Sebi's one-scheme-per-category to shake up mutual funds' industry

In a move that could lead to a huge overhaul in the Rs 20-lakh-crore mutual fund (MF) industry, market regulator Securities and Exchange Board of India (Sebi) on Friday laid down the framework for the categorisation and merger of schemes.

The market regulator provided for categories of each of the broad segments that include equity, debt, hybrid and solution-oriented schemes. For each of the five segments, Sebi has issued categories. A fund house will be allowed to launch only one open-ended scheme in each of the category.

The regulator, however, has been liberal in framing the categories. It has provided for 10 categories in the equity segment, which includes multi-cap, large-cap, mid-cap, small-cap, dividend yield and equity-linked saving schemes (ELSS). Similarly, debt segment has 16 categories including liquid, ultra-short duration, money-market and dynamic bond. Further, there are six categories in hybrid and two in the solution-oriented segment, which includes retirement and children’s fund.

Asset management companies (AMCs) that have more than one scheme in the stated category would be required to either wind up, merge or change the fundamental attribute of the scheme after obtaining regulatory permission.

“MFs would be required to analyse each of their existing schemes in light of the list of categories stated herein and submit their proposals to Sebi after obtaining due approvals from their trustees as early as possible but not later than two months from the date of circular,” said Sebi.

AMCs will also need to propose their future course of action for schemes that are not in alignment with the Sebi circular. After Sebi’s approval, AMCs will be given another three months to make necessary changes to comply with the one-scheme-per-category norm. In other words, the next six months will be a hectic time for the MF industry to ensure compliance with Sebi’s latest diktat.

“The industry needs to offer fewer well-defined choices rather than a plethora of clones,” said Aashish Somaiyaa, MD & CEO, Motilal Oswal AMC.

On several occasions in the past, the market regulator has frowned upon asset managers launching several me-too schemes aimed at mobilising assets without keeping the best interests of investors in mind.

Currently, the domestic 40-plus player MF industry offers a total of 830 schemes, of which 317 are open-ended equity schemes.

Industry players said following Sebi’s circular, several schemes will cease to exist.

“It is desirable that different schemes launched by a mutual fund are clearly distinct in terms of asset allocation, investment strategy. Further, there is a need to bring in uniformity in the characteristics of similar schemes. This would ensure that an investor is able to evaluate the different options available, before taking an informed decision to invest in a scheme,” Sebi said in a release.

Sebi has said the one-scheme-per-category rule will not be applicable to exchange-traded funds (ETFs) tracking different indices; fund-of-funds having different underlying schemes; and sectoral and thematic funds investing in different sectors.

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