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Last Updated : Jan 31, 2018 01:10 PM IST | Source:

Standoff between SEBI and mutual funds on scheme name change

SEBI has asked mutual funds to drop names like “Prudence” and “Balanced” from schemes which have 65 percent exposure to equities

Himadri Buch @himadribuch

Rakesh Seth (name changed) is not pleased. It’s not that the fund manager at one of the largest mutual fund houses in the country didn’t have things to worry about. He is already torn between a volatile Sensex, pressure to outperform his peers and identifying new investment opportunities. And now he has a new headache. Market regulator SEBI wants him to change the names of some of his most successful schemes.

SEBI in a formal meeting with mutual funds wanted AMCs like Seth's to modify names of certain schemes.

This has left Seth in a quandary regarding the investment strategy of such schemes, which are popularly known by their present names.  Seth, who manages assets worth Rs 30,000 crore across six schemes, is unsure how his existing investors will take to the name change.


Seth is not alone. His peers across fund houses are facing the same dilemma and all are confused.

Does the SEBI order imply that HDFC Prudence, one of the largest funds in terms of AUM in the country, will now have to change its name to HDFC Aggressive Hybrid Fund? Will Reliance Monthly Income Plan be rechristened to Reliance Regular Income Plan? Currently, five houses – HDFC, L&T, Mirae, Union and IDBI –  are using the word ‘Prudence’ in their balanced funds.

That is not all. Fund officials Moneycontrol spoke to have confirmed that SEBI has asked them to drop names like “Prudence” and “Balanced” from schemes which have 65 percent exposure to equities.

Similarly, SEBI has suggested that the word “Monthly” should be dropped from MIPs (Monthly Income Plans). MIPs are hybrid products that invest predominantly in fixed income securities and generally take equity exposure of 10-30 percent.

The market regulator has one more directive for the fund houses. Not more than one scheme of a fund house can have the word “Focussed,” even though the investment philosophy may be ‘focussed’ for all the schemes. For instance: Motilal Oswal Mutual Fund is known for its schemes which has the stamp of ‘Focused’ across most of their funds. For instance, one scheme is ‘focussed’ on 35 multicap scrips. Now the name will have to change.

Name Game

So why is SEBI insisting on a name change? The regulator, it seems, wants to make it easy for a customer to choose a mutual fund according to his needs and ability. According to the regulator, AMCs use these names as marketing tools to attract customers and many of the new buyers may not fully understand the scheme.

So SEBI wants MF companies to distinguish different schemes in terms of  asset allocation and investment strategy. The regulator also wants to  bring in a uniformity in similar schemes launched by different mutual funds so that an investor finds it easier to compare the products before buying.

That is why in its October 6, 2017 circular MF categorisation, SEBI while laying  down  the categories of schemes, described each scheme’s characteristics. The regulator mandated fund houses to categorise all their existing and future schemes into five broad categories and 36 sub-categories. The five broad categories are  – equity funds, debt funds, hybrid funds, solution oriented funds and other funds.

The equity funds for instance, will have 10 offerings, including  Multi cap fund (at least 65 percent exposure across market capitalization), large cap fund (having at least 80 percent exposure to large cap stocks), small cap fund (65 percent exposure to small cap stocks) and ELSS (80 percent on equity instruments).


Large cap stocks are the first 100 companies in terms of market capitalisation. While mid cap stocks comprise from the 101st to 250th companies, small cap stocks are of companies from the 250th rank and below.

These changes, SEBI hopes, will enable investors to know where the scheme invests and what is the level of risk involved and how much returns an investor should expect.

MF houses miffed

Interestingly, the name change was never part of the October 6 order and mutual fund houses are particularly miffed about that. They were just asked to submit proposals within two months from Oct 6 to align schemes with the new categorisation. While mutual fund houses have accepted the categorisation, they are unhappy at this “request” from SEBI to change the scheme names.

They fear that the name change might put a spanner to the industry’s stupendous growth. Mutual fund industry saw its assets base jump to over Rs 22 lakh crore in 2017, adding more than Rs 5.4 lakh crore to the kitty, on strong participation from retail investors and investor awareness initiatives.

Boosted by strong participation from retail investors, the number of mutual fund folios grew by a staggering 1.37 crore in 2017, to an all-time high of 6.65 crore. Folios are numbers designated to individual investor accounts, though one investor can have multiple accounts.

“Over the last 20 years, some fund names have become synonymous to investors with certain investment attributes and have become brands in themselves. Changing those names could lead to a post-investment dissonance for investors. Similarly, some fund houses just launched their schemes with these names,” said a fund manager from a private fund house on condition of anonymity.

For example, Union Mutual Fund has just launched its scheme Union Prudence Fund and collected funds from investors in December 2017.  Some fund house officials believe that an abrupt change of name may lead to investors getting jittery.

Concerns of fund houses notwithstanding, many existing investors may choose to redeem, thinking that a new name might lead to a change in investment strategy and future probable returns, say industry veterans.

In light of these concerns, AMCs say it will be a massive exercise to explain to investors both the change of categorisation and change of names leading to some investor anxiety which is not good for the industry. Mutual funds may have to invest a significant amount of money in branding and they will have to spend to re-establish their communication with investors.

A mutual fund house CEO, on the condition of anonymity, said: “SEBI should not get into micro-management like this. Name change is clearly a regulatory over-reach.”  Another CEO said, “SEBI says don’t call my existing fund as Balanced of Prudence. Will it be beneficial if I call it Aggressive Hybrid Fund?  Suggest me some names then. Will investors benefit from this?”

The investors, however, aren't too much concerned. Raghav Duggad has investments worth Rs 4 lakh across 5 mutual fund schemes. He is not perturbed by the possible changes. “As long as the investment objective of the scheme remains the same, I will not redeem just because of the name change.”

Adds Arun Kejriwal, Founder of Kejriwal Research: “Somebody who is investing in mutual funds, understands basic of MFs. So, from the investor perspective name change will make little or no difference. SEBI wants MFs to differentiate their schemes from the rest.”

While seasoned investors like Duggad might not be bothered, new ones might well be a little confused. “ So, fund houses will have to reinvent in terms of branding if they want to try come up with their unique selling point,” adds Kejriwal.

And, manager like Seth will know, is not easy

New Thresholds 

The name change is not all.

Going by the SEBI circular, funds benchmarked to midcap indices should have 65 percent of their assets in mid-caps (101st-250th stock). But from a total AUM of Rs 7,17bn (27 schemes), only one fund had 65 percent allocation to mid-caps. As per a CLSA report, Rs 19,300 crore of buying in midcaps would be required to reach the 65 percent lower limit.

In the case of large-cap schemes (with an AUM of Rs 1,46,000 crore), most of them have already reached the 80 percent minimum investment criteria. About Rs 3,500 crore of additional buying would be needed to make all of them compliant.

Small-cap funds (with AUM of Rs 27,200 crore) will need to spend  Rs 1,800  to meet the 65 per cent threshold.  Eventually, the additional buying would be a function of how the fund houses reclassify the funds, or effect mergers of various schemes in order to comply with the SEBI regulation.

According to sources, SEBI had called for a formal meeting individually to discuss the consolidation proposals and to inform mutual funds for revising scheme names.

Additionally, the capital market regulator has told fund houses that they cannot have more than one child benefit plan or a retirement plan. Also, fund houses now need to merge their multiple such plans with different investment objectives. For instance, if there are two retirement schemes launched by the same fund house—one of which invests 75 percent in stocks (aggressive plan) and the other invests 25 percent in stocks (conservative plan) - then SEBI wants both these plans to be housed under one scheme as sub-options

Some mutual funds are taking at as fait-accompli. “We don’t seem to have a choice. We have filed for change in name. Once they (SEBI) approves it we will put an addendum,” says Seth.

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First Published on Jan 31, 2018 01:08 pm
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