Kolkata: On Feb 26, capital market regulator Sebi has published a circular that will affect a large number of existing investors through a few important steps. The circular on “Categorization and Rationalization of Mutual Fund Schemes”, will first affect all investors of children’s funds and retirement funds. For these two important solution-oriented schemes have been discontinued with immediate effect.
No investment in children’s funds and retirement funds
Since these to categories of funds have been stopped, there will be no further investments of any sort in these — SIP or lumpsum. Both categories were important since many parents would invest in these funds to for financial security for their children, who would get a neat corpus when they turn 18 for higher studies or starting a business etc. Perhaps even more popular were retirement funds since this is becoming a pressing need with the passage of time. Retirement funds, as the name implies, was meant for turning investments into these as corpuses that retirees could depend on for financial sustenance after hanging up their boots.
To be merged with other funds
These schemes will be merged into other funds which have similar asset allocation and risk profiles, However, that can be done only after the approval of the regulator. There are as many as 15 children’s funds and an almost a double number (29) of retirement funds in the market now (till the end Jan 2026).
“Solutions-oriented scheme category is being discontinued w.e.f the date of the circular. Existing schemes in this category shall stop all subscriptions with immediate effect. Such schemes shall be merged with any other scheme having similar asset allocation and risk profile with prior approval from SEBI,” the circular said.
New fund category: Life cycle funds
Those who want to invest for the long-term, Sebi has introduced a new category altogether. This is called Life Cycle fund. These will be open-ended schemes that will have a target date maturity. There will also be a glide path investing in a mix of asset classes i.e. Equity, Debt, InvITs, ETCDs, Gold & Silver ETF.The benchmark of these funds will be the same as set for Multi Asset Allocation Funds.
These funds will have a minimum tenure of five years and a maximum tenure of 30 years. The tenures can only be in multiples of five years. Sebi has also said that a maximum of six schemes by an AMC can be active at any point in time. Moreover, as each fund attains a period which is less than one year to maturity, it can be merged with nearest maturity Life Cycle Fund with positive consent from the unitholders.
Those Life Cycle Funds investing in debt instruments can do so only in AA & above rated instruments with maturity less than the target maturity of scheme. Life cycle funds could carry a higher exit load of 3%.
“In order to inculcate financial discipline, in life cycle funds, an exit load of 3% would be chargeable on any exit by an investor within one year of investment; an exit load of 2% within first two years of investment and 1% in the first three years of investment,” it was mentioned.
AMCs to offer both value & contra funds
So long AMCs could only offer either value fund or contra fund. The logic: these were lookalike funds and there was a chance of portfolio overlap. Both these funds are known to focus on select undervalued but promising stocks. Contra funds usually target out-of-favour, underperforming assets and value funds focus on stocks with low valuation. Now an AMC offering both funds will have to ensure that the overlap in their allocation should not be more than 50%. “Mutual Funds shall be permitted to offer both Value and Contra funds subject to the condition that scheme portfolio overlap between the two schemes shall not be more than 50%,” Sebi’s circular says.
Change in investment pattern of some funds
Sebi has also mentioned changes in the investment patterns of certain categories of funds. These are as follows:
Dividend Yield fund: Predominantly in dividend-yielding stocks, minimum 80% of total assets in equity. Earlier, such a fund has to invest a minimum of 65% of its total assets in equity.
Value fund: To follow a value investment strategy and put minimum 80% of total assets in equity. Earlier, this floor was only 65% in equity.
Contra fund: Follow a contrarian investment strategy and put minimum 80% of assets in equity and related instruments. Earlier, this floor was only 65%.
Focused fund: Invest in maximum 30 stocks and minimum 80% of total assets in equity. This floor was 65% in equity too.
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