A major change has taken place in the classification of mutual funds in the country. As per the October 2017 SEBI circular on ‘Categorization and Rationalization of Mutual Fund Schemes’ they have been simplified and classified as per the regulation by the AMCs.
Change in Classification
Mutual Funds have been clearly divided into 5 groups based on type of investments or purpose. They are:
The first three schemes are divided into several sub-categories with each of the sub categories being clearly classified and defined by SEBI.
Impact of Rationalization of Mutual Funds
Clarity due to Classification
More clarity has been obtained regarding the constituents of a particular mutual fund. Earlier the lines of differentiation between two funds would mostly get transgressed especially between mid-cap and large-cap funds.
The detailed categorization has brought about more transparency in the mutual fund schemes offered by fund houses. Investors clearly know where exactly is their investment being channelized and they can have better control over them.
Relevant Naming of Schemes
The scheme names have to reflect the risk levels inherent to the mutual funds. Fancy adjectives will no longer be attached to the mutual fund names.
Changed Attributes of Schemes
The changed regulations have entailed fund houses to make changes in the investment strategies or mandate or benchmarks with regards to their schemes.
Clear Definitions Laid Down for Equity Funds
Definitions of small-caps, mid-caps, large-cap stocks which are relevant to equity fund based schemes have been clearly stated by SEBI thus eliminating confusion in that regard. Large-cap stocks would include topmost 100 companies of the primary benchmark in terms of full market capitalization, mid-caps would comprise 101st to 250th ranked companies and companies ranked 251st and thereafter would be classified under small-cap stocks.
Categorization and rationalization of mutual funds has been a good start in the context of bringing about standardization and improving the classification of mutual funds.