Mumbai, December 5, 2017

Sebi clarifies on market capitalization norms for equity funds, while allowing certain other fund categories to invest in a wider range of securities

The Securities and Exchange Board of India (Sebi) on Monday clarified some norms for mutual fund classification that will make compliance easier for asset managers.

In a reworked circular, the capital markets regulator has clarified on market capitalization norms for equity funds, while allowing certain other fund categories to invest in a wider range of securities.

This circular amends an earlier 6 October notice, which asked fund houses to classify their schemes under five broad categories to cut through the clutter of similar plans and help investors in making better decisions.

The categories were further divided into sub-categories; for equity funds, the classification was based on market capitalization and for debt funds on investment duration.

Following the circular, the Association of Mutual Funds in India had written to Sebi saying that some of the provisions were restricting fund houses’ ability to offer products within the suggested classification and are likely to impact risk management. Mint first reported this on 7 November.

In the revised circular, Sebi prescribed that for equity funds, the market capitalization for the previous six months would be considered.

Market capitalization is the basis for equity fund classification. For instance, the norms state that an equity large cap fund will consist of at least 80% large cap stocks. Large cap stocks are defined as the top 100 companies in terms of market capitalization.

For a mid cap equity fund, at least 65% of the funds need to be invested in mid-cap stocks. These are stocks that rank between 100-250 in terms of market capitalization.

For debt funds, Sebi had categorized funds on the basis of maturity of the fund. Sebi has now revised the norms to focus on the maturity of the underlying security.

In addition, for medium and medium-to-long term debt funds, the fund manager is now allowed to reduce the fund duration by one year if there are adverse interest rate movements.

Fund houses have been asked to specify asset allocation in case of such adverse situations in their offer documents.

Additionally, banking and public sector unit (PSU) funds are now allowed to invest in municipal bonds in addition to debt instruments of banks and public sector banks.

The circular also clarified that a corporate bond fund can invest only in AA+ and higher-rated instruments while credit risk fund can invest in AA and lower rated securities.

“These are operational changes that will help the fund houses in complying with the Sebi provisions, without compromising the spirit of the original circular that insists on reducing duplication and similar schemes,” said Manoj Nagpal, chief executive officer of Outlook Asia Capital, a Mumbai-based mutual fund advisory firm.

The revised circular by Sebi, however, did not clarify on the industry demand of making allowances for schemes that have a decent track record.