SEBI proposes nomenclature rules for mutual funds

By Shalini Pandey

The Securities and Exchange Board of India’s (SEBI’s) mutual fund advisory panel has recommended strict definitions on how mutual funds are categorised, a move that might halve the number of schemes offered by asset management companies currently.

The capital markets regulator aims to ensure that an asset management company has only one product offering in each category. The move will help investors cut through the clutter of 2,000 investment schemes and aid decision-making. At the end of August 2017, 42 fund houses in Indian managed Rs 20.6 trillion. The panel has recommended that funds be broadly segregated into equity, debt, hybrid and thematic. In categories such as equity and debt, there would be further sub-categories such as large cap and small cap.

What was the need?

Currently, SEBI nomenclature rules for mutual funds loosely define just two aspects: whether a fund is open-ended or close-ended and whether it invests in equity or debt. Some of the definitions which the mutual fund panel has recommended are currently adopted by the industry. However, there was no sanctity to investment objectives or names. For instance, some of the large funds’ houses are managing two equity-linked savings schemes, or four monthly income plans, or exactly the same kind of balanced funds.

“In many of these cases, these schemes are exactly same in their investment pattern and nature. The only difference is the name. This often ends up confusing the customer and he/ she might end up buying the same scheme because their names are different,” said Manoj Nagpal, Chief Executive Officer of Outlook Asia Capital, a Mumbai-based mutual fund advisory firm.

A true reflection

Now, the categories and nomenclature devised by the panel are to ensure that scheme names reflect the nature of its investments. If a fund is called a large cap fund, then 80% of the money received will need to be invested in large cap stocks. If some funds do not fall into the defined categories, they will be shut.

The categories and nomenclature made by the panel were aimed to ensure that every scheme’s name reflects the true nature of the investments. SEBI is looking to notify these by the end of the month or after its board meets on 18 September 2017, according to sources.

What will AMC’s do?

Mutual funds are already planning mergers of schemes before the axe falls.  “We have started operationalising merger plans as we are expecting SEBI’s notification any day. The major challenge is to merge two very large schemes. In such a scenario, most fund houses are planning to tweak the similar schemes in terms of their investment objective so that they can both survive under defined nomenclatures,” said an official of a top fund house who did not wish to be named.

Amendments to the income tax act in the past two fiscal years’ budgets will also make mutual fund mergers easier. In the budget for the financial year 2017, the government exempted scheme mergers from the capital gains tax. Further, in the budget for this fiscal, the finance ministry clarified that if an investor chooses to exit a merged scheme, the date and cost of investment of the original scheme will be considered for taxation.

At an event organised by industry lobby group Federation of Indian Chambers of Commerce and Industry, G. Mahalingam, a whole-time member at the capital markets regulator, said SEBI proposed to soon introduce rules for these mergers.

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