IANS:
Sebi Tightens Rules on Mutual Fund Classification and Overlaps
The recent regulatory changes have introduced tighter rules on the classification of mutual fund (MF) schemes and capped portfolio overlaps, leading to the immediate closure of a plan category. This shift may result in a consolidation of thematic investment choices and a potential decrease in the returns from arbitrage funds.
Key Regulatory Changes
– Uniform Scheme Naming: The Securities and Exchange Board of India (Sebi) has mandated that the name of each mutual fund scheme must align with its category. This measure aims to enhance clarity for investors and ensure all schemes remain ‘true to label.’
– Elimination of Solution-Oriented Funds: The category of solution-oriented schemes has been scrapped, halting all such subscriptions immediately. This move is seen as a long-overdue acknowledgment that these funds primarily served as a labeling exercise.
– Investment Plan Names: Sebi is emphasizing the need to decouple scheme names from their perceived returns. The description of the ‘type of scheme’ in offer documents and advertising must follow a strict format. Phrases solely highlighting returns cannot feature in scheme names.
– Broad Scheme Classification: mutual funds have been broadly classified into five categories:
– Equity
– Debt
– Hybrid
– Life Cycle
– Other (including fund of fund schemes and passive funds like index or exchange-traded funds)
Overlap Restrictions
– Portfolio Overlap Guidelines: Asset managers are now restricted to a 50% overlap between thematic equity schemes and other thematic or equity category funds, excluding large-cap schemes. This regulation aims to ensure distinctness among similar funds.
– Compliance Period: Thematic funds have a three-year period to comply with these portfolio overlap criteria, while other schemes have six months. Funds failing to meet these standards will undergo mandatory mergers.
– Expert Insights: Industry experts, like Aditya Agarwal from Wealthy.in, suggest that this could lead to the merging of underperforming thematic funds. Dhirendra Kumar of Value Research observes that Sebi’s actions challenge fund companies to demonstrate genuine differentiation among their offerings.
Introduction of New Product Categories
– Life Cycle Funds: Asset managers are now allowed to introduce life cycle funds. However, foreign securities will not be treated as a distinct asset class.
– Value and Contra Funds: Managers can launch both value and contra funds, with a maximum 50% overlap between their portfolios.
– Arbitrage Funds: New rules require arbitrage funds to limit debt exposure to government securities with a residual maturity of less than a year. Given that these funds can allocate up to 35% to debt, this, combined with an STT (Securities Transaction Tax) increase from April, could reduce returns from this category by 30-40 basis points.
Potential Concerns
Some caution that while Sebi is striving for simplification, the introduction of new scheme types can create confusion among average investors. Kumar articulates this concern, suggesting that instead of gaining clarity, investors might face an overwhelming array of fund choices — suggesting the need for fewer types rather than a proliferation of categories.
Conclusion
Sebi’s recent regulations on mutual fund classification and portfolio overlaps represent a significant shift aimed at enhancing transparency and accountability in the mutual fund industry. By ensuring that fund names align with their actual investment strategies, Sebi is working to foster a more straightforward experience for investors. However, the challenge remains: will these changes result in a clearer selection of investment options, or will they lead to a complicated landscape filled with nuanced products? The effectiveness of these reforms will unfold in the near future, as both investors and fund managers adapt to this evolving framework.