With the absence of a regulatory definition of market capitalisation on the market-cap classification of schemes, the players unscrupulously classified these as large-cap, mid-cap, and small-cap.

For example, one fund house treated Rs 2,000 crore worth company as a small-cap, while the other treated it as a mid-cap.

Since almost all mutual fund houses took such a liberty, comparing schemes became difficult due to a lack of uniformity. The performance of a scheme that treated a Rs 2,000-crore company as a small-cap wasn’t comparable to a scheme that classified the same company as a mid-cap.

Simply because, if two schemes that were being classified as “midcap funds” had such a huge difference in their basic assumption, then their risk and return profile can never be the same—thus incomparable.  

The Securities and Exchange Board of India (SEBI) has reprimanded mutual funds for not maintaining uniformity in the scheme classification. It recently asked them to either reclassify schemes or merge them as per the revised guidelines.

According to the new regulations, the mutual fund houses will have to broadly classify their offerings into categories mentioned below:

• Equity Schemes;
• Debt Schemes
• Hybrid Schemes
• Solution Oriented Schemes
• Other Schemes

SEBI offered further explanation on market capitalisation based on the classification of schemes:

• Large-cap oriented schemes should invest at least 80% of their assets in large-cap stocks
• Large-cap and mid-cap schemes shall have minimum allocation of 35% in each category
• Similarly, mid-cap schemes and small-cap schemes shall invest at least 65% in mid-cap and small-cap stocks, respectively

And here’s how the market capitalisation categories were defined:

• Large caps: First 100 companies on full market capitalisation basis
• Mid caps: All companies from 101st to 250th on full market capitalisation basis
• Small caps: All other companies from 251st onwards on full market capitalisation basis

Initially, the mutual fund houses agreed with this decision, but changed their stance when they realised the difficulties in implementing the changes the capital market regulator suggested. In response, the industry body, Association of Mutual Funds in India (AMFI), made a representation to SEBI requesting amendments to the newly issued rules.

Taking a note of issues the mutual fund industry raised and realising the practical difficulties in the implementation, SEBI recently amended the classification norms .

In the original circular, SEBI directed the mutual fund houses to adopt the list of stocks the AMFI had prepared that classified them as large-caps, mid-caps, or small-caps. Further, it advised the association to adhere to the following points while preparing the list:

1. If a stock is listed on more than one recognised stock exchange, an average of the full market capitalisation of the stock on all such stock exchanges, will be computed;
    
2. In case a stock is listed on only one of the recognised stock exchanges, the full market capitalisation of that stock on such an exchange will be considered.
    
3. This list would be uploaded on the AMFI website and it will be updated every six months based on the data as of on the end of June and December every year. The data shall be available on the AMFI website within five calendar days from the end of each six-month period.

Mutual fund houses argued that, these norms would potentially limit their choices while picking stocks for the portfolio. Moreover, some fund managers opined that the new norms will push them take higher risks.

In the amended version of mutual fund classification rules, SEBI offered some concession by adding an additional point to the list above. The new circular says, “While preparing the single consolidated list of stocks, average full market capitalization of the previous six month of the stocks shall be considered.”

What are the implications of SEBI’s mutual fund circular

Nothing will change significantly, since the amendment, in this regard, won’t be considered in isolation, but will be an addition to the original provisions. Thus, it will only give the fund manager time to react if any market movement disqualifies the fund manager’s stock selection.

Consider this example: The fund manager of a mid-cap oriented scheme bought 10 stocks about two years back which, due to market movement, have become large-caps now. Given the new regulations, this results in the fund violating categorisation norms. Since the new amendments requires the AMFI to consider the market-cap’s six-month average , the fund manager will not be stressed to sell them immediately.

Conversely, a large-cap fund can make investments in such stocks only with a lag effect—this saves it from further flip-flops in buying and selling; by which, a forced decision is set to comply with the classification norms.

Currently, HDFC Mutual Funds, ICICI Prudential Mutual Fund, Reliance Mutual Fund, UTI Mutual Fund, Invesco Mutual Fund , and Kotak Mutual Fund, among others, have more than one scheme with similar asset allocation and scheme objective in their product basket. The scheme duplication is extremely prevalent in the large-cap category across the industry.

The fund houses mentioned above will have to reclassify the schemes or merge them. In either scenario, you, as an investor, will have to ensure the scheme objective is aligned to your investment objective and risk profile.

The merger and reclassification of schemes is likely to make it easier for you to compare schemes in the future.

Editor’s note: PersonalFN’s unbiased mutual fund research services will always hand-pick the right mutual fund schemes for your portfolio. Opt for PersonalFN’s Fund Select report  to know which mutual fund schemes to BUY, HOLD and SELL. After our rigorous shortlisting process, we go a step ahead when picking funds that are SIP-worthy. Through this, PersonalFN conducts a detailed analysis on how SIPs in the top shortlisted funds have performed, across multiple market conditions and timeframes. Only those funds that successfully pass this evaluation are chosen and listed for you. You can read more about the report and the subscription details here: The Super Investment Portfolio – For SIP Investors.

 

MustRead

Best Midcap Funds For 2018. Look Before You Leap!

Try our SIP Calculator to find future value of your SIP contributions.

  DISCLOSURE AS PER SECURITIES AND EXCHANGE BOARD OF INDIA (RESEARCH ANALYSTS) REGULATIONS, 2014  

About the Company including business activity 

Quantum Information Services Private Limited (QIS) was incorporated on December 19, 1989. 

QIS was promoted by Mr. Ajit Dayal with an objective of providing value-based information / views on news related to equity markets, the economy in general, sector analysis, budget review and various personal products and investments options available to the Public. It was the first company to start equity research on an institutional level.

'PersonalFN' is a service brand of QIS and was started in the year 1999. In 1999, the Company registered the Domain name www.personalfn.com for providing information on mutual funds and personal financial planning, financial markets in general, etc and services related to financial planning and research in various financial instruments including mutual funds, insurance and fixed income products to customers. It offers asset allocation and researched investment recommendations through its financial planning services. 

Quantum Information Services Private Limited (QIS) is registered as Investment Adviser under SEBI (Investment Adviser) Regulations, 2013 and having Registration No.: INA000000680. In terms of second proviso to Regulation 3 (1) of SEBI (Research Analysts) Regulations, 2014 the Company is not required to obtain Certificate of registration from SEBI.

Disciplinary history

There are no outstanding litigations against the Company, it subsidiaries and its Directors. 

and condition on which its offer research report. For the terms and condition for research report click here.

Details of associates

1. Money Simplified Services Private Limited;
2. PersonalFN Insurance Services India Private Limited;
3. Equitymaster Agora Research Private Limited;
4. Common Sense Living Private Limited;
5. Quantum Advisors Private Limited;
6. Quantum Asset Management Company Private Limited;
7. HelpYourNGO Private Limited;
8. HelpYourNGO Foundation;
9. Natural Streets for Performing Arts Foundation;
10. Primary Real Estate Advisors Private Limited;
11. Rahul Goel;
12. I V Subramaniam.

Disclosure with regard to ownership and material conflicts of interest

1. Neither QIS, it’s Associates, Research Analyst or his/her relative have any financial interest in the subject Company , except QIS receives fees for providing research to Quantum Equity Fund of Fund (QEFoF) which is Fund of Fund scheme managed by QMF.
2. Neither QIS, it's Associates, Research Analyst or his/her relative have actual/beneficial ownership of one per cent or more securities of the subject Company, at the end of the month immediately preceding the date of publication of the research report.
3. Neither QIS, it's Associates, Research Analyst or his/her relative has any other material conflict of interest at the time of publication of the research report except that QIS (PersonalFN) is, as per SEBI (Mutual Funds) Regulations 1996, an associate / group Company of Quantum Asset Management Company Private Limited and Trustees and Sponsor of Quantum Mutual Fund (QMF) and to that extent there may be conflict of interest while recommending any schemes of QMF. However any such recommendation or reference made is based on the standard evaluation and selection process, which applies uniformly for all Mutual Fund Schemes. The payment of commission (upfront /annualized & trail), if any, for any Schemes by QMF to QIS (PersonalFN) is also at arm's length and as per prevailing market practices

Disclosure with regard to receipt of Compensation
 

1. Neither QIS nor it's Associates have any compensation from the subject Company in the past twelve months.
2. Neither QIS nor it's Associates have managed or co-managed public offering of securities for the subject Company in the past twelve months.
3. Neither QIS nor it's Associates have received any compensation for investment banking or merchant banking or brokerage services from the subject Company in the past twelve months.
4. Neither QIS nor it’s Associates have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past twelve months except from Axis Bank Limited under a service agreement.
5. Neither QIS nor it's Associates have received any compensation or other benefits from the subject Company or third party in connection with the research report

General disclosure
 

1. The Research Analyst has not served as an officer, director or employee of the subject Company.
2. QIS or the Research Analyst has not been engaged in market making activity for the subject Company.

Subject Company means Mutual Fund Schemes

Quantum Information Services Private Limited CIN: U65990MH1989PTC054667 Regd. Office: 103, Regent Chambers, 1st Floor, Nariman Point, Mumbai - 400 021 Corp. Office: 103, Regent Chambers, 1st Floor, Nariman Point, Mumbai - 400 021. Email: info@personalfn.com Website: www.personalfn.com Tel.: 022 61361200 Fax.: 022 61361222

SEBI-registered Investment Adviser. Registration No. INA000000680, SEBI (Investment Advisers) Regulation, 2013

Add Comments