The Indian capital markets regulator — Securities and Exchange Board of India (Sebi) — on Friday, July 18, released a proposal to review the categorisation of mutual fund schemes. The move is aimed at improving the clarity and addressing the issue of overlap in portfolios of schemes.
The proposal came after Sebi said that it had noticed a significant overlap of portfolios in certain schemes. It was therefore felt necessary to introduce clear limits to the industry to avoid schemes with similar portfolios, Sebi added.
In its consultation paper, Sebi suggested that mutual funds should be permitted to offer both Value and Contra funds, subject to the condition that no more than 50% of the schemes’ portfolios would overlap at any point in time.
The overlap condition shall be monitored at the time of NFO deployment and subsequently on a semi-annual basis using month-end portfolios, the markets regulator added.
In case of more than permitted overlap, AMC shall rebalance the portfolios within 30 business days. An extension of up to an additional 30 business days may be obtained from the Investment Committee (IC) of the AMC.
Reasons for granting the additional business days should be properly recorded and maintained. Endeavour shall be made to ensure that the scheme portfolio overlapping remains within 50% at all times, Sebi said.
“If the deviation persists beyond this period, investors of both the schemes shall be given an exit option without any exit load,” it proposed.
The markets regulator also proposed that mutual funds shall be permitted to invest the residual portion in equity, debt (including money market instruments), gold & silver (instruments as permitted by SEBI), REITs and InvITs, subject to the ceilings laid out in MF regulations w.r.t the respective asset class, in the equity category schemes.
Proposed changes for debt schemes
Sebi has proposed changes to the naming conventions of debt schemes to improve investor clarity. It recommended replacing the term ‘Duration’ with ‘Term’ for better understanding. Additionally, the ‘Low Duration Fund’ should be renamed to ‘Ultra Short to Short Term Fund’ to more accurately reflect its investment objective. Sebi also suggested that each debt scheme’s name should clearly indicate its investment horizon—for example, Overnight Fund (1 Day) or Medium Term Fund (3 to 4 Years).
Additionally, Sebi proposed that mutual funds be allowed to launch sectoral debt fund subject to ensuring that no more than 60% of the portfolio in a sectoral debt scheme overlaps with any other sectoral debt scheme/debt category scheme, while also ensuring sufficient availability of investment-grade paper in the chosen sectors, and exempting such schemes from the sectoral exposure limits.
Moreover, it said that mutual funds should be allowed to invest the residual portion of their debt category schemes in REITs and InvITs, except for the schemes with shorter duration, such as Overnight Fund, Liquid Fund, Ultra-Short Duration Fund, Low Duration Fund, and Money Market Fund.
Another Sebi proposal suggested that Arbitrage Fund category scheme should be allowed to take exposure in debt instruments only in government securities with a maturity of less than one year and in repos backed by government bonds. For equity savings schemes, it suggested that net equity exposure and arbitrage exposure should be mandated between 15% and 40%.
With respect to hybrid category schemes, mutual funds should be allowed to invest the residual portion in REITs and InvITs, except in Dynamic Asset Allocation and Arbitrage Funds.
Furthermore, mutual funds should be permitted to offer different types of schemes within the solution-oriented category, offering varying mixes of equity and debt components.
Sebi also recommended that mutual funds be allowed to offer solution-oriented life cycle fund of funds with a target date. These schemes could include lock-in features tailored for specific financial goals such as housing, marriage, and other objectives.
Additionally, the schemes may offer varying lock-in periods, such as 3 years, 5 years, or 10 years, to suit different investor needs.
Also, Sebi proposed a change in terminology, suggesting that the word ‘fund’ in scheme names be replaced with ‘scheme’. For example, instead of ‘Large Cap Fund’, it should be referred to as ‘Large Cap Scheme’.
Overall, mutual fund offerings would continue to be grouped under five broad categories — Equity-oriented schemes, Debt-oriented schemes, Hybrid schemes, Solution-oriented schemes, and Others.
The Sebi has sought public comments till August 8 on the proposals.
