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Fund Classification Enhanced

Value Research has enhanced the classification system under which mutual funds are categorised to take into account the increasing number of institutional plans that are being launched.

Value Research has enhanced the classification system under which mutual funds are categorised and rated by it. The changes, which will be effective from May 31, 2003, introduce three new categories of funds, bringing the total to 20.

While all the new categories are of debt funds, they mark a significant innovation in the way Indian mutual funds are categorised. For the first time, we have a category of funds that is based on the kind of investors it is aimed at, rather than any investment characteristic. The new categories are:

· Debt: Medium-term Institutional
· Debt: Short-term Institutional
· Debt: Ultra Short-term Institutional.

This change in classification will be implemented through the entire spectrum of Value Research products, which includes this website, the Value Research Mutual Fund Performance Report, our monthly magazine Mutual Fund Insight, Value Research Asset Monitor.

The rationale for these changes is that institutional funds operate under a lower expense structure than retail-oriented debt funds. This lower expense puts them at a direct advantage, in terms of returns, vis-à-vis retail funds. Their performance therefore is not directly comparable to existing plans. But now with the help of this new classification it will be easy to make a meaningful comparison of fund performance.

Looking back, Franklin Templeton AMC was the first in the country to launch an institutional plan in September 2002. By May this year, the number of institutional plans introduced in the medium-term debt category had grown to 10. Even Short-term and Ultra Short-term categories have introduced institutional plans.

For AMCs, these categories make sense as corporates and high net worth individuals (HNIs) make big-ticket investments, which are easier to service. It is obviously more cost- efficient to collect and service Rs 1 crore from a single investor as compared to collecting the same amount in small portion from 100 investors. Funds, in turn, are passing on lower costs to big-ticket investors. Therefore, the minimum investment limit for institutional plans has been set much higher than that for a retail fund in the same category. For example, DSPML Bond Institutional Plan has a minimum investment limit of Rs 5 crore, it is just Rs 1,000 for DSPML Bond Retail.

Basically, when funds separate investors on the basis of their investment ability and offer distinct benefits to each category they are effectively ending the cross-subsidisation of small investors by large investors. This used to happen earlier as savings from mobilising large investments were deployed in collecting much smaller and dispersed sums from retail investors.