The new fund categorisation drove forced funds to pick clear identities and drop misleading fancy names
Suresh received an unusual notice from his mutual fund company one morning. His cherished “opportunities fund” was suddenly becoming a “large-cap fund” from next month. “What’s going on here?” he wondered, genuinely confused by this sudden change. His fund had always invested across different company sizes and market capitalizations for years. Now it would focus only on large companies, fundamentally changing its proven strategy.
This wasn’t just happening to his fund alone in isolation. Dozens of schemes across India were simultaneously changing names and strategies together. All thanks to new SEBI rules that were fundamentally reshaping the mutual fund industry. The regulator had noticed something genuinely troubling in the market for years. Mutual funds were confusing investors badly with fancy, meaningless names. These names told you absolutely nothing about what the fund actually did with your money. A “bluechip fund” in one company behaved completely differently from another company’s “bluechip fund.”
Solution was radical but absolutely necessary: StandardizeĀ
From October 2017, every single fund must fit into clearly defined categories. Large-cap specifically means top 100 companies by market capitalization only. Mid-cap means companies ranked 101 to 250 precisely. Small-cap covers companies ranked 251 onwards in market cap.
If your fund invests at least 80% in large-caps, it must honestly call itself large-cap. No more creative naming schemes that obscured what the fund actually invested in. This seemed simple enough on paper to implement. But fund houses faced a genuine operational dilemma with existing schemes. Many popular funds didn’t fit neatly into these new rigid boxes.
Diversified equity funds had invested freely across all market caps for many years. Under the new strict rules, they couldn’t exist anymore in that flexible form. They had to choose a specific category and stick to it religiously. Some became flexi-cap funds, which can invest anywhere without the 80% restriction. Others split their strategies completely into pure large-cap or mid-cap funds.
The portfolio reshuffling that followed
Fund managers had to sell certain stocks that didn’t fit the new category. They bought others to match their new mandates precisely and quickly. This created significant market volatility in late 2018 as hundreds of funds adjusted simultaneously. When hundreds of funds sell small-cap stocks together at once, prices fall sharply. Large-cap buying in unison pushed those prices up unnaturally high.
For retail investors like Suresh, this meant forced changes to their carefully built portfolios. His fund had to sell all mid and small-cap stocks to become pure large-cap. He lost the market cap diversification he had originally chosen when investing years ago. “Should I stay with this fund or switch elsewhere?” he asked his financial advisor, genuinely uncertain about the right move.
That’s actually a very good question worth considering carefully and thoughtfully. The answer depends entirely on your original investment goal and what you wanted. If you wanted a large-cap fund all along for stability, staying makes perfect sense. The fund now clearly matches your needs and conservative risk profile.
But if you specifically wanted diversification across market caps for better returns, you should switch to a flexi-cap fund instead. Don’t stick with a fund that no longer matches your investment objective.
Not entirely badĀ
It brought much-needed clarity and transparency to the entire industry.
Now you can genuinely compare apples to apples across fund houses. All large-cap funds compete against each other with identical benchmarks now. Their strategies and holdings are directly comparable for the first time. This transparency helps investors make significantly better informed choices confidently. You can clearly see which fund manager truly adds value beyond just following the index mechanically.
Exit load structures also became more uniform across the industry finally. Most funds now charge 1% if you withdraw within one year. Expense ratios became much easier to compare directly across funds. Every fund house publishes costs in a standard, comparable format now.
Some fund categories disappearedĀ
Capital protection funds? Gone completely from the landscape. They couldn’t truly guarantee capital anyway, so the name was misleading. Fixed maturity plans faced strict new restrictions and guidelines. These close-ended debt funds had been very popular among investors. Now launching them requires clear justification and adherence to stricter guidelines.
Fund of funds finally got their own distinct category. These funds invest in other mutual funds rather than directly in securities. They serve a specific purpose for certain investors seeking automatic diversification without effort.
The biggest winner in all this regulatory change?
The small retail investor.
Before categorization, you needed deep knowledge to pick appropriate funds correctly. Names were deliberately misleading and fancy. Investment strategies were unclear and often changed without proper notice.
Now, categories tell you everything upfront and honestly. Want exposure to large companies? Pick any large-cap fund confidently knowing what you’re getting. Want to bet on small companies for higher growth? Choose a small-cap fund knowing exactly what you’re buying.
This doesn’t mean all funds in a category perform equally well. Manager skill and research quality still matter significantly for returns. But at least you know exactly what you’re buying and can make fair comparisons.
International funds got better defined too under the new comprehensive rules. If a fund invests overseas, the name must clearly reflect it. No more ambiguity about geographical focus areas. Sector funds became completely clear and honest as well. Banking funds invest in banks and financial institutions only. Pharma funds buy pharmaceutical stocks exclusively without deviation. No surprises or unexpected style drift anymore.
ELSS funds remained in their own special tax-saving category. These tax-saving schemes have a mandatory three-year lock-in period by law. Their structure didn’t change much, as they were already well-defined.
What should you actually do with your renamed funds now?
First, carefully check if the new category matches your original investment goal. If yes, you can relax completely and continue your SIP or maintain holdings.
If there’s a significant mismatch between goal and category, don’t panic and sell immediately. Check the exit load structure first carefully. Waiting for a few months might save you substantial money in exit charges. Also consider tax implications of selling and buying new funds.
Review your overall portfolio holistically after all the changes settle. The renaming might have inadvertently created overlaps you didn’t intend originally. Three funds in your portfolio might now all be large-cap funds. This reduces diversification you thought you had.
Use this as an excellent opportunity to rebalance thoughtfully and systematically. Sell duplicates that serve the same purpose unnecessarily. Fill important gaps in your overall asset allocation strategy.
Read the new scheme documents that were issued carefully and completely. They explain changed strategies very clearly in simple language. Know exactly what the fund will do differently going forward. Understand how it affects your expected returns.
Suresh ultimately decided to stay with his renamed large-cap fund after thinking. It matched his conservative, low-risk profile well at his age. Large-caps suited his needs perfectly at this life stage. But he also started a new SIP in a small-cap fund simultaneously. This intelligently restored the market cap diversification he originally wanted and valued.
