MF Re-categorisation: How It Impacts Your Investment Plan?

By Adhil Shetty | May 4, 2018

With the strict classification of schemes, fund houses may not be able to alter the investing style or focus of their schemes, as they did earlier.

MF Re-categorisation: How It Impacts Your Investment Plan?

Market regulator SEBI in October last year directed all Mutual Fund companies to redefine fund categories and rationalise all the Mutual Fund schemes. The SEBI’s purpose for asking Mutual Fund companies to change the name of their funds was to alleviate confusion and align the fund name to their investment objective. For example, a Mutual Fund company having more than one small and mid-cap fund can confuse the investors, so such multiple funds within same AMC would be either merged, seize or alter its feature to align within a class as permitted by the SEBI.

How Re-categorisation Will Be Done?

Now Mutual Fund companies can list their funds only in five broad categories, i.e. Equity scheme, Debt scheme, Hybrid Scheme, Solution Oriented Scheme and Other Scheme. Equity scheme is further bifurcated into 10 sub-categories like Large Cap, Midcap, Multicap etc., whereas debt schemes are further divided into 16 sub-categories and Hybrid schemes are split into 6 sub categories. In total there would be 36 sub-categories of all the schemes in Mutual Fund.

Under categorisation, Mutual Fund schemes are defined as per each sub category on the basis of its portfolio structure. For example, the large cap mutual fund will be those schemes which would have at least 80% exposure to large cap stocks, similarly, mid cap fund would require at least 65% exposure in the mid cap stocks.

Impact Of Re-categorisation On Investors

Comparing the mutual fund schemes in the existing setup is not easy for the normal investors because it is very difficult to identify schemes of different mutual fund companies whose structure and investment pattern are similar. Post re-categorisation it would be very easy for the investors to identify similar schemes across mutual fund companies and compare their performance with each other. At present mutual fund companies have multiple schemes in the same category which easily confuses the investors. Mutual fund companies use it as a trick to attract fresh investment from investors by presenting the same type of scheme in a different name. Now, schemes which are having same features will come into a single category, therefore it’ll help the investors to avoid confusion due to duplication.

If you are an existing investor and there is a change in the categorisation of your fund, then you may now need to relook your investment strategy because there may be considerable change in the investment pattern such as shifting completely from large cap to midcap or vice-versa. Also, when the fund would initiate the standardisation process, then it may need to sell off a portion of its portfolio and replace it with another stock, this process may increase the cost of mutual fund scheme which may finally increase the cost for investors.

With the strict classification of schemes, fund houses may not be able to alter the investing style or focus of their schemes, as they did earlier. For instance, mid-cap funds stray into the large-cap territory or across market caps, in response to market conditions, which dramatically alters their risk profile. Now, funds will be forced to maintain their investing focus. Any drastic change in style will constitute a change in the fundamental attributes of the scheme, which would have to be communicated to the investors.

Options Available To You

SEBI’s move is aimed at improving the investment scenario and bring in more transparency for the investors. With better clarity and standardisation, it will be easier for the investors to distinguish between performer and laggards. All the existing investors will be informed by their mutual fund companies about changes that would happen in their structure or name due to the re-categorisation process. If your existing fund has performed well till now and no major change is happening in their objectives like converting from large cap to mid-cap or vice versa, then you may consider staying invested. You must review your investment portfolio to align it with your financial goal once the re-categorisation process is completed.

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Adhil Shetty

About Adhil Shetty

Adhil Shetty is the Founder and serves as the Chief Executive Officer of BankBazaar.com. Adhil has a Master’s degree in International Relations with a specialization in International Finance and Business from Columbia University in the City of New York, and a Bachelor’s degree in Engineering from the College of Engineering Guindy, Anna University. Adhil is an expert in Personal Finance (Car loan/Home loan and personal loan) and he majorly consults on investment and spends rationalization for the Indian loan borrowers. His guidance is number based with real time interest rate calculations and hence useful for consumer’s real time query.

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