SEBI Mutual Fund Categorization and Rationalization – How it helps investors?

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The Securities and Exchange Board of India (SEBI) announced a bold move in October 2017. In a circular, it did  Mutual Fund Categorization and Rationalization into five broad categories (equity, debt, hybrid, solution-oriented and others) and a few sub-categories under them (such as large-cap, mid-cap, small-cap under equity). Mutual fund houses would then only be able to have one scheme in each sub-category, with some exceptions.

# The Schemes would be broadly classified into the following groups:
a. Equity Schemes
b. Debt Schemes
c. Hybrid Schemes
d. Solution Oriented Schemes
e. Other Scheme
# Only one scheme per category would be permitted, except ;

a. Index Funds/ ETFs replicating/ tracking different indices

b. Fund of Funds having different underlying schemes and

c. Sectoral/ thematic funds investing in different sectors/ themes

# In case of Solution oriented schemes, there will be a specified period of lock-in. However, the said lock-in period would not be applicable to any existing investment by an investor, registered SIPs and incoming STPs in the existing solution oriented schemes.

# Mutual Funds will be permitted to offer either Value fund or Contra fund.

# Definition of Large cap, Mid-cap & Small-cap Funds

Large Cap: 1st – 100th company in terms of full market capitalization.

Mid Cap: 101st – 250th company in terms of full market capitalization.

Small Cap: 251st company onwards in terms of full market capitalization.

The complete SEBI Mutual Fund Categorization and Rationalization can be viewed at SEBI Notification.

The reason for the move is that most investors are extremely confused by the sheer number of schemes on offer. Some fund houses have over a 100 schemes across categories. The move will immediately make matters easier for investors.

While some fund houses are not happy, SEBI is insisting that they submit proposals to align with the new rule by the end of the year.

Will the change really bring that much improvement to the mutual fund investment experience? Let’s examine the impact it is likely to have.

Impact of SEBI Mutual Fund Categorization and Rationalization

Mutual Fund Categorization and Rationalization

# Easier to choose

Currently, there are over 1200 open-ended mutual fund schemes. Around a third of these are equity and a fourth are debt schemes. These large numbers cause confusion. Even if you stick to just one particular fund house, it can be difficult to go through all their equity or debt schemes. Categorisation will bring improvement. Within equity, 10 sub-categories have been allowed; within debt, 16 sub-categories have been allowed. Fund houses will be allowed only one per sub-category. While the number of categories may still be high, selection will become less confusing, as you would be able to conduct an apples-to-apples comparison for each category that suits your risk

# One definition

There is a major lack of definition in the mutual funds industry. Every player defines large-, mid- and small-cap, for example, as they wish. This only makes matters difficult for the investors and investment advisors. With categorization, all of this will go away. All large-cap funds will be making investments in the same set of stocks, and mid-cap funds won’t be investing in those classified as small-caps.

# Sticking to the objective

As the objective of a fund must now always adhere to the category it is placed within, there can be no drastic change in investment styles. If there were to be such a change, investors would need to be informed and the categorization of the scheme would change. As an investor, this means that you can be more certain that the scheme fits your risk profile.

# Debt funds clearer

While equity terms like mid-cap and small-cap are familiar to most investors, debt fund terms are pretty confusing. Now that the scheme is properly labelled (for example, hybrid funds will now be classified as aggressive, conservative and balanced), it will be easier to traverse the segment.

# Portfolio review

As funds are likely to make several changes over the coming months to their schemes, it would be essential for investors to conduct a thorough review of their portfolio. Most fund houses would rather not merge two schemes and are likely to instead change their attributes so as to cover all sub-categories. Therefore, investors would need to check whether the funds they’ve invested in suit their risk profile.

Overall, the move will bring benefits to retail investors, particularly those who aren’t very savvy with the markets, but it remains to be seen just how much the total number of schemes drop by. With so many categories defined, we’re may not see a huge drop; however, the process of decision making by new users will definitely be simplified.

About the Author:

Ram Kalyan Medury Jama

Ram Kalyan Medury is a Fintech Enthusiast and Entrepreneur. He founded Jama, an online and mobile app based direct mutual fund platform and investment advisory. He has nearly two decades of Fintech experience at leading companies like Infosys, ICICI, Magma. As an entrepreneur, he is passionate about spreading investor awareness and helping people create wealth by investing in high return, low-cost instruments. Ram is a SEBI Registered Investment Advisor and an MBA from IIM Bangalore. is not associated with Jama or with Mr.Ram Kalyan Medury. This is a guest post and NOT a sponsored one. We have not received any monetary benefit for publishing this article. The content of this post is intended for general information / educational purposes only and views expressed here are of the author.

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13 Responses

  1. Large Cap: 1st – 100th company in terms of full market capitalization.
    Mid Cap: 101st – 250th company in terms of full market capitalization.
    Small Cap: 251st company onwards in terms of full market capitalization. ”

    Which Index represents this market cap( 1st – 100th , 101st – 250th and 251st company on wards ) as per SEBI .

    Because currently only Nifiy 50 used by most of the Large caps and Some even using BSE 200 ..

    Is SEBI planning to define new Indexes for this categorization.

  2. Sir,
    Kindly let me know about your opinion regarding Aditya Birla mid cap fund. As per sebi’s rules, will midcap and small cap funds be merged. Is there a possibility that two funds of Birla AMC, that is, midcap fund and small and midcap fund be merged?
    What is the deadline for categorization?

      1. Agreed! Bitcoin is too speculative now. If governments decide to tighten them (e.g.: China, US) then anything can happen. However blockchain is a fantastic trend and over time could change how the world works.

          1. If you had invested one lakh rupees in 2010 Nov in bitcoin, your investmenet(!) would be worth about 720 crores today. About rs 650 cr would have been added in the last 12 months alone!
            Looks like classic bubble though; expect a crash round the corner.

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