Major events for mutual fund investors in 2018 and what they imply

mutual funds

Year 2018 was an eventful year for the Indian Mutual Funds (MF) industry, which stayed in the lime light for one reason or the other throughout the year. The industry witnessed some important regulatory decisions and mandates made by SEBI. Let’s take a look at some of the landmark events that defined 2018:

TRI as a benchmark for scheme performance:

In January 2018, SEBI issued a circular making it mandatory for fund houses to benchmark schemes’ performances to the Total Return Index (TRI) with effect from February 1, 2018. The TRI takes into account both the capital gains and dividend receipts from the index’s constituent securities. Benchmarking mutual fund performance against the TRI index will provide investors with a correct picture of a fund’s performance. In the long run, due to inclusion of dividend in the benchmark, investors will be able to delineate the exact alpha generated by the fund. For detailed information please refer our newsletter no 155 titled “Benchmarking to Total Return Index (TRI)”. Link -(

Long-Term Capital Gains (LTCG) & Dividend Distribution Tax (DDT)

The Union Budget for 2018-19 announced on February 1, 2018 made two major changes on the tax front. These include re-introduction of LTCG at 10% on equity shares & equity oriented mutual funds and introduction of 10% DDT on equity oriented mutual funds with effect from 1 April 2018. The LTCG tax will be levied on profits exceeding Rs. 1 lakh in a financial year made from the sale of equity oriented instruments held for over a year. The grandfathering clause protects gains made by existing investors on a mark-to-market basis up to January 31, 2018. Our newsletter nos. 147 & 148 titled “LTCG Tax on Equity & Equity Oriented Mutual Funds” & “Dividend Distribution Tax (DDT) on Equity & Equity Oriented Mutual Funds”, respectively, give a complete write-up on the topic. Link – (

Re-categorization of schemes

In October 2017, with an aim to bring about uniformity across fund houses and to make returns of funds in the same category comparable, SEBI introduced Categorization and Rationalization of Mutual Fund Schemes. As per the new rules, mutual funds will be categorized into 5 broad groups and 36 categories as Equity schemes (10 categories), Debt schemes (16 categories), Hybrid schemes (6 categories), Solution oriented schemes (2 categories) & Other schemes (2 categories). Please refer our newsletters titled “Mutual Fund Scheme Consolidation – Part I & II” (nos. 145 & 146) for a detailed write-up on scheme re-categorization. This is an important change which will now make it easier for investors to compare scheme performances. Link-(

Categorization of Large Cap, Mid Cap & Small Cap Stocks

Along with re-categorization of schemes, SEBI has also standardized the definition of large cap, mid cap and small cap stocks. According to SEBI’s norms, large-caps are defined as the top-100 companies in terms of market-cap, while companies from 101 to 250 in market-cap have been classified as mid-cap and the rest are tagged as small-cap stocks. The regulator has mandated AMFI to prepare the list of large-, mid- and small-cap stocks every six months based on their average full market capitalization of the previous six months. Such standardization will bring consistency across fund houses and enable an apple to apple comparison of funds from different fund houses.

The default by IL&FS & Introduction of Side Pocketing

In the months of September, the default by IL&FS and crisis in the NBFC space led to a panic in the mutual funds industry which had billions worth of investment in debt funds. The default by IL&FS led to sharp falls in the NAVs of many liquid and ultra short-term funds. Some funds lost around 3-5% in a single day, wiping out half a year’s gains. The Mutual Fund industry had an exposure of around Rs. 2,700 crores to bonds and commercial papers issued by IL&FS.

The IL&FS default prompted the regulator to take prompt action to safeguard investor interests. Accordingly, in December, SEBI allowed debt funds to segregate troubled assets from the rest of the portfolio, also referred to as ‘side-pocketing’.  Such a practice ensures fair treatment to all investors in case of a credit event. Going ahead, in case of a credit event, fund managers can segregate the portfolio comprising of debt or money market instruments, thereby protecting losses incurred by the investors.

Despite ups and downs, the Mutual Fund industry added Rs. 1.23 lakh crores to its AUM taking the Average AUM to Rs. 23.65 lakh crores as on December, 2018.

Timeline for the year

Disclaimer: Ventura Securities Ltd has taken due care and caution in compilation of data for its web blog. The information has been obtained from different sources which it considers reliable. However, Ventura Securities Ltd does not guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. Ventura Securities Ltd especially states that it has no financial liability whatsoever to any user on account of the use of information provided on its web blog. The information provided herein is just for the knowledge purpose and shouldn’t be construed as investment advice under any circumstances.

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