RECENT GUIDELINES BY

SEBI FOR MFs

Akshay Nagar
Vaibhav Nagpal
Aayush Goel
Sherin Alex
Tarun Kumar
TABLE OF CONTENT

• Introduction
• The structure of mutual funds as per SEBI guidelines
• SEBI Guidelines to invest in Mutual Funds
• Expense ratio changes(TER)
• How Investor will be benefited
• 10 Takeaways for Re-categorization
• conclusion

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INTRODUCTION
In India, the SEBI MF Regulations of 1996 govern the workings of
mutual funds. These guidelines treat mutual funds like Public
Trusts that fall under the Indian Trust Act of 1982. For handling
mutual funds and to ensure accountability on the trustees, the
guidelines specify a three-tier set up comprising of the fund
managers, the investors, and the representatives.

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.
GUIDELINESON 3
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THE STRUCTURE OF MUTUAL FUNDS
• 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.

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GENERAL GUIDELINES BY SEBI TO INVEST
IN MUTUAL FUNDS
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.

GUIDELINESON 5
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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.
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.

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SEBI CHANGES TER OF MUTUAL FUNDS (ECONOMICS
TIMES, SEPTEMBER -19 2018)
Aim is to make it cheaper to invest in mutual funds and to protect the
interests of small investors.
TER Cut for equity MF’s
Sebi, in its board meeting on September 18, 2018, announced
changes in the total expense ratio (TER) of mutual funds. It
made the changes to bring in transparency in appropriation of
expenses, and reducing mis-selling and churning. The changes
are as below:
Transparency in expenses: All commission and expenses, etc.
shall necessarily be paid from the scheme only and not from the
AMC/Associate/Sponsor/Trustee, or any other route. Further,
Sebi said that the mutual fund industry must adopt the full trail
model of commission in all schemes without payment of any
upfront commission or upfronting of any trail commission. GUIDELINESON 7
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GUIDELINESON 8
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CONTD.
• In case of close-ended and interval schemes, TER for equity-oriented
schemes shall be a maximum of 1.25 per cent and for other than equity
oriented schemes shall be a maximum of 1.00 per cent.

The TER for index schemes, Exchange Traded Funds (ETFs) and Fund
of Funds shall be maximum of 1.00 per cent. The TER for fund of funds
(FoFs) shall be a maximum of twice the TER of the underlying funds.
- FoFs investing primarily in Liquid, Index and ETF schemes: Total TER
(including the TER of underlying schemes) shall be maximum of 1.00
per cent.
- FoFs investing primarily in active underlying schemes: Total TER
(including the TER of the underlying schemes), shall be maximum of
2.25 per cent for equity oriented schemes, and maximum of 2 per cent
for other than equity oriented schemes.

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ADDITIONAL EXPENSES OF 30 BPS FOR
PENETRATION IN B-30 CITIES
• The additional expense permitted for penetration in B-30
cities, shall be based on inflows from retail investors. The
definition of ‘retail investors’ shall be determined in
consultation with the industry. Pending such clarification, the
additional incentive shall be permitted for inflows from
individual investors only and not on inflows from corporates
and institutions. Further, the B-30 incentive shall be paid as
trail only.

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PERFORMANCE DISCLOSURE
• Adequate disclosure of all schemes’ returns (category wise)
vis-à-vis its benchmark (total returns) shall be made available
on the website of AMFI.

Upon implementation of the above decisions, the trustees and

AMC boards shall monitor the implementation by the
respective AMCs and shall report to SEBI periodically, says
Sebi in its board meeting report.

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HOW INVESTOR WILL BENEFIT???(INDIAN EXPRESS –
12 OCT 2018)
• Investors can save up to 80-90 basis points in charges, every year, on
their AUM. For example, the SBI Bluechip Fund (AUM over Rs 20,000
crore) has a TER of 2.35%. Under the new rules, the TER will come
down to 1.4% (plus the additional TER on account of inflows from B-15
cities), and thus the investor will save between 80 and 90 basis points.
An investment of Rs 1 lakh in the scheme, growing at, say, 10% for 20
years with a TER of 2.35%, would have grown to a corpus of Rs 4.18
lakh; the same investment with a TER of 1.5% would grow into a corpus
of Rs 4.99 lakh.
• For regular growth schemes such as Aditya Birla Sunlife Frontline
Equity (AUM Rs 21,880 crore) the TER comes down from 2.18% to
1.4% (plus additional charge on inflow from B-15 cities) within the
scheme. With the changes brought in, the regular schemes will now
come much closer to the direct plans offered by them in terms of TER.
The direct plan of Aditya Birla Sunlife Frontline Equity has a TER of
1.31%. GUIDELINESON 12
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SEBI ISSUES NEW RULES TO STREAMLINE
MUTUAL FUND SCHEMES (OCT 2017)
• Schemes to be categorized into 5 groups - equity, debt,
hybrid, solution oriented and other schemes

• Specified period of lock in for solution oriented

schemes

• Large cap, mid cap and small cap defined to ensure

uniformity

• Only one scheme per category permitted except for

Index Funds/ETFs, Fund of Funds and
Sectoral/Thematic Funds GUIDELINESON
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TAKEAWAYS (RE-CLASSIFICATION AND RE-
CATEGORISATION) 31 JULY 2018 – FINANCIAL EXPRESS.
1) As per the new SEBI mandate, a fund house can offer 10 types of equity funds, 16
categorisations of bond schemes and 6 categories of hybrid fund schemes. In addition to
these funds, they are allowed to issue index funds, funds of funds and other solution-based
schemes.
2) The new category very precisely defines the tenure or type of security a fund can invest
in. For example, a short-term duration fund can invest in a scheme with a maturity of 1-3
years, while a medium duration fund can invest in securities with a duration of 4-7 years.
3) A corporate bond fund can invest in securities in a manner that at least 80% of the fund
is in corporate bonds rated AA, whereas a credit risk fund must have at least 65% invested
in corporate bonds of rating AA and below.
4) A short-term income fund can hold 10-20 year maturity government securities if the
overall duration is within 3 years.
5) With the precise definition of the tenure, fund managers now have less flexibility in
managing a scheme. For example, a short-term income fund with a portfolio duration of
2.8 years won’t be able to add too much of a new security with a duration of, let’s say, 3.5
years because it has a potential to push the overall duration beyond 3 years.

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6) Earlier the balanced funds never used to be balanced. According to the name, the funds were
supposed to invest 65-70% in the equities and the rest in debt. At the end of May 2018, its size was
24% of all pure equity funds, up from 10 per cent just two years ago. SEBI has given approvals to
only those new balanced funds if they manage to hold equities and debt in almost equal proportions.
7) After the re-categorisation, in a Balanced Hybrid fund, the percentage of equities can be 40-60 per
cent of the total assets and the rest in debt.
8) An Aggressive Hybrid fund, on the other hand, can have 65-80% of the assets in equities and 20-30
per cent in debt. The earlier balanced funds have to become aggressive hybrid fund, sacrificing the
name balanced fund.
9) A new category of a hybrid fund is called Dynamic Asset Allocation or Balanced Advantage Fund.
The fund manager can swing between equities and debt. If equities are down, then the manager has an
option to switch completely to debt. If the equities market has bottomed up, one has the flexibility to
acquire more equity funds.
10) A Conservative Hybrid Fund allows investing 10-25 % in equities and the rest in debt. Earlier,
fund houses used to call these funds fixed monthly/quarterly returns.

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CONCLUSION FOR RE - CATEGORISATION AND
MERGER…
 There will be greater clarity as far as the investors are concerned. Since the fund
classification is based on the end use of the funds and the asset quality, this is the
right step in terms of MF simplification for customers.
 There could be a merger of schemes. For example, if the AMC has 3 equity
schemes in the same category then under the new rules, there will be only 1
scheme. Every new scheme floated by the AMC must have a unique value
proposition to offer to investors.
 The exercise may result in some interesting reclassification. For example, if the
portfolio of the particular equity scheme is invested 96 % in the Nifty stocks then it
would require reclassification as an index funds and will entail lower costs.

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 As funds get bigger their average expense ratio loading on the clients will reduce.
This will ensure that the net impact on the investors is much lower and therefore
their net returns are actually much higher.

 There is only one challenge in this entire exercise. Merger of schemes could create
uneconomically large sized funds. This is truer of mid-cap funds where the
investment opportunities in the market are limited. Merging 3 mid-cap funds with
AUM of Rs.3000 crore into a single fund with AUM of Rs.9000 crore could make it
unwieldy. That will be a challenge for the fund manager.

 Overall, the SEBI move to reclassify mutual funds is a step in the right direction. It
compels fund managers to actually provide a clear value proposition to the
investors. That could be the big take-away!

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BIBLIOGRAPHY
• https://indianexpress.com/article/explained/how-mutual-fund-investors-gain-from-new-sebi-
norms-5370956/
• https://economictimes.indiatimes.com/mf/mf-news/sebi-changes-total-expense-ratio-ter-of-
mutual-funds/articleshow/65859125.cms
• https://www.financialexpress.com/money/10-insights-from-recent-sebi-re-categorisation-of-
mutual-funds/1264291/

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GUIDELINESON 19
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