Mutual funds re-categorisation: Don’t redeem in panic

Investors need not get rattled by markets regulator Sebi’s move to recategorise mutual fund schemes. Instead, they should look into the changes carefully to see if the new scheme structure gels well with their overall portfolio strategy or not, and then take a final decision.

In October last year, Sebi had asked all fund houses in the country to align their schemes under a broad framework that the regulator put in place. The fund industry was given six months to complete the process and it is now expected that this recategorisation should be over by the end of the month.

The main objective for the recategorisation of mutual funds is to help investors select schemes easily. According to Sebi, the schemes should be “clearly distinct in terms of asset allocation, investment strategy, etc”. The markets regulator divided mutual fund schemes into five broad groups, which are further divided into a total 36 categories.


The five broad categories are equity, debt, hybrid, solution-oriented and other schemes. Within these groups, there are sub-categories with debt funds being divided according to duration and accrual, while equity funds have been divided by market capitalisation, tax treatment, sectoral exposure, etc.

Financial planners and advisers say investors should not rush to redeem their existing schemes just because there are some changes to their attributes. “Not many schemes have undergone drastic changes in their attributes...lot of people are getting alarmed because of the use of jargons in the industry,” said Sanjeev Govila, a Delhi-based financial planner and CEO of Hum Fauji Initiatives. “Even if there are changes to the attributes of funds in one’s portfolio, investors should see if the changed scheme structure fits into their overall portfolio and then decide on the next course of action,” he said.

According to a city-based financial planner, if an investor has any doubts about the changes that have been made to the attributes of the schemes in which he has his investments, it’s always better to sit with his financial planner or adviser, go through them in detail and then decide whether to effect a change in the portfolio or not. “Rejig your portfolio structure only if there are some drastic changes in the attributes of the schemes that you have and the new structure does not gel well with your financial plan,” the financial planner said.

Financial advisers and planners also warn about two things. First, under the Sebi-mandated recategorisation exercise, fund houses have given investors the option to exit a scheme free of charge. But industry players say that, in any case, over 98% of investments by value in the entire MF industry is under a ‘no exit load’ structure. “So, investors shouldn’t fall pray to this option and redeem their scheme even though they don’t need to,” said Govila.

Second, some unscrupulous distributors are telling investors that they should exit their existing investments and enter some new ones so that the distributors can make some money. Investors should be careful about this, too, financial advisers and planners said.