Are there too many mutual funds?
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Policymakers have been debating whether there are too many mutual fund schemes in the industry. With the count currently over two thousand, there is a chance of some duplication. Experts share their views with Mint on whether there is a need to consolidate mutual fund schemes and categories.
Aashish P. Somaiyaa, MD and CEO, Motilal Oswal Asset Management Co. Ltd
Excessive choice leads to sub-optimal decisions. People make choices they are likely to regret, they are less likely to stick with and at the extreme, sometimes they may refuse to make a choice lest they go wrong. This is human psychology. For us to choose wisely, we need an optimal number of sharply differentiated choices, instead of array of poorly defined clones. Excessive choice is also counter-productive to the very process of investing. The top 500 stocks by market capitalisation account for over 94% of market cap, while top 300 stocks (account for) 88%. This means that if an investor has a bunch of 8-10 funds that in turn own 300 unique stocks, then the investor owns 88% of the market. If you buy the market, you can’t beat the market. Product proliferation also increases irrelevant products. Just as the regulator is putting the onus of product suitability on intermediaries, who determines whether the products being launched and pushed are relevant for whoever they are being pushed to? Investors must wonder why asset management companies (AMCs) send communication about every new product launch but seldom about reinforcing the decision to invest in the fund that one already owns.
N. Vishwanath, founder and CEO, Blue Ocean Financial Services Ltd
There is no clear answer for this in terms of “Yes” or “No”. There should be filters that will guide consolidation. Till sometime back, launching new schemes was one of the easier routes to gather assets. As a result, the fund suite became too diversified. Too many funds in the same category differing merely in terms of percentage exposure to one specific market cap segment offer little differentiation. In such cases, yes, consolidation is a must.
Most of such schemes declare their objective as “To generate capital appreciation over long term”. Which don’t equity funds have that as a goal?
Sometimes, fund houses merge underperforming schemes with performing ones, to obscure the former’s underperformance. Of course, the fund house gives investors an exit window, but then the big talk at the time of selling sounds hollow.
Also, closed-ended funds are launched with a narrow redemption window during the cool down period.
Why not also introduce a date every month or quarter to buy into the fund again? This will help investors average their cost of acquisition when markets are bad. The (market) regulator, too, needs to look into this aspect.
Munish Randev, CIO, Waterfield Advisors Pvt. Ltd
Our nascent market definitely needs to make mutual fund investing simpler. While all financial literacy efforts are helping novice investors understand the risk-return profile of each category of schemes, the next step—to choose the right scheme—is daunting. The existence of multiple schemes in the same fund type just confuses the investor more and also allows sales push by distributors due to higher commission on a particular clone scheme as the AMC may want to promote that one. Some AMCs have historical baggage of similar schemes, possibly due to mergers. We have also seen fund houses changing the profile of a scheme just so they can mimic another existing scheme which may have either stopped accepting flows due to size or just not performing well. These shifts often mislead the investors. I believe that a basic set of scheme categories with one scheme from each AMC (say, large-cap, mid-cap, flexi-cap, short-term debt…) should be a discipline. All innovations targeted towards advanced investors or advisers should be outside the main categories. Needless to say, if schemes are merged, the net expense ratio will come down as well, thus benefiting the investors.
Kalpen Parekh, president, DSP BlackRock Investment Managers Pvt. Ltd
The mutual fund industry, across 40 AMCs, offers around 2,100 schemes. Top 10 AMCs have an average of around 140 schemes each, and the top 5 have an average of around 190 schemes each. In contrast, more than 80% of the total mutual fund AUM is covered by just 310 schemes (15% of total schemes); most of them open-ended. For the top 15 fund houses, 80% of assets get covered by 6-29 % of their schemes (which means that a long tail of products that have very low assets). This indicates that while we offer choice to customers, they are still buying at best one-third of that range.
All of the above fall in just four asset classes that the industry offers currently—debt, equity, gold, and international equities. It’s no wonder that the Securities and Exchange Board of India (Sebi) has considered designing the categories. In that context, Sebi rules will help the industry build very sharp focus around few products and help mutual funds not get distracted with too many short-term themes and niches.
The second big advantage would be creation of consistent definitions around market caps or duration or credit exposures. This will make fund comparisons more relevant and also bring better accountability.