Room for second-guessing

In 2017, the Securities and Exchange Board of India (Sebi) introduced a scheme categorization framework that transformed the mutual fund (MF) landscape.

- SANDEEP PAREKH

In 2017, the Securities and Exchange Board of India (Sebi) introduced a scheme categorization framework that transformed the mutual fund (MF) landscape. Prior to this, MF houses operated with significant discretion in naming and structuring schemes. It was common to find multiple schemes within the same fund house following near-identical investment strategies but marketed under different names. For instance, titles like "equity growth fund", "premier equity", or "opportunity fund" often masked portfolios heavily tilted toward large-cap stocks.

For retail investors, the result was heightened confusion. Many found it difficult to differentiate between schemes or evaluate their relative performance. Without clear parameters, comparison across asset management companies (AMCs) became a challenge, and investors were often left to navigate a cluttered and inconsistent product universe which incentivized old wine in new bottles.

Sebi's 2017 circular sought to address this by introducing 36 distinct categories of schemes. These were grouped under five broad heads—equity, debt, hybrid, solution-oriented, and others. Each AMC was permitted to offer only one open-ended scheme per category, with certain exceptions. This measure was aimed at eliminating duplication and improving comparability for investors. Sebi has taken a step further in its regulatory efforts. On July 18, it released a consultation paper proposing a new round of reforms aimed at revisiting and rationalizing MF categorization through a draft circular. This introduces structural shifts in how AMCs design, govern, and differentiate their offerings.