them under one product heap, SEBI introduced a slew of measures in September that stipulate the categorisation of Mutual Funds.  Currently, the 42-member Mutual Fund industry in India handles over INR 19.5 lakh crore in assets across 2,000 schemes. SEBI’s move can be seen as an effort to reduce ambiguity and introduce more transparency for investors as often they have to choose from several similar schemes under one category that causes confusion. Interestingly, the govt. prepared the ground for Mutual Fund scheme mergers by removing tax anomalies in the previous two budgets.

Additional Reading: 10 Benefits Of Investing In Mutual Funds

What are the changes?

  1. Mutual Fund schemes will now be sorted into three categories- equity, debt and hybrid which will be further classified into subcategories as per the investment mandate.
  2. Under the equity category, there will be 8-10 divisions such as large-cap, multicap, mid-cap and small-cap funds among others. In debt, there will be around 16 categories such as liquid, ultra-short term, and dynamic schemes among others. In hybrid, there will be four subsections depending on the scheme’s exposure to stocks and bonds.
  3. SEBI has also mandated that Mutual Funds should benchmark their schemes against the Total Return Index (TRI), a benchmark that captures dividend income and gives investors a truer picture of the fund performance with respect to the benchmark.

Additional Reading: Tax Saving Mutual Funds

Although the date of enforcement of these rules hasn’t been confirmed yet, if you’re an investor, it is advisable that you stay up to date with Mutual Fund changes and check if the merged fund is an appropriate fit for your investment capabilities and objectives. If the new fund meets your requirements, then you can continue the fund without any tax implications but switching over to another fund would attract tax expenses. Find out which scheme suits your investment objective and how you can diversify your portfolio by clicking on the button below.

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