Skip to main content

How Mutual Fund Classification will Impact your Portfolio

Best SIP Funds Online 


At the time when equity mutual funds are receiving massive monthly inflows in equity and balanced mutual funds, going up to around  Rs 25,000 crore, the capital markets regulator Securities and Exchange Board of India (SEBI) has come out with new classification of mutual funds. It's intended to make the mutual fund selection process easier for investors.


According to the new classification, the mutual funds schemes will be classified into five broad categories-- equity schemes, debt schemes, hybrid schemes, solution oriented schemes and other schemes. Solution-oriented schemes will be retirement or children funds.


Equity schemes can be further classified into 10 sub-categories such as large, mid, multicap, small cap et. Debt schemes can be classified into 16 sub-categories while hybrid funds can be further classified into six sub-categories. Only one scheme per category will be permitted.


Sector or thematic funds, closed-end funds, fund of funds are kept out of the purview of this classification.


Fund houses have been given two months time from the date of the circular to review their classification and submit the proposal with SEBI. And after SEBI clears their proposal they will have to carry out the necessary changes within three months time.

Schemes will be comparable:

 The biggest advantage of this classification is that it will make mutual fund schemes comparable. Right now it's a bit difficult as each fund has its own definition of large-cap, mid and small cap stocks. Therefore, even in a large-cap category the weighted average market capitalisation of mutual funds range between 29,000 crore to 1,90,000 crore. In order to bring in uniformity among fund classification, SEBI has also given the definition of large, mid and small cap stocks.


Large cap will be defined as 1st to 100th companies in terms of full market capitalization. 101st to 250th company as per full market capitalization will be termed as mid caps and from  251st company onwards will be classified as small cap.  


This new classification will ensure that for example if an investor has invested in a large-cap fund, it will remain a large cap fund throughout


There won't be duplication of schemes as it is happening right now where a fund house has two or more schemes in a category with similar strategy.


Also, among debt funds the classification has been made much more clearer as per the weighted average maturity of the portfolio. New categories has been introduced by SEBI such as overnight funds which will invest in securities with duration of just one day. 

  

SEBI has not addressed the credit risk in the new classification of debt funds as it is currently based on only average maturity which may not be very helpful for the retail investor. There are broadly eight categories of debt funds right now while as per new classification it will go up to 16. SEBI could have retained the existing classification and defined them more clearly in terms of average maturity and credit risk

Performance may be impacted


There are three reasons why the scheme's performance will be impacted with the new classification.

a) Right now funds, even a large cap fund, has the liberty to invest a portion of their portfolio in mid and small cap stocks, which helps them generate alpha. This is called style drift and it may not be possible after the new classification is implemented. Therefore there may be lesser alpha generation compared to benchmark. Right now the alpha generation is done through stock picking while going forward fund manager will be able generate alpha by being underweight or overweight on stocks as compared to benchmark or peer as the universe will be limited and same for all,


b) As per the new mandate, if a fund wants to be classified as a large-cap fund then it will have to invest in the stocks defined as large-cap by this regulation. Therefore, it will have to buy some stocks or may have to sell few which will have an impact cost in the short-term and will have to be borne by the investor.


c)Finally, the fund will have to rebalance the portfolio as per the list of large, mid and small cap stocks published by AMFI on a six monthly basis.


So, if a stock has become large-cap as per the definition then a mid cap fund won't be able to hold it even if the fund manager sees potential in it. So, this will result in forced selling and may impact the performance of the fund.

However, the new classification is considered a step in the right direction as it will bring clarity, uniformity among mutual fund buts investors may see some impact on performance over short-term.



SIPs are when Stock Market is high volatile. Invest in Best Mutual Fund SIPs and get good returns over a period of time. Know Top SIP Funds to Invest Save Tax Get Rich

For further information on Top SIP Mutual Funds contact Save Tax Get Rich on 94 8300 8300

OR

You can write to us at

Invest [at] SaveTaxGetRich [dot] Com

Popular posts from this blog

TDS Rate and Personal Account Number(PAN)

    The TDS rate doubles to 20% from 10% if you fail to mention your Personal Account Number   IF you run a glance through your pay slip, you will come across something called TDS, which is tax deduction at source. In most cases, the employer deducts this amount at the time of payment of salary itself and pays the total tax amount to the government on behalf of all the employees. If you are a self- employed or practicing professional s, you have to pay this amount yourself.    Tax deducted at source is one of the modes of income tax collection by the government. Under the income-tax laws, income tax at specified rates is required to be deducted while making certain payments.    The rate of deduction of tax at source on interest and rent payment is 10%. For salary payments, the employers deduct income tax at source on a monthly basis after computing income tax liability on estimated annual taxable income of the employee. Tax benefits on housing loan, investments, etc are consid...

Equity investors should track market developments

The stock markets have been volatile over the last few days. They are in a sideways movement and trying to find the bottom after a fall of 20 percent a week ago. The market sentiments are not very positive at the moment and the recent developments are expected to dampen them further. Globally, governments and central banks are trying to cut rates and announce packages to improve business sentiments. These are some of the major developments in the markets last few month: A) Global On the global front, another large US bank went into a financial crisis. The US government took quick measures to avoid the spread negative sentiments in the markets. The US government announced a bail-out package and agreed to shoulder the losses on the bank's risky assets. China announced a large cut in interest rates and reserve ratio to boost the investor sentiments in the markets. Recently, the World Bank announced China's growth rate next year will come down to 7.5 percent. The European ...

Fortis Mutual Fund

Fortis Mutual Fund, a relatively new player, it is still to prove its case and define its position in the industry. In September 2004, it came onto the scene with a bang - three debt schemes, one MIP and one diversified equity scheme. And investors flocked to it. Going by the standards at that time, it had a great start in terms of garnering money. Mopping up over Rs 2,000 crore in five schemes was not bad at all. The fund house has not been too successful in the equity arena, in terms of assets. Though it has seven equity schemes, it is debt and cash funds that corner the major portion of the assets. Most of the schemes are pretty new, and the two that have been around for a while have a 3-star rating each. The last two were Fortis Sustainable Development (April 2007), which received a rather poor response, and Fortis China India (October 2007). Fortis Flexi Debt has been one of the better performing funds, after a dismal performance in 2005. It currently has a 5-star rating. None ...

Banks tweak ATM strategies

Unrestricted usage of third-party ATMs ends on Thursday The era of free ATM usage will come to an end on Thursday, October 15. Every transaction carried out on another bank’s ATM could cost an account holder as much as Rs 20 and withdrawals will face a limit of Rs 10,000, the Indian Bank’s Association has said in its guidelines. According to the guidelines, banks can offer savings-account holders five free thirdparty withdrawals every month —they can be charged from the sixth transaction onwards. Current account holders can be charged the fees, which ranges from Rs 18 to Rs 20, from the very first transaction. Most banks are convinced that charging current account and no-frill account customers from the word go is a good idea. It suggests that the usage of ATMs by current-account holders is price-insensitive. For others, banks have decided to frame their charges depending on the profile of the customer. For instance, HDFC Bank is allowing its salary account and premium customers an unl...

Women need to plan for Retirement

Plan for Retirement Online       Higher life expectancy, lower pay and fewer work years necessitate thorough planning.   Women have raced ahead of men in various fields but, when it comes to retirement planning, they tend to lag behind. Despite saving a higher proportion of their salary, compared to men, women generally do not take retirement planning seriously. Below are some of the reasons why they should: According to the United Nations Department of Economic and Social Affairs, in India, the life expectancy of women is 69 years and, of men, it's 66 years. Due to this, a woman will need an additional `55 lakh to manage her living expenses (see table).Besides, usually, women work fewer years compared to men to take care of children and family.Further, a recent study by Korn Ferry Hay Group shows that women in India earn 18.8% less than men. Not to mention, a higher life expectancy can also mean higher medical expenses as the likelihood of health ailments such as diabetes, high...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now