Mutual Fund Investments – SEBI Guidelines

The regulator for markets in India, SEBI (Securities and Exchange Board of India), works for the protection of investors’ interest in securities while regulating and promoting the securities’ market. The organisation has created guidelines for investors to gain awareness regarding the manner in which mutual funds function by offering the required information. The regulator aims to simplify the wide variety of schemes that tend to confuse investors due to their complexity. The guidelines regarding the consolidation and merger of MF schemes are created in an effort to make it easier for investors to compare different schemes made available by mutual fund companies.

Guidelines Regarding Structure

The guidelines regarding the structure of schemes define a Guarantor as someone who introduces a mutual fund. The guarantor’s role is to generate revenue through the launch of a mutual fund. The fund is then handed to a fund manager.

A sponsor, according to the guidelines, is defined as someone who sets up schemes in keeping with the regulations of the Indian Trust Act, 1882. Sponsors primarily have the role of listing the schemes with the Securities and Exchange Board of India.

The Securities and Exchange Board of India is responsible for making policies related to mutual funds. It also has the responsibility of regulating the industry and laying down the law so that investors’ interest is safeguarded. So far as ‘asset allocation’ and ‘investment strategy’ are concerned, mutual funds can be very different from one another. The new guidelines have focused on uniformity so far as the functioning of schemes is concerned. Investors will, therefore, find it easier to make investment decisions. To make things standard and to introduce uniformity in schemes that are similar to one another, the following is the manner in which mutual funds are categorised:

  • Equity funds
  • Debt funds
  • Balanced or hybrid funds
  • Solution-oriented funds
  • Other funds

Major Highlights of SEBI Regulations for Investment in Mutual Funds

The following are the major highlights of the regulator’s guidelines regarding mutual funds:

  • Mutual funds have been categorised into 5 groups – equity, debt, balanced, solution-oriented, and others.
  • Definitions of small, mid, and large cap have been made clearer to facilitate uniformity.
  • Solution-oriented funds come with a lock-in period.
  • Only one scheme is permitted in each category, apart from ETFs or index funds, thematic or sectoral funds, and fund of funds.

Apart from laying down the law, the Securities and Exchange Board of India has also created guidelines for investors.

SEBI Guidelines for Investors

  • Assessing personal finances: Mutual funds are highly diverse investment options. As a result, they carry some risk with them. Investors are urged to be clear when they assess their financial standing. They are also asked to be careful when assessing their ability to bear risk in case a scheme does not perform as expected. The risk appetite of investors must be considered individually in keeping with each scheme.
  • Research information regarding schemes: Before making investments in mutual funds, it is essential for investors to attain detailed information regarding the scheme in which they wish to invest. Equipping yourself with all the details regarding your investment options will make it easy to make the right decision.
  • Diversification of portfolios: Investors can spread their investments carefully by diversifying their portfolios. As a result, the potential to mitigate risks or maximise profits of potentially major losses increases. Diversification of portfolios is instrumental in gaining sustainable long-term financial results.
  • Refrain from cluttering portfolios: Select the right funds to create a portfolio needs professional management of the schemes in addition to careful monitoring. Investors should ensure that their portfolio is not cluttered while choosing the number of schemes to add to their portfolio in order to ensure that the schemes can be well-managed individually as well as collectively.
  • Assign time frames: Investors are advised to ensure that a time frame is assigned to each scheme in order to ensure that the plan grows. If there is stability in the maintenance of the schemes, market fluctuations and volatility can be curbed significantly.

Effects of New Categorisation on Investors

Investors will be affected by the new categorisation in the following ways:

  • The number of schemes available may be lower, thus making it relatively easier for investors to make a selection.
  • Some schemes may be merged with others.
  • The expense ratio of investors could decline because of the higher Assets Under Management per scheme.

Experts suggest that the latest guidelines regarding the merger and consolidation of schemes will essentially simplify things for investors when it comes to comparing and investing in the numerous schemes made available by fund houses. The guidelines are also expected to reduce clutter while introducing uniformity, thereby making it easy for individuals across the country to invest in mutual funds.

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Display of any trademarks, tradenames, logos and other subject matters of intellectual property belong to their respective intellectual property owners. Display of such IP along with the related product information does not imply BankBazaar's partnership with the owner of the Intellectual Property or issuer/manufacturer of such products.

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