Sebi clarifies regulations for classification of mutual funds

MUMBAI: The Securities and Exchange Board of India (Sebi) on Monday clarified some norms for mutual fund classification that will make compliance easier for asset managers. In a reworked circular, the capital markets regulator has clarified on market capitalisation norms for equity funds, while allowing certain other fund categories to invest in a wider range of securities.

This circular amends an earlier October 6 notice, which asked fund houses to classify their schemes under five categories. These were divided into sub-categories; for equity funds, the classification was based on market capitalisation and for debt funds on investment duration.

In the revised circular, Sebi prescribed that for equity funds, the market cap for the previous six months would be considered.

Market cap is the basis for equity fund classification. For instance, the norms state that an equity large cap fund will consist of at least 80% large cap stocks. Large cap stocks are defined as the top 100 companies in terms of market capitalisation. For a mid cap equity fund, at least 65% of the funds need to be invested in midcap stocks. For debt funds, Sebi had categorised funds on the basis of maturity of the fund.

In addition, for medium and medium-to-long term debt funds, the fund manager is now allowed to reduce the fund duration by one year if there are adverse interest rate movements.

Fund houses have been asked to specify asset allocation in case of such adverse situations in their offer documents.