What does rationalisation of MF schemes mean?

Recently HDFC Mutual fund said that it would merge its popular HDFC Prudence Fund with HDFC Balanced Advantage fund and HDFC Balanced fund with HDFC Hybrid Equity Fund with effect from June 1, 2018. Kotak Mutual Fund has also said that it has decided to rename Kotak Income Opportunities fund as Kotak Credit Risk fund.

AMCs (Asset Management Companies) like HDFC and Kotak are busy changing the names of some of their schemes or merging one with another to comply with guidelines of Securities and Exchange Board of India (Sebi) Circular. If you are one of those who got confused with words like Prudence or Focused or Opportunities when you were investing in Mutual Funds, here is some good news for you.

Rationale behind the October 2017 guidelines

Sebi had issued a Circular in October 2017 on rationalisation and categorisation of mutual fund schemes.

The rationale behind issuing the guidelines were the myriad MF schemes, which Sebi felt, were misleading and confusing the investors with names and there was no uniformity in terms of asset allocation, investment strategy or characteristics and so there was a need for some standard guidelines.

As per statistics available on AMFI (Association of Mutual Funds in India) website, there were 1,998 schemes in the MF Industry as on March 31, 2018, out of which 840 were open-ended schemes.

The proposed guidelines are applicable to these 840 open ended schemes. Only time will tell how many of these schemes will either get merged or get the names changed.

For the record, many AMCs have been launching a number of New fund Offers (NFOs) and luring investors with words like “Plus, Opportunities, Prudence and Advantage” as part of the scheme. It was felt that there should be uniformity in definition and characteristics of schemes and those that had similar objectives should be merged.

Sebi further felt that uniformity once brought in would ensure that an investor of mutual funds would be able to evaluate the different options available, before taking an informed decision to invest.

How does the new categorisation make a difference?

Going forward, MF schemes would be classified into one of the following groups:

Equity Schemes

Debt Schemes

Hybrid Schemes

Solution Oriented Schemes

Other Schemes

Just to understand how the new guidelines will help you, let us take Equity schemes of the above five broad groups. Equity schemes will have the following categories:

Large Cap fund

Large & Midcap fund

Midcap Fund

Small Cap Fund

Value fund

Contra Fund

Dividend yield Fund

ELSS

Sectoral /Thematic fund

Focused Fund

Sebi’s new diktat ensures that there will be only one scheme in each of the above categories among equity schemes.

Many AMCs have more than one scheme in each of these categories as of now which means they will have to merge them and recategorise them after getting regulatory approvals.

Also, of the above equity category, there was no clear definition regarding a large cap, a mid-cap or a small cap company and each AMC had its own definition leading to confusion. The new Sebi guidelines define a large cap, mid cap and small cap company as follows:

Large Cap: 1st -100th company in terms of full market capitalisation

Mid Cap: 101st -250th company in terms of full market capitalisation

Small Cap: 251st company onwards in terms of full market capitalisation

So DSP Blackrock microcap Fund has been renamed as DSP Blackrock Small cap fund to comply with the guidelines.

Henceforth all AMCs will be required to adopt the list of stocks prepared by AMFI in this regard and AMFI on its part would adhere to certain criteria while preparing the list.

The list of companies with ranking based on market capitalisation would be uploaded by AMFI on its website and updated every six months based on the data as on the end of June and December of each year.

The data will be available on the AMFI website within five calendar days from the end of the 6 months period.

So subsequent to any change in the list every six months, mutual funds would have to rebalance their portfolios (if required) in line with updated list, within a period of one month.

After the consolidation exercise by all AMCs investing will become a little easy for you and hopefully you don’t need to ask the distributor every time to explain the difference between a small cap company and a large cap company. Happy investing!

(The writer is a former banker, and is currently with Manipal Academy of
Banking, Bengaluru)