MF Changes – How much of a difference would it make?

Expanding the number of equity schemes

Under the new rules, the number of schemes available under active equity will be expanded from 11 to 13. There are no new schemes added, but two categories have been split. For instance, Value Funds and Contra Funds have been split into 2 separate categories, so AMCs can have a value fund and also a contra fund. However, minimum equity allocation has been increased from 65% to 80%. The two ideas must also be demarcated. Similarly, sector funds and thematic funds have also been demarcated into two categories with 80% exposure necessarily to that sector or theme. The ELSS Fund will be called an ELSS Tax Saver Fund to underline its purpose.

Replacing Solutions Funds with Life Cycle Funds

Solutions funds, comprising of retirement funds and children’s funds, were goal-based funds but had not attracted too much public attention. SEBI now plans to scrap the solution funds classification and replace it with “Life Cycle Funds”, which will be more comprehensively suggestive of financial planning. A life cycle fund will be a multi-asset fund with allocations across equity, debt, liquid assets, gold, silver, exchange traded commodity derivatives, REITS, and INVITs. This will align more closely with how investors plan their long-term goals around their life cycle shifts and could actually fill the gaps that were there in the erstwhile solutions funds.

Introducing the overlap clause in mutual funds

SEBI has now introduced a clear overlap clause where there are no limits on the number of funds that can be floated by the AMC. For example, while an AMC can have just one large cap fund and one mid-cap funds; there is no limit to the number of sectoral funds or the number of thematic funds that they can issue. Now, SEBI has made it clear that when a fund issues multiple sector funds or multiple thematic funds, the overlap should not more than 50%. This overlap is not only applicable within sector funds and thematic funds; but also with other equity fund categories, apart from large cap funds. This will ensure that each new fund has a genuinely different story to tell.

A good start, but one big question remains?

All the 3 changes by SEBI are well appreciated. Firstly, the equity fund category break-up was long overdue; Value and Contra funds as well as sectoral funds and thematic funds. They deserved a separate classification and this gives more leeway to AMCs. Solution funds were not adding any value, and a life-cycle fund would be more comprehensive. It remains to be seen how it takes off as a financial planning tool. The 50% overlap limit will make most funds true-to label. The big question; why do we call the fourth category as “Other Funds”, instead of calling them “Passive Funds?” That would, probably, convey their role and their real purpose more eloquently.