A turnaround effort by SEBI to rationalize the industry

Given the phenomenal growth of the Indian MF industry over the last 2 decades, investors' dilemma over a selection of schemes has only aggravated due to the plethora of 800+ open-ended schemes and 1000+ close-ended schemes offered by 41 fund houses. The process of understanding, evaluating and finally investing in a scheme suitable to one's risk-return objective is like looking for a needle in a haystack.

Hence, keeping in mind the prime objective of maximization of investors' interest, in October 2017, SEBI took another positive step in that direction and issued a circular on mutual fund scheme categorization with an aim to clean up the industry and to enhance simplicity, transparency, comparability, and uniformity in scheme characteristics.

SEBI has defined various categories of funds along with scheme characteristics and naming convention for each fund category. While the broad parameter for equity categorization includes market capitalization, debt categorization is broadly based on the maturity/duration of the fund. The broad categories are as follows:

·         Equity (10 subcategories)

·         Debt (16 subcategories)

·         Hybrid (6 subcategories)

·         Solution-oriented (2 subcategories)

Others which includes index funds, Exchange Traded Funds and Fund of Funds (2 subcategories)

SEBI has also mandated that each fund house can have only one scheme in each subcategory (the exception being sector funds, ETFs and FoFs) and the scheme needs to comply with the parameters/characteristics of the said category. A case in point worth mentioning is the AMFI list of large-cap (1st 100 stocks), mid-cap (101 – 250 stocks) and small cap (251st stock onwards) in terms of full market capitalization which fund houses are expected to comply with and rebalance the portfolio, if required, in line with the AMFI list which will be updated every six months.

Thus, the regulator's initiative towards rationalization of the MF industry has kept the fund houses on their toes since the last six months. Schemes that have seen changes can be classified into three levels—schemes that have simply changed their name; schemes that have changed their category and schemes that have wound up and merged with another scheme. Just to put numbers to perspective, the industry has seen mergers of 80+ schemes into 31 unique schemes across categories. Post re-categorization, there are 39 schemes in large-cap (AUM of ~Rs. 1.20 Lakh Crs), 22 schemes in midcap (AUM of ~Rs. 69,000 Crs) and 11 schemes in small cap (AUM of ~Rs. 30,000 Crs) categories (Data as on 31^st May 2018).

Any structural change brings along with its benefits as well as difficulties, the scheme rationalization is no exception. While there is no second thought to the long-term benefits the change would provide to the investors, advisors as well as the fund houses, there are also some costs attached to it in terms of portfolio churn, a risk of front-running, increased transaction costs, shrinkage of mid-cap universe, etc.

Thus, from an advisor and investors' perspective, it is pertinent to revisit the portfolio, decipher whether the changes post re-categorization are cosmetic or much deeper and then take a holistic view to readjust the portfolio in alignment with one's risk-return profile.