Investment Made Easy: SEBI's New Rules for Mutual Fund Schemes

 

Investment Made Easy: SEBI's New Rules for Mutual Fund Schemes

In this blog, we discuss the major changes that were brought by SEBI via a circular on “Categorization and Rationalization of Mutual Fund Schemes” dated October 6, 2017. The basic idea behind this circular was to ease the process of investment in mutual fund by the investors.

Investment Made Easy: SEBI's New Rules for Mutual Fund Schemes 

1.      Categories of Mutual Funds in India

The Indian mutual fund industry offers many types of mutual fund schemes, and this circular helps us to understand these types better.

SEBI has defined the following broad categories –

1. Equity Mutual Funds (invest predominantly in equity)

2. Debt Mutual Funds (invest predominantly in debt)

3. Hybrid Mutual Funds (combinations of asset classes)

4. Solution-Oriented Mutual Funds (built to provide a solution for customer)

5. Other Mutual Funds.

 

Each of the categories is further classified on the basis of type of scheme; and minimum investment the scheme should have in equity and equity related assets.

The Basics of Re-Categorization of the Mutual Fund schemes in India

Before we understand each of the categories briefly, let us understand some important points from the circular.

 

Q. What are the different types of schemes available in mutual funds?

 

Mutual funds schemes can be of two types - open-ended and closed-ended

 Open-ended schemes are those from which an investor can enter and exit anytime they like. They are highly liquid in nature, and are not traded in the stock market. These mutual funds are available for purchase only through the Asset Management Company that prepares the mutual fund.

 Closed-ended schemes are those which have a fixed number of units, and have restrictions on entry into the fund.

 

Q. What are the different types of schemes available in mutual funds?

 The market capitalization of a company is the total market value of all its shares being traded in the stock market.

There are three types of mutual fund categories built on the basis of market capitalization –

 

Large Cap Mutual Funds The schemes comprising of the first 100 companies ranked on the basis of market capitalization are large cap funds.

 Mid Cap Mutual Funds The schemes comprising of the companies ranked 101st - 250th on the basis of market capitalization are mid cap funds. .

Small Cap Mutual Funds The schemes comprising of the companies ranked below the 250th company on the basis of market capitalization are small cap funds.

 

For selecting the companies for building these categories, mutual funds shall follow the list uploaded by the Association of Mutual Funds in India (AMFI).

This list shall be updated every six months, on 30 th June and 31 st December every year.

 Post the updating of the stock list by AMFI, mutual funds will be required to readjust the existing portfolios as per the updated list of stocks on the AMFI website.

 

Only one scheme per category of mutual fund shall be permissible except:

 

Index funds

ETFs

 Fund of funds

Sectoral/thematic funds

 

This means that a scheme of one category (large, mid or small cap) can either be open-ended or closed-ended. For example, no Asset Management Company can hold two large cap mutual fund schemes, with one of each scheme type.

Now let us study each category of scheme separately.

 

Types of Mutual Fund in India

 

I.                 EQUITY MUTUAL FUNDS


1.      Multi Cap Fund

This scheme is open-ended and invests across combinations of large cap, mid cap and small cap stocks. Minimum 65% of its total assets should be invested in equity and equity-related instruments.

2.      Large Cap Fund

This scheme is open-ended and majorly invests in large cap stocks. Minimum 80% of its total assets should be invested in equity and equity-related instruments of large cap companies.

3.      Large & Mid Cap Fund

This scheme is open-ended and invests in both large and mid cap stocks. Minimum 35% of its total assets should be invested in the equity and equity- related instruments of mid cap companies, and minimum 35% of its total assets should be invested in the equity and equity-related instruments of large cap companies.

4.      Mid Cap Fund

This scheme is open-ended and invests in mid cap stocks. Minimum                  65% of its total assets should be invested in the equity and equity- related instruments of mid cap companies

5.      Small Cap Fund

This scheme is open-ended and invests in small cap stocks. Minimum 65% of its total assets should be invested in the equity and equity-related instruments of small cap companies

                          6.  Dividend Yield Fund

This scheme is open-ended and invests predominantly in dividend yielding stocks. Minimum 65% of its total assets should be invested in equity.

   7.      Value Fund

This scheme is open-ended and it follows a value investment strategy. This means that the fund focuses on three types of stocks –

      i. Under-performing stocks;

      ii. Stocks with a low P/E ratio (Price-to-Earnings ratio); and/or

      iii. Stocks of companies of emerging sectors, which show potential for rapid         growth in the future.

 Minimum 65% of its total assets should be invested in equity and equity-related instruments.

  8.      Contra Fund

This scheme is open-ended and it follows a contrarian investment strategy. This means that the fund invests against the ongoing market trends. Minimum 65% of its total assets should be invested in equity and equity-related instruments. A mutual fund can either be a value fund or a contra fund. It cannot follow both strategies at the same time.

  9.      Focused Fund

This scheme is open-ended and invests in a maximum of 30 stocks while focusing on a certain level of market capitalization. Minimum 65% of its total assets should be invested in equity and equity-related instruments.

10.   Sectoral/Thematic Fund

This scheme is open-ended and invests in a particular sector or defines a theme around which its investments revolve. Minimum 80% of its total assets should be invested in the equity and equity-related instruments of the selected theme or sector by a particular mutual fund.

11.   Equity Linked Savings Scheme (ELSS)

                                 This scheme is open-ended, with a statutory lock-in period of three years and tax benefits                                         under section 80C of the Income Tax Act, 1961. In accordance with the Equity Linked Saving                                      Scheme, 2005, as notified by Ministry of Finance, minimum 80% of its total assets should be                                   investe

 


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