Sebi's New Rules For Mutual Fund Schemes

SEBI, the capital market regulator is back. It's reforming the mutual fund sector in India. SEBI wants you to make the best choice, before putting your hard earned money in mutual funds. So, it has come up with an innovative reform. As per rules of SEBI, mutual funds will be categorized into five schemes: equity, debt, hybrid, solution oriented and other schemes. Mutual funds have a practice of launching multiple schemes with similar themes. This will soon come to an end.

Take a look at this. Between 45 Mutual fund houses, there are more than 1200 mutual fund schemes on offer. You have about 400 equity schemes, 300 debt schemes and around 426 hybrid schemes. How would you pick up the right mutual fund scheme that best suits your needs?

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Sebi's New Rules For Mutual Fund Schemes

SEBI asked mutual funds to ensure that schemes devised under the news norms should not result in duplication vis-a-vis other plans offered by them.  SEBI allows only one scheme per category, except index funds, exchange traded funds tracking different indices; fund of funds having different underlying schemes; sectoral or thematic funds investing in different themes.

1. What are the SEBI rules on mutual funds?

SEBI has divided the mutual funds into 5 segments. Equity, debt, hybrid, solution-oriented and other schemes. Under each of these segments, SEBI has allowed categories.

• There are 10 categories under the equity segment. These include multi-cap schemes, large-cap, mid-cap, small-cap, dividend yield and ELSS (Equity-linked saving schemes).
• There are 16 categories under the debt segment. These include liquid schemes, ultra-short, money market and dynamic bonds.
• There are 6 categories under the hybrid segment. There are also 2 categories under the solution-oriented segment like retirement and children's funds. The solution oriented schemes will have a specified lock-in period.
• There is one category each for index funds/ETF's and fund of funds.

SEBI has also defined large cap, mid cap and small cap companies. Top 100 Companies in terms of market capitalization are called large cap, the next 101-250 Companies in terms of market capitalization are called mid cap and the Companies ranking from 251 onwards in terms of market capitalization are called small caps.

You will find the list updated on the AMFI website, twice a year. These rules are applicable for all open-ended schemes of mutual funds,  schemes which have received Sebi’s clearance but not launched, all open-end schemes where draft documents have been filed with Sebi as on date and all open-end schemes where mutual fund is planning to file draft scheme document.

Mutual funds have a maximum of 3 months to carry out all the necessary changes.

SEE ALSO: Mutual Funds To Invest Your Money

2. Why SEBI new rules in the mutual fund sector?

Different mutual funds define large-cap, mid-cap and small-cap schemes in a different way. Franklin India Bluechip Fund is a large-cap fund which invests in companies whose market capitalization is higher than that of the 100^th stock in the Nifty 500 index.  ICICI Prudential Focused Bluechip Equity Fund, which is also a large-cap fund, invests in top 200 stocks in terms of market capitalization on the National Stock Exchange of India.

Having a uniform definition for large-cap, mid-cap and small-cap schemes can avoid a lot of confusion making investing in mutual funds quite  easy for you.

SEE ALSO: 3 Reasons Equity Mutual Funds Are Good For You

SEBI's new rules on mutual funds are a step in the right direction. But, even after segmentation and categorization, there are still too many schemes around. Investors are still confused and further steps might be necessary in the mutual fund sector. Be Wise, Get Rich.