1. More about SEBI
The Securities and Exchange Board (SEBI) is the designated regulatory body for finance and markets in India. The primary function of the board is to protect the interests of the investors in securities and promote and regulate the securities market. SEBI has laid the ground rules for investors to become aware of the functioning of the mutual funds by providing necessary information. They serve to simplify the broad spectrum of mutual fund schemes that may often seem quite confusing to the investors. The guidelines on the merger and consolidation of mutual fund schemes issued by SEBI are aimed at simplifying the process of comparing various mutual fund schemes that are on offer by fund houses.
2. The structure of mutual funds as per SEBI guidelines
The SEBI guidelines define the Guarantor as one who, in his capacity as an individual or in partnership with a different entity or entities, launches a mutual fund. The role of the guarantor is to make revenue by putting together a mutual fund and handing it to the fund manager.
A sponsor sets up the mutual funds as per the guidelines of the Indian Trust Act, 1882, for Public Trust. They are responsible for listing with the SEBI, having provisions for resource management and ensuring the functioning of the fund takes place as per the SEBI guidelines.
The Trustee or Trust is established through a trust deed that is implemented by the sponsors of the funds and is accountable to all the investors of the mutual fund. The trustee company is regulated by the Indian Companies Act 1956, while the firm and the board members are overseen by the Indian Trust Act, 1882. The Investment management of the trust is done through an Asset Management Company which is to be listed as per the regulations of Companies Act of 1956.
3. Role of SEBI in Mutual Fund Regulations
As far as Mutual funds are concerned, SEBI makes the policies for mutual funds and also regulates the industry. It lays guidelines for the mutual funds to safeguard the investors’ interest.
Mutual funds are very distinct in terms of their investment strategy and asset allocation activities. This requires bringing about uniformity in the functioning of the mutual funds that may be similar in schemes. This will assist the investors in taking investment decisions more clearly.
To facilitate this standardization and bringing about uniformity in the similar schemes, the mutual funds have been categorized accordingly as follows.
a. Equity Schemes
b. Debt Schemes
c. Hybrid Schemes
d. Solution Oriented Schemes
e. Other Schemes
The categorization and rationalization of mutual funds into these five broad categories ensures that the mutual fund houses are only able to have one scheme in each sub-category, with some exceptions. The categorization helps in simplifying the selection of funds and works in the best interest of the investors by allowing them to evaluate their risk options prior to making informed decisions about investing in the right scheme. Following this consolidation of schemes, the investors can take a more informed decision without much hassle or confusion. In order to fulfill this purpose, SEBI has come up with some guidelines to help the retail investors in their mutual funds’ investment decisions.
4. Key Highlights of SEBI guidelines for Mutual Funds
a. Categorization of schemes into five groups – Equity, Debt, Hybrid, Solution Oriented, Others
b. To ensure uniformity, large, mid and small cap has been defined clearly
c. There is a lock-in period specified for solution-oriented schemes
d. Permission of only one scheme in each category, except for Index Funds/ Exchange Traded Funds (ETF), Sectoral/Thematic Funds and Funds of Funds.
5. SEBI Guidelines to invest in Mutual Funds
SEBI keeps in place the regulatory framework and guidelines that govern and regulate the financial markets in the country. The guidelines for investors are listed below.
a) Assessment your personal financial situation
Mutual funds present the most diversified form of investment options and therefore may carry a certain amount of risk factor with it. Investors must be very clear in their assessment of their financial position and the risk-bearing capacity in the event of poor performance of such schemes. Investors must, therefore, consider their risk appetite in accordance with the investment schemes.
b) Obtain researched information on the mutual funds’ investment schemes
Before venturing into mutual fund investment, it is imperative for you as an investor to obtain detailed information about the mutual fund scheme option. Having the right information when required to make the necessary decision is the key to making good investments. This may help in choosing the right schemes, knowing the guidelines to follow and also be informed of the investors’ rights.
c) Diversify your portfolios
Diversification of portfolios allows investors to spread out their investments over various schemes thereby increasing chances of maximizing profits or mitigating risk of potentially huge losses. Diversification is crucial to gaining long-term and sustainable financial advantage.
d) Avoid the clutter of portfolios
Choosing the right portfolio of funds requires managing and monitoring these schemes individually with care. The investor must not clutter the portfolio and decide on the right number of schemes to hold so as to avoid overlap and be able to manage each one of them equally well.
Not sure of the right schemes for your portfolio? ClearTax can help simplify this for you.
e) Assign a time dimension to the investment schemes
It is advisable for the investors to assign a time frame to each scheme to encourage the financial growth of the plan. It may help in containing the volatility and fluctuations in the market if the plans are maintained stably over a period of time.
6. How will the new categorization Impact me as an investor
This scheme is fashioned to help the investors in the following ways:
a. This may reduce the number of schemes on offer, thereby, making it comparatively easier to choose
b. It may have some schemes get merged with the others
c. It may cause your expense ratio to fall due to the higher AUM per scheme
With the number of funds available and the changes brought about, it can get a little confusing for a new investor to keep up. This is where ClearTax comes to your aid. Contact us for any queries you may have regarding the SEBI guidelines for investing in mutual funds.