Driven by a long-drawn need for standardization of mutual fund schemes, SEBI on October 6, 2017 has come out with a circular on categorization and rationalisation of mutual fund schemes. To facilitate convenient and informed decision making by investors, SEBI has categorised mutual fund schemes, under broad heads of equity, debt, hybrid, solution oriented, and other schemes. SEBI has further sub-categorized the above categories based on percentage asset allocation, type of the scheme, investment strategy, nature of securities, maturity period etc. We now have 36 distinct categories of mutual fund schemes.

Over the years, several mutual funds have come to manage different schemes with almost identical characteristics. Now, a mutual fund will be permitted to have only one scheme in each category. Existing schemes in the same category will have to be merged or wound-up. Towards this end, mutual funds will have to submit scheme restructuring proposals to SEBI within 2 months from the date of the circular, including a proposed course of action for rationalisation. SEBI will then issue observations on the proposals which will have to be implemented within three months.

Although the effort is laudable, there would certainly be a learning curve for the market and the re-classification of existing funds may lead to temporary discomfort to existing investors. Nevertheless, the classification is necessary and will help in reducing schemes with excessive number of labels, by reflecting the type and objective of the fund as closely as possible. This will create a level playing field and make it easier to compare schemes. On the other hand, this may stifle innovation and reduce operational flexibility to some extent, but that may be a reasonable cost to ensure product suitability; given that mutual funds can offer the smallest ticket sizes and reach the smallest investors. Finally, behavioural economics shows the confusion an excessive number of identical products has on consumer choice. The implementation should however be calibrated for innovation in the future and not be left to a straight jacketed formula.