Impact on Investors: Categorization and Rationalization of Existing Mutual Funds

12 September 2022
4 min read
Impact on Investors: Categorization and Rationalization of Existing Mutual Funds
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Do you know the two main qualities a mutual fund holds? One is that they are highly leveraged, and secondly, you are allowed to invest in other mutual funds too, which makes it cluttered. Doesn’t it? But in the first place, mutual funds were made to make investing quite easy, and investors would not really have to be burdened with picking individual stocks. 

But recently, SEBI came up with a Categorization and Rationalization of the Existing Mutual Funds in order to achieve consistency in the working of AMC across explicit classes. This, in fact, is quite a big change in terms of mutual funds of India. The new simplification is an exercise that is stepped in the right direction for comparisons. So let us see in detail the categorization and what it is all about.

The New Mutual Fund Categories and Subcategories (2021)

The First Five Groups to Classify Schemes

  1. Equity Schemes
  2. Debt Schemes
  3. Hybrid Schemes
  4. Solution-Oriented Schemes
  5. Other Schemes
  • Equity Funds and Sub-Categories
  • Large Cap funds
  • Large & Mid Cap funds
  • Mid Caps funds
  • Small Caps funds
  • Multi Caps funds
  • Dividend Yield funds
  • Value funds
  • Contra funds
  • Focused funds
  • Sector and thematic funds
  • ELSS funds 
  • Debt Funds and Sub Categories
  • Banking and PSU funds
  • Gilt funds
  • Gilt funds; 10-year constant duration
  • Floater funds
  • Corporate bond funds
  • Credit risk funds
  • Long duration funds
  • Dynamic bond funds
  • Short duration funds
  • Medium duration funds
  • Medium to long-duration funds
  • Overnight funds
  • Liquid funds
  • Ultra-Short Duration funds
  • Low duration funds
  • Money market funds
  • Hybrid Funds Sub Categories
  • Conservative hybrid funds
  • Balanced hybrid funds
  • Aggressive hybrid funds
  • Dynamic Asset Allocation 
  • Multi-Asset funds 
  • Solution-Oriented Schemes
  • Retirement Plans
  • Children Future Planning
  • Other Schemes
  • Index Funds
  • Fund and Funds
  • ETFs

Will this Change Past Performances?

When the fund is changing its mandate for change in the portfolio strategy in order for the categorization and rationalization to come into effect, then it is quite obvious that the earlier strategy would also result in the past performance not being valid. 

It is a given that a new strategy has come about and taken over, so you may not expect past returns going forward from this, and you do not know how the strategy will play out. When the fund changes its nature, that means the past pattern is not valid going forward.

How Does this Help Investors?

– It was earlier hard to gauge which is large-cap and which was not, and with every fund having its own definition, it was quite hard to carry out the comparisons correctly. There were times when large-cap funds could be called mid-cap funds easily. So the setting of the definitions helps eliminate the cap-associated confusion to some extent.

– Over time, there have been just too many schemes that have come into existence. So the clean-up will, without a doubt, will reduce the clutter.

– There were also a lot of unbalanced schemes that were stuffed with a lot more equity than was required. This made it difficult to compare the two balanced funds on the basis of returns.

– One of the biggest advantages of this is that it makes mutual fund comparisons much easier. This will also lead to comparisons within the same categories, and it will without a doubt be giving relative comparisons across the same categories, which will make much more sense. It would not be like comparing oranges and apples, would it?

Conclusion

There will always be newer ways for classification, that’s no doubt at all. Soon this classification may be outdated too. But for now, we have a better classification than before that does bring out some tremendous benefits for investors, fund houses, and all the associates.

To be very fair, this is quite a big change, and AMCs will take time to stabilize their portfolios and reclassify schemes. Things are changing for good, and some investors might feel like it is a time of uncertainty, but you cannot resist a change that happens for good. Also, you have definitely read through the benefits of it.

Disclaimer

The stocks mentioned in this article are not recommendations. Please conduct your own research and due diligence before investing. Investment in securities market are subject to market risks, read all the related documents carefully before investing. Please read the Risk Disclosure documents carefully before investing in Equity Shares, Derivatives, Mutual fund, and/or other instruments traded on the Stock Exchanges. As investments are subject to market risks and price fluctuation risk, there is no assurance or guarantee that the investment objectives shall be achieved. Groww Invest Tech Pvt. Ltd. (Formerly known as Nextbillion Technology Pvt. Ltd) Ltd. do not guarantee any assured returns on any investments. Past performance of securities/instruments is not indicative of their future performance.
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