Scheme reclassification: Why the Mutual Fund’s and investors stand to gain

The regulator Securities and Exchange Board of India (Sebi) felt it was the time to bring in standardisation in the definitions of schemes and create a uniform template of communication. The objective was to streamline the sector, product positioning and alignment of schemes according to their investment pattern.

When it all began?

In 2015, the Association of Mutual Funds of India with the help of the erstwhile Sebi chairman made a representation to the finance ministry and requested that any transfer of unit or units that happens in the process of consolidating scheme of a MF, will not be treated as transfer and will not result in short-term/ long-term capital gain/ loss in the hands of the unit holders.

While this move was to make it more tax efficient for the investors but the larger purpose was to encourage consolidation of existing schemes. Looking at the larger interest of the investors and the need of the sector, the ministry agreed to the proposal in all fairness. Post which, there was a provision made under ‘The Finance Act, 2015’ Section 47, to provide tax neutrality on transfer of units of a scheme under the process of consolidation of schemes of MFs according to the Sebi (Mutual Funds) Regulations, 1996.

While the investors benefitted from this amendment, the larger purpose of reducing or curtailing the growing number of schemes did not transpire. Investors, too, had a tendency to get attracted towards new fund launches. But, over a period of time through continuous investor education events and improved understanding of investments, the investor behaviour changed. They started accepting the existing schemes irrespective of the net asset value at which it was being offered and money started coming into the existing open-ended funds. Therefore, the need for launching a new fund also got reduced, both from an investor and distributor point of view. This increased acceptance is well coinciding with the current consolidation exercise which has a clear goal and standarsised definition. Sebi has now defined 10 categories of equity funds, 16 categories of debt funds, 6 categories of hybrid funds, 2 categories of solutions-based funds and 1 category each for index funds/exchange-traded funds and fund of funds — a total of 36 categories.

What’s in it for investors?

The recategorisation exercise has investors at the heart of it, to simplify the process of investment. Investors can now identify schemes that suit their investment goals, style and the duration of investment. With the clear definitions, duration bands (average maturity of a fixed income portfolio) and the perfect tag line, the investor is empowered to make an informed choice. Once this exercise is completed, this will ease comparing funds across industry for investors.

Distributors can help in offering the right products to the customer and also make them understand the purpose of the fund clearly. This is of course a unique exercise conducted by the Indian MF sector and Sebi which is first of its kind in the world. The Indian regulator is ahead of the curve and has always been proactive in streamlining the Indian capital market and protecting the best interests of investors on many areas. There is much to compliment Sebi as well as the entire sector in the manner this has been thought out and executed.

What’s in it for the sector?

The exercise is taking place at a time when the sector is at the cusp of big growth. The next round of growth for the sector will come from what we are doing now. Going forward, the managers will have to operate within the defined parameters which will be a bit tighter. It also gives clarity and comfort to follow a set of guidelines in identifying securities. While it sets the practice of managing the portfolio and generating alpha not only on the basis of market cap investing but also purely on the basis of stock selection differentiation and individual capability, to select the right sectors and stocks. Operating with a clear mandate and set of standardised parameters will not only increase the probability but also caps the downside risk.