What is the new categorisation of mutual funds? |
Posted: November 6, 2017 |
Product proliferation,which means too many products and names with an improper system to make insightful comparisons, has been a long-standing problem for mutual funds investors in India. Mutual funds generally use instances of under or over performance to explain how their fund is different.This obviously does nothelp theinvestors much in terms of building confidence in theirmutual fund products. In the backdrop of increasing demand for SIP as a long-term investment and savings route, SEBIhas issued a circular requesting for specific and clear categorisation of mutual fund schemes.This seems to be a step in the right direction taken by SEBI. Overall, SEBI has listed eight broad categories for equity mutual funds, whichinclude large-cap funds, mid-cap funds, and small-cap funds, three of the core equity mutual fund categories. As per the new circular, amutual fund needs to invest at least 35% of the corpus in each of the segments mentioned and defined above. Moreover, investors who are looking for a mixed bag, cango for multi-cap funds as an option. Investors having a specific strategy can make their investment choice from a list of focused funds. Thesenormally don’t contain more than 30 stocks.Further, they can go in for dividend yield funds, value funds, contra funds, and sector funds for mixed bag options. SEBI requires all equity funds to have at least 65% invested in equity.For tax saving and sector funds thisincreases to at least 80%. This clear categorization makes it much easier for the investors to understand and follow the ranking and rating of equity funds. For instance, if a fund is referred to as five-star, mid-cap fund, an investor will now be aware that this fund will invest its assets in particular segments.Moreover, the investors will know that this fund will be among the top 10% in its overall category. Therefore, in case such a fund outperforms its peers consistently over time, the investors will then be in a much better position to choose that fund with a lot more confidence. As per the new categorization of mutual funds, SEBI requires mutual funds to ensure that their products are categorized intothe following three primary classifications –
Moreover, investors who want to go in for strategic options in these categoriescan choosefrom dynamic allocation funds with flexible percentages, multi-asset class funds comprising two or more classes, arbitrage funds, and equity saving funds including equity and derivatives.
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