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Digging deeper into new mutual fund grouping

We tell you how SEBI's classification of mutual fund schemes affects you

Digging deeper into new mutual fund grouping

In the article titled 'The grand fund makeover', we informed you about SEBI's classification of mutual fund schemes. Now, we tell you how it affects you as an investor.

The new fund classification has its own share of hits and misses. The biggest advantage of the new classification is that it will bring uniformity to fund schemes across fund houses. In the current scenario, there are a number of schemes of the same type within a fund house which hinders comparison. For instance, within the mid-cap category, there are schemes that invest in mid, small and large-caps in varying proportions. The new classification clearly states the definition of a mid-cap fund. This will facilitate comparisons of mid-cap schemes across fund houses.

Another advantage of the new classification is that it is likely to lead to economies of scale for fund houses, thus reducing fund costs. This is because the new classification will lead to a lot of funds getting merged which will result in bigger fund sizes. Bigger funds can keep their costs low and remain profitable.

Among the downsides of the new system are too many categories of funds. While SEBI's intention was to reduce complexity, the new classification has far too many schemes to be called 'simple'. There are 16 categories of debt funds alone. For a layman, the job of choosing a suitable fund hasn't got any easier. Another downside of the new classification is that fund houses will be forced to merge their schemes or close the ones that don't readily fit into a category. This will lead to inconvenience of the investors in these schemes.

Finally, as fund sizes grow, it will become a fresh problem for certain funds that can't afford to grow any bigger. Consider small-cap funds for instance. A big small-cap fund will find it difficult to deploy its corpus, given the lack of liquidity and number of opportunities in the Indian small-cap space.

AMFI has already approached SEBI asking it to review the new system as it limits fund houses' ability to offer new products. Meanwhile, fund houses are busy reading their offer documents minutely.