Mumbai: After making it more difficult for asset management companies to habitually float new fund offers (NFOs), India’s capital market regulator is now targeting mutual fund (MF) schemes with look-alike portfolios. It is asking fund houses to whittle down the number of existing products by merging some smaller schemes with similar larger schemes, signalling the second stage of reforms in the Rs6.75 trillion MF industry.
The aim is to help investors make better choices by reducing the clutter they have to currently wade through.
The so-called open-ended equity schemes—in which investors are free to enter and exit at all times—a favourite of retail investors, are the first target. After directing funds to bring down the number of such schemes in a recent meeting, officials of the Securities and Exchange Board of India (Sebi) have been following up with each fund house on the action taken so far.
“The market is overcrowded with similar schemes bearing different names and the regulator is distinctly uncomfortable with this,” said a senior official with a foreign asset management company.
Sebi has asked MFs to merge all small schemes in their portfolios with the large ones. If the fund houses do not follow the regulator’s informal directive, Sebi will come out with formal guidelines, the MF official added.
Small equity schemes are those whose assets under management (AUMs) are below Rs100 crore, said industry officials who are aware of Sebi’s directive.
The regulator does not want asset management companies to run multiple schemes with different names, but similar portfolios. It also wants to bundle together schemes with different nomenclature, but similar asset allocation. And, finally, it does not want firms to have different schemes within one portfolio offering significantly different returns as that amounts to discrimination against one set of investors, said the chief executive officer of a fund who attended a recent Sebi meeting.
He declined to be identified as Sebi is yet to put out the formal guidelines. The Sebi spokesperson, too, declined to comment for the story.
Following this, the existing number of schemes will shrink. And since the fund houses will be required to manage fewer schemes than what they are managing now, the move will help them control fund management costs.
There are 43 fund houses and 40 of them are currently selling equity schemes.
According to Delhi-based MF tracker Value Research Online, there are at least 445 equity schemes and 408 of these are open-ended. Sebi’s directive is meant for those open-ended equity schemes that have failed to attract any meaningful investment, but are still alive.
There are at least 165 such small open-ended equity schemes with less than Rs100 crore assets each. For instance, of the 13 open-ended equity schemes under JM Financial Asset Management Pvt. Ltd, 10 are small schemes. All 13 such schemes managed by ING Investment Management (India) Pvt. Ltd have assets below Rs100 crore. Similarly, all open-ended equity schemes under L&T Investment Management Ltd are small. Seven out of nine such schemes of LIC Mutual Fund Asset Management Co. Ltd are small and 10 out of 12 such schemes of Sahara Asset Management Co. Pvt. Ltd are small. Eight out 10 such schemes of Religare Asset Management Co. Pvt Ltd are small.
The list is long and almost all fund houses are still selling such schemes, which were launched long ago, but failed to mop up enough money from investors.
Many of the small schemes are a product of the NFO culture prevalent till recently. Fund houses exploited the high entry loads and upfront charges by rolling out schemes till Sebi broke up the party. The regulator has stopped clearing NFOs unless it is convinced that a new scheme will have an investment objective different from available schemes and capable of fetching sufficient returns for investors.
While addressing an MF summit in June last year, Sebi chairman C.B. Bhave slammed the industry for the practice of erratically launching schemes without taking into account investor interest.
“Even if you put before me 3,000 investment products, I won’t know how to choose from those products. I’ll have no idea of which scheme is good for me,” Bhave had said.
“If you really want to reach to the so-called small investors in whose name you do everything, does he really need 3,000 options? Is there really so much of innovation that is going on? Are these schemes really so different from each other or were there incentives operating in the market that made us generate these 3,000 options?” he had asked the audience.
Fund houses also agree that many schemes have become uneconomical as they have not been able to scale up. According to industry estimates, an ideal size for an equity fund is about Rs500 crore.
“To build corpus, you need to have grosses in excess of redemptions. Only consistency of performance will give you greater grosses,” said a senior fund manager on condition of anonymity. Grosses is industry speak for gross inflows from investors.
While working on its direction to reduce the number of existing schemes, in October, Sebi had relaxed norms for merger of MF schemes, allowing fund houses to give exit option to unitholders of the surviving scheme.
At the time of the merger of schemes, the fund houses need to give the unitholders of the surviving schemes an exit option if MFs can show that there was no change in the fundamental attribute of the scheme.