SEBI’s Strict Categorization of Mutual Funds To Demotivate Asset Managers

The Advisory Panel recommendation if implemented will halve the mutual funds schemes offered by asset managers. It will have deep implications in time to come for both investors and asset managers.

Strict Categorization into Four Categories

The Advisory Committee of Security and Exchange Board of India has advised to strictly define the categories of mutual fund investments. They proposed that there shall be four categories under which mutual fund investment will take place. They are debt, equity, hybrid and thematic. This will help in melting down 2000 different types of mutual fund investments into these four categories. These categories will have sub categories such as large and small caps for equity and debt. If the recommendations are implemented, near about 10 kinds of equity funds, 10 types of debt funds and 3-4 types of hybrid funds will only survive.

80% of the funds that are invested will be invested in fund category and those that won’t fit in any of these categories will be shut down. There are 42 AMCs that are operating selling 2000 types of schemes with an asset of 20.6 trillion rupees as of August 2017. If these recommendations are implemented then there will be deep implications.

Implications of the Recommended Implementation

Most of the schemes fall in one of those four categories. After the implementations, there will be clear cut understanding of the mutual funds schemes. Presently there is lot of confusion between the investors as the name of the schemes are different while the category remains the same. This leads investors into confusion and despite choosing schemes of different types (based on names) they choose the same category of schemes. Presently, a mutual fund scheme is loosely defined into open-ended or close-ended and whether it invests in equity or debt.

These implementations will surely have positive impact on customers as they will have clear understandings about their investment pattern and type. While the AMCs may not like the decision as it gave them a way to attract investors using tricks. The intent of this recommendation is to ensure that the name of the scheme matches the nature of investment and its category. Suppose if an investment is made into large cap sub category of a mutual funds then 80% of the fund should be invested in large cap stocks. Another step already under consideration is usage of Aadhaar number in stock market. All these steps will bring transparency that will surely help genuine customers in finalizing their scheme they want to invest in.