The Securities and Exchange Board (Sebi) has, in a circular, revamped framework for classification of mutual fund schemes, introducing a new life cycle funds category and scrapping the existing solution-oriented schemes segment with a view to ensuring “true-to-label” positioning of the schemes, curbing exaggerated return claims and enhancing uniformity and investor protection.
Under the revised structure, MF schemes are broadly classified into five main categories— equity, debt, hybrid, life-cycle and other schemes—along with fund of fund schemes and passive schemes such as index funds and exchange-traded funds.
Fund managers and industry experts don’t see much impact of the new rules on investments, including those schemes of funds banned by the regulator. A Balasubramanian, chief executive of Aditya Birla Sun Life Mutual Fund and a former chairman of the Association of Mutual Funds (Amfi), says the impact on investors is expected to be minimal.
For investors, there is nothing significant that changes immediately with the new norms. From a money management point of view, portfolio allocation definitions become more uniform now. That is the main difference,” he says adding Sebi has given fund houses up to six months to align portfolios and reposition their schemes wherever required. In case of overlapping schemes, some mergers may take place.
“A few schemes here and there may get merged. But overall, it should not cause major inconvenience either to investors or to the industry,” he says.
For example, if a fund house runs two similar sectoral schemes with overlapping mandates, it may consolidate them into one. For an investor holding units in one of the merged schemes, the units will typically get mapped into the surviving scheme without requiring fresh action.
On the impact of now banned solution-oriented schemes, another industry veteran says earlier, retirement funds and children’s funds were run as separate solution-oriented categories. With the introduction of more structured age-based allocation categories, inflows into some older formats may be restricted.
According to him, certain existing schemes may be grandfathered, meaning existing investors can continue, but fresh inflows could be stopped after a transition period. “Time has been given for implementation. In some cases, inflows may be stopped. But existing investors are protected,” he says.
On the changes in sectoral and thematic funds, he says earlier, there were exposure caps within sector definitions. For example, limits existed on how much a fund could allocate to financial sector entities as a whole, and sometimes within sub-segments. But under the new framework, a mutual fund can launch a scheme investing exclusively in a single sector, such as financial services, subject to single-security limits. As per norms, exposure to a single security cannot exceed 12 per cent of the scheme’s assets.
“This gives flexibility. Earlier, due to sector caps, fund managers sometimes had to invest in other sectors even if opportunities were better in one sector. Now, exclusive sector funds can be structured more clearly,” he says.
Offerings a practical example of how it will affect your investments he says if you are a 35-year-old salaried professional investing through SIP in a multi-cap fund and a retirement-oriented fund, under the new rules, the fund will continue to invest across large, mid and small-cap stocks depending on the defined allocation norms. And the key difference is that the category definition is now more tightly interpreted across fund houses which reduces the risk of one multi-cap fund behaving very differently from another in terms of mandate.
If you are investing in a retirement fund that falls under a category being restructured now, another fund manager who has been in the industry for nearly three decades, the fund house may stop new subscriptions in that specific format and may either reposition it or migrate investors to a revised structure. However, your accumulated corpus remains invested and managed as per the updated mandate. He does not need to redeem unless he chooses to.
Similarly, if you are investing in a financial services sector fund, under the new rules, he says such a fund can now have clearer, exclusive exposure to financial sector companies, without the earlier sectoral caps from within. However, the 12% cap on a single stock ensures diversification within the sector.
Stating that the new norms brings in greater clarity and less confusion, Balasubramanian says one of the main objectives is to reduce varied interpretations across fund houses. “In our industry, sometimes interpretation varies from one fund to another. Market narratives also change. This circular clarifies things very clearly. It brings uniformity,” he says.