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 AMCs 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.
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.
– 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?
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 Soon this classification may be outdated too.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.