Mutual Funds re-categorization by SEBI is considered to be a step in the right direction. One of the good aspect of this re-categorization is that SEBI has clearly defined mutual funds categories. This makes investors easier to understand the risk return characteristics of a specific scheme they wish to invest.
Here is the complete list of mutual funds re-categorization with its definition by SEBI:
However within this re-categorization there is one aspect which may confuse investors. SEBI has introduced some new categories which were not there. In equity mutual funds now you have large and mid-cap category while in debt you have low duration fund or overnight money market funds. Investors may find it difficult to decide how these categories fit in their objective. Which of these categories are a considerable option and which one of them is good to give a miss?
Let’s understand few of these categories and what to be included in one’s portfolio:
Equity Mutual Funds
In equity mutual funds you have now large cap, large and mid-cap, multi cap , mid cap and small cap categories along with sector and ELSS funds. SEBI has clearly defined where these categories of mutual funds scheme can invest. So a large cap category will invest in top 100 stock stocks as per market capitalization. Similarly a mid-cap category will invest in 101-250th stocks. A small cap category will be invested in 251st company onward as per market capitalization.
Previous to sebi re-categorization we had large cap, multi cap and mid-cap categories for investors. A large cap category predominantly invested in large cap stocks but was the large cap universe was not well defined. A mutual fund company can find some large cap beyond top 100 stocks. Similarly in a mid-cap mutual fund scheme a small cap stock can find a place or vice versa. Thus the decision of involving a stock in a particular category was with AMCs and that’s where it made all the difference. To enhance a scheme returns companies use to consider exposure in such stocks beyond the mandate of the scheme.
Now SEBI has defined each and every category along with the universe of stocks they can invest. So post re-categorization a large cap mutual funds scheme has to hold minimum 80% in large cap stocks. These stocks can be included only from top 100 companies as per market capitalization. Thus, it leaves no decision making to AMC going beyond this definition of large cap fund.
Within this re categorization one more category has been introduced i.e. large and mid-cap fund. As per definition this category has to invest minimum 35% in large cap and mid cap stocks, while the rest can be invested either way. So Beyond 75% a fund manager is free to vary the allocation. If you consider the allocation then it’s similar to a multi cap fund. The difference within these 2 categories is that multi cap fund is not restricted to a strict allocation between large and mid-cap stocks. The only condition is that it has to adhere is to invest minimum 65% in equity related instruments. Look at these 2 and it does create a confusion.
Debt Mutual Funds
Similar to equities we too have some new categories in debt mutual funds scheme. We have now an overnight fund which will invest primarily in securities with 1 day maturity. Then we have a low duration fund which falls between an ultra-short term fund and short term funds. This fund mandated to invest in securities with Macleay duration of 6 months to 1 year. Previous to re categorization an ultra-short term funds was investing in securities up to one year maturity. But now an ultra-short term fund is restricted to invest in securities up to six months maturity. We have other categories in debt funds which are new to investors.
Should You Invest
Now comes the difficult question – should you invest in these new categories. Though it’s still early days to comment on the change in performance but surely the change will come in. We might see difference in returns of large cap mutual funds scheme from different companies reducing. The primary reason for this change is that the underline investment universe is strictly restricted now. On the other side multi cap funds may shine in the future since they will have all the flexibility to diversify among stocks from different categories. Similarly small cap funds will be the category to watch out for since they can invest in a wide list of stocks. But one category which may be good to miss is large and mid-cap. One can create the same diversification with large cap and mid cap schemes separately or invest in multi-cap if looking for better results.
Similarly on debt mutual funds the investors should not rush to include new categories like low duration funds.An ultra-short term fund may still meet the objective of short term investments. In a nutshell every category is not made for inclusion in your portfolio. Its wiser to stick to funds with performance track record and keep an eye on the performance of new categories before you make a decision.