The Securities and Exchange Board of India has decided to only partially modify the circular on categorization and rationalization of mutual fund schemes despite a detailed representation made by Association of Mutual Funds in India or AMFI, say mutual funds.
The market regulator clarified some norms for mutual fund classification that will make compliance easier for asset managers.
The capital markets regulator clarified on market capitalization norms for equity funds and allow certain other fund categories to invest in a wider range of securities.
In a bid to reduce the number of schemes in mutual funds, SEBI had come out with a circular on Oct 6 defining various categories of mutual fund schemes to reduce confusion among investors and expedite scheme consolidation.
The categories were further divided into sub-categories; for equity funds, the classification was based on market capitalization and for debt funds on investment duration.
Following the circular, AMFI had written to SEBI saying some of the provisions were restricting fund houses’ ability to offer products within the suggested classification and are likely to impact risk management.
In the revised circular, SEBI stated that for equity funds, the market capitalization for the previous six months would be considered.
Market capitalization is the basis for equity fund classification.
The mid-cap equity fund, needs to deploy at least 65 percent in mid-cap stocks and the stocks must be that rank between 100-250 in terms of market capitalization.
In terms of debt funds, SEBI categorized funds on the basis of maturity of the fund. But has now revised the norms to focus on the maturity of the underlying security.
The regulator also stated that for medium and medium-to-long term debt funds, the fund manager can now reduce the fund duration by one year if there are adverse interest rate movements.
Fund houses have been asked to specify asset allocation in case of such adverse situations in their offer documents.
"We were expecting much more clarifications from SEBI, but we are happy that SEBI has heard some of our demands," said a head of a MF advisory firm on condition of anonymity.
The regulator did not announce any changes to the market capitalisation criterion for various equity mutual funds, which was expected by some sections of the industry.
SEBI has modified the characteristics of a corporate bond fund. Besides, it included municipal bonds as one of the instruments of investment for a banking and investment fund.
Each scheme has many sub-categories; and a fund house can have only one scheme in a sub-category, except for index funds/ETFs, fund of funds having different underlying schemes and sectoral or thematic funds.
The regulator has long been calling for the rationalisation of mutual fund schemes. At present, there are more than 2,000 schemes.
Corporate bond funds can now invest 80 percent of their total assets in AA+ and above rated corporate bonds.
Earlier, the regulator had said at least 80 percent of total assets should be put only in highest rated instruments.
Besides, credit risk funds would be permitted to invest in AA and below rated instruments (excluding AA+ rated instruments) and minimum investment in corporate bonds should be 65 per cent of the total assets.
Municipal bonds are now a permissible investment option for banking and investment funds. These funds have to invest at least 80 per cent of total assets in debt instruments of banks, public sector undertakings and also public financial institutions.
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