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Share Market November 14, 2017

Consolidation of Mutual Fund Schemes – The Way Ahead

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Indian retail investors are increasingly placing their money in stock market products. Mutual Funds not only eased the manner in which individuals could invest in shares and bonds, but they also cut down minimum investment requirements by floating systematic investment plans (SIP). (Also read: and-which-one” Why Mutual Funds, And Which One) SEBI, the regulator of the capital market, has lately realized the necessity of simplification in mutual fund investments since most investors just rely on company representatives’ pitch while taking investment decisions. Large-cap, mid-cap and small-cap are now common terms within the investors’ circle;it’s time we move a step further.

It may not need reiteration that Indian stock exchanges are returning big money to investors, but any impending correction that can bring down the prices of shares and bonds and subsequently alter the value of mutual fund portfolio cannot be left overlooked. Smart and informed decision making is thus the need of the hour so that retail investors aren’t disappointed in the long-run and this wave of shift of interest from traditional assets like gold (Also read: The Guide to Investing In Gold) and bank deposits to stock market products doesn’t fade away.

Keeping this in mind, SEBI has directed mutual fund companies to consolidate their schemes and categorize products in such a manner that investor doesn’t feel confused and lost while opting a scheme of her interest. The rationale is why to have multiple products with different names and taglines when all have exposure to the same asset class, say large-cap. Investors have now passed the phase when they could not construedifference between investment in shares (deemed as risky but one with higher returns) and bonds (risk-free but lesser returns); the next level is sub-categorization of schemes and merger of those with thesame asset class.

Here’s decoding the SEBI directive. Mutual fund schemes will now be placed within categories named Equity, Debt, Hybrid, Solution-oriented and Others, with a further sub-categorization depending on asset type like large, mid or small cap. For those who wanted enhanced clarity and definite distinction, top 100 companies (in terms of market value) will now essentially be called large-cap, mid-cap will consist of companies below this and upto 250, and companies outside top 250 will be called small-cap.

A lot many investors who wish to avail benefits of both equity and debt by investing in hybrid schemes will now find it simpler to comprehend the risk underlying their product of choice with segregation based on scheme’s exposure to equity and its subsequent naming as ‘aggressive,’ ‘conservative’ and ‘balanced.’Another great advantage of the SEBI’s move is fund managers would now strictly adhere to commitments, and any diversion of funds will be out of the picture. This, in turn, will shed light on the best asset class that could return maximum value to its backers.

The downside of this strict observance of the mandate is fund managers would feel suffocated at a time when a particular scheme is underperforming, and they are unable to take corrective actions by shifting some of the corpus to better-performing asset classes. In the long-term, however, managers will learn how to maneuver within defined boundaries. The key takeaway is mutual fund investment is set to becomeeven simpler in coming days and investors will feel empowered and better placed to take informed and prudent investment decisions.

Also read: Investment Advice for Millennials of India

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4 responses to “Consolidation of Mutual Fund Schemes – The Way Ahead”

  1. Binay Rathi says:

    Much needed clarity will come in now…

  2. Raman Deep Singh says:

    Sticking to the set mandate of the scheme will definitely be both good and bad!

  3. Kartik says:

    It will also decrease the huge number of schemes in the market

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