What is the difference between the following mutual fund schemes?
Answer: No difference. They are all large cap or predominantly large cap funds.
Then why does HDFC MF needs to offer 3 of the same type?
Interestingly, you and I are not the only one asking this question. Recently, the regulator, SEBI, too was on our side – wondering!
And it did something.
On Oct 6, 2017, SEBI released a circular on categorisation and rationalisation of mutual fund schemes. The intent is to help investors understand mutual fund scheme offerings better and hence make the correct choice.
Basically, it is telling the fund houses – please do away with this nonsense!
Will SEBI succeed in getting the fund houses to reduce the number of schemes and helping investors make optimal choices?
Let’s find out.
To enable the process, the first thing that SEBI has done is define 5 groups to classify the schemes.
These 5 groups are:
- Equity Schemes – investing in equity and equity related investments
- Debt Schemes – investing in debt instruments
- Hybrid Schemes – investing in a mix of equity, debt or any other asset
- Solution Oriented Schemes – schemes such as Retirement Scheme or Children’s Savings Scheme.
- Other Schemes – schemes such as Fund of Funds or Index Funds and ETFs.
Under each group there are “types of schemes” which will have a common definition across fund houses. The number of this “types” defined by SEBI is as follows:
- Equity Schemes – 10 types of schemes such as large cap, mid cap, small cap, multi cap, large+mid cap, Dividend Yield, Value Fund / Contra, Focused, Sectoral / Thematic, ELSS or tax savings.
- Debt Schemes – 16 types of schemes such as Liquid, Short Duration, Low Duration, Medium Duration, Gilt, Dynamic Bond, etc.
- Hybrid Schemes – 6 types of schemes such as Conservative Hybrid, Balanced Hybrid, Aggressive Hybrid, Dynamic Asset Allocation, etc.
The individual characteristics of each of these types has been clearly defined by SEBI. This includes definition of market capitalisation and what will be included in what kind of scheme.
For example, the investment universe of a large cap fund will be the top 100 stocks by full market capitalisation.
A mid cap fund will restrict its investments within 101st to 250th company in terms of full market capitalisation.
The rest can be taken up by a small cap fund.
A large + mid cap fund will have to invest at least 35% in each of large caps and mid caps respectively, as per the market capitalisation universe defined above.
Not just that, a focused fund can have upto 30 stocks only with a defined capitalisation (large or mid or small or multi).
A multicap fund has no restrictions on where to invest.
Restriction of the number of mutual fund schemes
Any fund house can have only 1 type of scheme mentioned above except for the following types:
- Index Funds / ETFs replicating / tracking different indices – There can be as many schemes as the indices.
- Fund of Funds having different underlying schemes – Various solution oriented schemes can be packaged as different fund of funds.
- Sectoral / thematic funds investing in different sectors / themes – If there are 30 sectors, there can be 30 schemes (that too per fund house).
To bring this into effect, the investment objective, investment strategy and benchmark of each scheme will be modified (wherever applicable) to bring it in line with the categories of schemes listed above. This will also likely bring in a change of names in the schemes.
SEBI doesn’t want scheme names that highlight the return aspect of the scheme such as Credit Opportunities Fund or High Yield Fund. This is more so applicable to the debt schemes.
The cleaners are waiting
Fund houses such as HDFC, ICICI, Aditya Birla and Reliance will literally go to the cleaners. They are the ones who have created the biggest mess with number of undifferentiated schemes. Several of their schemes are going to get merged, hopefully.
While we await the details, here are some specific changes I anticipate happening:
- HDFC Mid cap opportunities fund is now faced with a choice to be either a large+mid cap fund or a multi cap fund. Most likely, it will choose to be a multi cap fund.
- Quantum Long Term Equity fund too is faced with a similar choice as above. In my view, it too will choose to be a fund in the multi cap category, thus not being restricted to pick its investments. In fact, that will be the right thing to do.
- HDFC Top 200 – is now likely to be a large+mid cap fund with 35% of its assets invested in each.
- MOST Focused Multi cap 35 fund will likely be renamed as MOST Focused Multi cap 30.
- If ICICI Pru Focused Bluechip Fund wants to be called so from now on, it will have to limit the number of stocks in the portfolio to 30. Else, it will become the ICICI Pru Large Cap fund. But wait! ICICI already has a ICICI Pru Select Large Cap fund. Ah! We need to wait and watch.
- A fund such as Axis Treasury Advantage Fund will have to rename itself to, may be, Axis Low Duration Fund (since it wants to maintain a average maturity profile and duration of upto 12 months).
- Franklin India Low Duration Fund will either have to rename itself to Ultra Short Duration Fund or increase its portfolio duration to 6 – 12 months.
- Monthly Income Plans, one of the most misleading names in the fund industry, will finally be correctly identified as Conservative Hybrid Funds with equity investments ranging between 10% to 25%. No more short term or long term OR savings or savings plus.
- All popular equity hybrid funds such as HDFC Balanced and ICICI Pru Balanced will now be Aggressive Hybrid Funds with minimum of 65% in equity investments with a maximum cap of 80%.
- I wonder about the future of HDFC Balanced and HDFC Prudence. Most likely, they will revert to their original positioning. HDFC Prudence will remain as it is – an Aggressive Hybrid Fund. HDFC Balanced will be Moderate Hybrid fund with 40% to 60% in equity investments and no arbitrage investments. This will likely impact its tax status too.
Several other mutual fund schemes will undergo name changes, change in investment objectives and strategy. So, it is important that you keep an eye on this.
Follow the Unovest blog to keep yourself updated with all the changes happening with your mutual fund schemes.
Will the number of mutual fund schemes reduce?
In my view, the reduction in the number of mutual fund schemes is not going to be significant.
However, the clear cut definition on type of scheme and the broad grouping will ensure that automatically several confusing, duplicate schemes are done away with.
The removal of this confusion is more important. This will make it easier for you, the investor, to choose the right scheme for your portfolio.
But hold your breath!
The changes are not happening anytime soon. They are at least 6 months away. SEBI has given 2 months for mutual funds to provide the changes they plan to make. SEBI will share its observations on them. Post that, mutual funds will be given 3 months to effect the changes.
That’s okay though. We are willing to live with this period too.
All in all a good start.
What is your take on this SEBI initiative? Share your feedback with me in the comments.