The Securities and Exchange Board of India (SEBI) is the statutory body that regulates the security market and protects investors’ interests. The market regulator has constituted a set of guidelines to promote investor awareness regarding how mutual funds work. While mutual funds are quite popular as an investment tool, the provisions and schemes of the funds are sometimes difficult for an average investor to understand.
Given below are the guidelines of SEB I for mutual funds explained in simple terms.
What is the Securities and Exchange Board of India (SEBI)?
SEBI is the market regulatory body that oversees the Indian capital markets. SEBI guidelines for mutual funds regulate the securities market and uphold the investors’ interests by constituting certain rules and regulations. The statutory body came into existence on April 12, 1992, under the SEBI Act, 1992. Its headquarters are in Mumbai, Maharashtra.
The main objective of SEBI is to maintain a system in the market and ensure a transparent investment environment for investors. In simpler words, SEBI ensures that there are no malpractices in the capital market of India.
The structure of mutual funds as per SEBI guidelines
SEBI has defined a clear three-level management structure to ensure the smooth handling of the funds. Some details regarding the same are mentioned below.
- Guarantor: The Guarantor is responsible for filing the registration of the mutual fund. He also grows money by launching a mutual fund scheme and hands it over to the fund manager.
- Sponsor: A mutual fund sponsor makes sure that the scheme follows the regulations of the Indian Trust Act, 1882. He is also responsible for the listing of the mutual fund schemes with the SEBI.
- Trustee or the Trust: It is a setup established by the mutual fund sponsors and is accountable to all the investors. The trust is listed and regulated under the Indian Companies Act 1956.
Moreover, the firm, the board of trustees, and the board of directors of a mutual fund house fall under the jurisdiction of the Indian Trust Act 1882. The trust carries out its investment management through asset management companies (AMCs), which also comes under the regulations of the Companies Act of 1956.
Based on asset allocation and investment strategies, there are various types of mutual funds. However, to ensure uniformity, SEBI has revised the guidelines to recategorize the mutual funds into 5 broad categories and few sub-categories. These new changes are aimed to provide uniformity and clarity to mutual fund investors and assist them in making investment decisions that will eventually increase their returns.
Role of SEBI in mutual fund regulations
As mentioned above, the revised guidelines of mutual funds as per SEBI have categorized them into five different groups. The details of the same are,
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Equity schemes
Equity schemes are mutual fund schemes that have a majority investment in equity instruments. SEBI has categorized 11 different categories of equity funds under the new guidelines. Out of these, five categories are defined by market cap. SEBI has also defined various capitalisations as:
- Large-Cap (first 100 companies by market value are kept in large-cap).
- Mid-Cap (investment in 101 – 250th companies after the top 100 are termed mid-cap.
- Small-Cap (investment in companies having a rank above 251 are termed small-cap)
- Large and Mid cap funds
- Multi Cap Funds
- ELSS
- Dividend Yield Fund
- Value Fund
- Contra Fund
- Focused Fund
- Sector or Thematic Fund
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Debt schemes
In debt funds, there are 16 different classifications, which are segregated based on fund duration and the quality of the credit. The choice for AMC is the same as in the equity fund, i.e., only one fund can be picked from each of the 16 categories. The various debt schemes are mentioned below,
- Overnight Fund
- Liquid Fund
- Ultra Short Duration Fund
- Low Duration Fund
- Money market fund
- Short Duration Fund
- Medium Duration Fund
- Medium to Long Duration Fund
- Long Duration Fund
- Dynamic bond Fund
- Corporate Bond Fund
- Credit Risk Fund
- Banking and PSU Fund
- Gilt Fund
- Gilt Fund with 10-year Constant Duration
- Floater Fund
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Hybrid schemes
This fund has seven different categories of hybrid schemes as per the revised guidelines. These funds are mentioned below,
- Conservative Hybrid Fund
- Balanced Hybrid Fund
- Aggressive Hybrid Fund
- Dynamic Asset Allocation or Balanced Advantage Fund
- Multi Asset Allocation
- Arbitrage Fund
- Equity Savings
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Solution-oriented schemes
This category of funds are constituted to serve investors who invest in mutual funds with specific long-term goals. As per the new SEBI guidelines, there will be two categories in Solution-Oriented Funds. These funds are mentioned below,
- Retirement Fund
- Children’s Planning Fund
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Other schemes
These funds are collections of schemes that are not included in the rest of the four mentioned above. Here there is no restriction for AMCs to pick only one fund from each category. So, they can have various mixes of funds from different indexes.
These funds are,
- Index Funds
- Fund of Funds (FOFs)
SEBI’s main aim behind this segregation of mutual funds is to ensure uniformity in funds across the nation and enhance ease of access for investors. It will also allow mutual fund houses to have only one scheme in each subcategory, with some exceptions. This will also simplify the selection of funds from an investor’s perspective. By following these consolidated scheme guidelines, an investor can make informed decisions without much hassle or confusion.
Key highlights of SEBI guidelines for mutual funds for investors
SEBI has made several new amendments to the mutual fund guidelines. The key points of those amendments are:
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Assessment of personal finances
The investors are required to estimate their risk appetite along with their returns expectation before investing in the funds.
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Diversification
Diversification is inherent to mutual funds. Investors can spread their risk by making diverse investments. This will not only provide better chances for higher returns but also lower the chances of losses or risks for the investor.
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Specific Time frames
The time frame of investments are also crucial for their growth. Hence, investors should ensure that they stay invested in the scheme for the optimum time frame assigned by them.
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Declutter of portfolio
Selection of the right mutual fund scheme is essential to avoid any clutter. Investors need to invest in schemes that suit them better based on their risk parameters, returns expectations, investment budget, investment horizon, etc. To ensure that the investments selected will maximize their wealth, investors can take the help of professional fund managers that will curate their portfolio to achieve their investment goals.
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Researching information about funds to be invested in
Getting all the information about the mutual fund scheme to be invested in is crucial for any investor. This will assure the investor of no unwanted surprises or expenses as well as provide them of a realistic picture of the returns that can be generated by the fund.
Impact of new categorisation on investors
The new categories are segregated to serve the investors. This recategorization is expected to have the following impact on investors.
- Reduction in number of schemes leading to ease in selection of funds
- Provisions for merger of schemes
- Reduced expense ratio with increase in Assets Under Management (AUM) per scheme.
Conclusion
Overall, the reclassifications of mutual funds by the Securities and Exchange Board of India seem to be a sound step in the right direction. It persuades the fund managers to provide a clear, concise, and beneficial value proposition to the investors and upholds the investor’s awareness. It will help the investor in making correct investment decisions by selecting the right mutual funds based on their investment goals
Frequently Asked Questions
What is a mutual fund?
A mutual fund is a pool of investor funds that is invested into a collection of individual stocks and securities that will help the investor generate higher returns at lower costs based on their desired risk profile, returns expectations, etc.
What is Fund of Funds?
Fund of Funds is a type of mutual fund that invests in other mutual funds to generate returns rather than individual stocks or securities.
How many funds are available under equity funds as per the revised categorization?
As per the revised categorization, there are 11 funds available under equity funds.
What are solution oriented funds?
Solution-oriented funds are funds that are set up to meet the specific needs of the investors. The two types of solution-oriented funds available in India are,
- Retirement fund
- Children’s fund
