Will Sebi’s move to halve mutual fund schemes alter distribution?
The Securities and Exchanges Board of India (Sebi) is looking to cut by half the number of active mutual funds in India, Mint reported on Monday. The move is expected to make it easier for customers who are now faced with a choice of over 2,000 funds managed by 42 fund houses.
According to the website of the Association of Mutual Funds of India (AMFI), there are over 11,000 different mutual fund schemes (counting every individual plan) that currently manage a non-zero sum of money in India (most of these schemes are not currently available for investment—Sebi estimates there are about 2,000 active funds, which it intends to bring down by half). These 11,000 funds together managed nearly Rs20 trillion in the April-June 2017 quarter, AMFI data shows.
The assets under management (AUM) in these 11,000 schemes are distributed in a highly unequal fashion. India’s No. 1 mutual fund scheme by AUM in the April-June time period, the SBI-ETF Nifty 50, managed Rs18,800 crore—accounting for nearly 1% of funds held across all mutual fund schemes in India.
The second placed fund, HDFC Liquid Fund-Direct Plan-Growth Option, wasn’t far behind (just 12% behind the SBI-ETF Nifty with Rs16,700 crore under management), with the top 10 funds together accounting for 7.5% of the total assets under management. Monday’s report said Sebi wants to restrict the number of funds to around 1,000—as Table 1 shows, these account for nearly 90% of all assets under management nowadays.
There is a simple reason why the AUM is distributed so unequally across funds: when people are looking to invest, they want to invest in funds that are doing well, and a good proxy for that is the value of AUM. So, to use a much-abused phrase, “the rich get richer”, leading to what mathematicians term as a “power law distribution”.
Power law distributions are especially common in real life. Income and wealth, for example, commonly follow the power law distribution, as does the number of followers per user on Twitter (the Pareto distribution, commonly known as the “80-20 rule”, is a special case of power laws). In fact, even the occurrence of words in a natural language (such as English) has been shown to follow a power law distribution (Zipf’s Law to be precise).
From that perspective, what is surprising about the distribution of AUM across mutual funds in India is that they are not more unequally distributed. The AUM of the top 10 funds, for example, are remarkably close to each other, with the 10th biggest fund having nearly 70% of the assets of the top fund (See Table 2)
The proposed Sebi regulations will do nothing about this “head of the distribution”, and instead shorten what is now a really long tail.