Sebi firming up rules to classify mutual fund schemes

There is currently no official classification for mutual fund schemes. Once products are brought under these categories, asset managers will have to merge those that are similar. MUMBAI: The Securities and Exchange Board of India (Sebi) is set to usher in rules that will require the mutual fund industry to introduce asset categories, amove that will spark scheme mergers and is aimed at helping investors identify the right plan from within the product heap.

The capital market regulator intends to classify mutual fund schemes into three broad product groups — equity, debt and hybrid — which will be sorted further into subcategories as per the investment mandate, said two people familiar with the plan.

There is currently no official classification for mutual fund schemes. Once products are brought under these categories, asset managers will have to merge those that are similar. For instance, a fund house operating two separate schemes that invest in mid-caps will have to merge them or scrap one.

Defining All Categories
The proposals were discussed at a meeting of members of the Sebi-appointed mutual fund advisory panel on Friday. The rules will be finalised at Sebi’s next board meeting.

“Fund houses will have to be true to the product label,” said a member of the mutual fund advisory panel. “Sebi will issue a circular with the list of classifications asking fund companies to comply with the requirement within six months.”

The regulator’s decision to simplify the process of investing in mutual funds comes at a time when retail investors are pouring money into various schemes. India’s 42-member mutual fund industry handles over Rs 19.5 lakh crore in assets across 2,000 schemes. Unhappy about the number of products, Sebi has been informally asking fund houses to consolidate the schemes. But with this falling on deaf ears, the regulator has decided to push them into consolidation through new rules.

The Sebi-appointed panel has identified a little over 30 subcategories to classify schemes. Within the equity category, there will be eight to 10 divisions such as large-cap, multicap, mid-cap and small cap funds among others. In debt, there will be around 16 categories such as liquid, ultra shortterm and dynamic schemes among others. In hybrid, there will be four subsections depending on the scheme’s exposure to stocks and bonds.

The regulator will issue guidelines defining all the categories. For instance, if a scheme has to be classified as a large-cap scheme, it should have invested 80% of its corpus in such stock. The definition will be based on the IISL (India Index Services and Products Ltd) indices, one of the two people familiar with the discussions. IISL is a National Stock Exchange unit that provides indices and services related to that.

Sebi will ask mutual funds to describe the product in a tagline, currently restricted to whether they are open ended or close ended. Once the rules are implemented, the taglines will need to provide more details.

“The new classification will bring the legitimacy of superiority of comparability and it would be usable,” said a panel member.

The Sebi-appointed committee also discussed aligning mutual fund regulations with the Companies Act with regard to the appointment of directors, independent directors, trustees and auditors. As per the Companies Act, there has to be a rotation of directors every three years. Also, there will be an upper age limit of 70 years for directors.

The panel also recommended easing rules for mutual funds’ exposure to interest rate futures.

“Till now, mutual funds could only do securities-based hedging in their bond portfolio. Now, Sebi could allow durationbased hedging,” a panel member said.

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