Sebi proposes to conduct review of MF schemes’ categorisation

New Delhi: Markets regulator Sebi on Friday proposed to review the categorisation of mutual fund schemes in a bid to improve clarity and address the issue of overlap in portfolios of schemes.

The proposal came after Sebi noted a significant overlap of portfolios in some schemes and felt the necessity to introduce clear limits to the industry to avoid schemes with similar portfolios.

In its consultation paper, Sebi suggested that mutual funds should be permitted to offer both Value and Contra funds, subject to the condition that no more than 50 per cent of the schemes’ portfolios would overlap at any point in time.

The overlap condition should be monitored at the time of New Fund Offer (NFO) deployment and subsequently on a semi-annual basis using month-end portfolios.

In case of a higher-than-permitted overlap, the Asset Management Company (AMC) should rebalance the portfolios within 30 business days. An extension of up to an additional 30 business days may be obtained from the Investment Committee (IC) of the AMC, with the reasons for granting the additional days properly recorded and maintained.

“If the deviation persists beyond this period, investors of both the schemes shall be given an exit option without any exit load,” Sebi proposed.

The regulator proposed that mutual funds should be permitted to invest the residual portions of their portfolios in equity, debt (including money market instruments), gold and silver, Real Estate Investment Trusts (REITs), and Infrastructure Investment Trusts (InvITs) under the equity category schemes.

Sebi also recommended changes in the nomenclature of debt schemes to enhance investor understanding. It proposed that the term ‘Duration’ be replaced with ‘Term’ for better clarity. Additionally, the ‘Low Duration Fund’ should be renamed as ‘Ultra Short to Short Term Fund’ to better reflect the investment objective, and the name of each debt scheme should indicate the fund’s duration, such as Overnight Fund (1 Day) or Medium Term Fund (3 to 4 years).

The regulator further proposed that mutual funds should be allowed to launch sectoral debt funds, provided that no more than 60 per cent of the portfolio in a sectoral debt scheme overlaps with any other sectoral debt or debt category scheme.

This move should also ensure sufficient availability of investment-grade papers within the chosen sectors.