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Share Market November 16, 2017

Investing in Mutual Funds Under New Classification Plan

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The declaration by the government on the infusion of additional capital of INR 2.11 lakh crore in state-owned banks produced a domino effect. Not only did it bolster India Inc. on the availability of credit in near-future, the investors in banks’ stocks were greeted with an extraordinary surprise. Stocks of public sector banks saw a historic surge, as high as 40 percent, as sentiments were bullish on their recovery after a long spell of distress owing to NPAs and inability to lend to the market because of poor capital adequacy.

Now if you were someone who had placed money in a mutual fund scheme (Also read: Why Mutual Funds, And Which One) that invested yourmoney in PSBs, your assets rose beyond expectations. But the real problem until now was the distorted difference between schemes on offer by asset managers and that placement of collective money in categories ranging from large-cap to mid-cap and equity to debt to hybrid was ambiguous. This affected how funds invested in the banking sector stocks since there was no clear demarcation between large-caps like SBI and HDFC and small-caps like Andhra Bank and Allahabad Bank.

Securities and Exchange Board of India (SEBI) has now addressed this problem by asking mutual fund managers to classify their schemes against the backdrop of stocks held under them and maintain placement sincerity so that funds aren’t diverted to stocks that do not fall under the nomenclature of the scheme. (Also read: Consolidation of Mutual Fund Schemes -The Way Ahead) This is how you set to gain from this SEBI mandate.

  1. Well-defined schemes will ease investors’ decision-making and rule out slipups and future regrets. Now that equity, debt, hybrid would be diligently segregated with sub-classification (like equity schemes’ division under ten categories including large, multi, mid and small cap), people who shied away from investing in stock market products will also feel reassured.
  1. Name of the scheme from now onwards will indicate what kind of returns you can expect. Vague terms like high yield cannot be included in the name hence it will now be investor’s choice to either buy risk and high returns under equity schemes or safe but low returns under debt schemes. A dubious name can no longer determine investment choice.
  1. The third advantage comes from the element of certainty in the placement of money by fund managers. At a time when banking sector stocks are everyone’s choice, fund houses can be tempted to cash in on this by placing some money from the corpus of an integrally dissimilar scheme in these stocks. Such wandering will now be checked as complying with the nature of scheme has become an inevitable necessity for fund houses.
  1. Fund houses can be expected to scrap some of their old schemes and merge them with ones that have same investment mandate. With lesser number of schemes, investors will be better placed to compare schemes of one house with that of others. The downside, however, will be a surge in the corpus of a scheme to which others are merged. Combined with the factor that out-of-the-way placement of money in stocks isnow forbidden, investors may feel the pinch of lesser returns in near-term.
  1. Schemes that attracted investors through superficial promises of abnormally high yield will, in the end, find no takers as their returns will be compared to better players; stock markets can now see a rise in investors who place their funds with long-term growth perspective

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5 responses to “Investing in Mutual Funds Under New Classification Plan”

  1. Nitin Sharma says:

    Relived! Tired of exploring various schemes which essentially are almost same

  2. Kanak Saxena says:

    Please explain “The downside, however, will be a surge in the corpus of a scheme to which others are merged.”

  3. Vijay Mehta says:

    Why will returns decrease?

    • Chetan says:

      Currently, sometimes fund managers go beyond the mandate of the scheme and invest in securities which as per the norms of the scheme are not covered but they do so just to increase the returns. This will not be possible when classification is strong!

  4. Deepak Kumar says:

    Nice!

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