SEBI to revisit mutual fund categorisation, circular likely next week

Capital market regulator, the Securities and Exchange Board of India (SEBI) in consultation with the mutual fund industry is planning to revise fund categorisation into largecap, midcap and smallcap stocks, sources told Moneycontrol.

“A representative of the fund managers has been asked to create a new list as SEBI wants more stocks to be incorporated under largecaps, midcaps and smallcaps,” the source said.

Confirming the news, another source said, “SEBI may make an announcement to the same next week.”

In order to enable investors to make accurate comparisons of schemes, SEBI introduced categorisation and rationalisation of mutual fund schemes in October 2017.

This was done to ensure that an investor is able to take a more holistic and informed decision while investing in a particular scheme.

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The market regulator had issued a list defining largecap, midcap and smallcap companies in order to ensure uniformity in respect of the investment universe for equity mutual fund schemes.

Since then, AMFI, in consultation with SEBI and stock exchanges, prepares a list of stocks once  in six months based on the data provided by the BSE, National Stock Exchange (NSE) and Metropolitan Stock Exchange of India (MSEI).

SEBI’s last categorisation exercise had led to large scale restructuring of mutual funds, especially in mid and smallcap funds, as MFs could not deviate from the classification as defined by NSE and BSE.

Earlier, there was no standard definition to classify companies as large, mid or smallcap. Each fund house would employ its own criteria for deciding the same. This would lead to huge differences in the classification of companies by various asset management companies. Moreover, for investors, comparing two funds from the same category would sometimes result in an apple to orange comparison.

As per the new rules, top 100 companies, in terms of market capitalisation, will be considered as largecaps, the 101st to 250th companies will be considered as midcaps and the 251st onwards will be considered smallcaps.

Along with this, SEBI laid down a minimum investment criteria for large, mid and smallcap companies. As per this criteria, any midcap fund is now mandated to maintain 65 percent of its portfolio in midcap stocks.

Every reclassification has a cost to fund management for selling scrips and buying other scrips just to satisfy reclassification, all this at cost of fund expenses that shall hit NAV to be borne ultimately by investors.