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Clockwise from top left: Kunal Bajaj, Swarup Mohanty, Nilesh Shah, and Manoj Nagpal
Clockwise from top left: Kunal Bajaj, Swarup Mohanty, Nilesh Shah, and Manoj Nagpal

Right-sizing mutual fund schemes

We ask the experts if Sebi's aim to consolidate, standardise and bring down the total number of schemes can be achieved

Securities and Exchange Board of India’s (Sebi) circular on scheme and category consolidation aims to standardise how similar-characteristics schemes are defined, and bring down the total number of schemes. Will this end be achieved, we ask the experts.

Kunal Bajaj, Founder and CEO, Clearfunds

What’s in a name? A lot, if Sebi’s new move is anything to go by. At present, customers are besieged by a bewildering array of colourfully named funds from the same asset management company (AMC). If you look past the fancy branding, these schemes often offer the same features. Sebi’s move to tightly define how funds are categorized (and therefore, named) will help investors clearly understand what each fund is all about before choosing one. Sebi should put index funds and exchange-traded funds (ETFs) the same category as the index they track—this will allow apples-to-apples comparison for the customers.

Our research shows that of the roughly 850 active open-ended schemes available today (including index funds and ETFs), there will likely be an initial reduction of 45-50 schemes or 7-8%. Most AMCs will need to re-label and rationalize their offerings, but this exercise alone will not result in a decrease in number of schemes available.

Looking out a few months ahead, we see a sharp increase in mutual fund offerings by the AMCs in categories where they do not have a competing scheme. This would be followed by many more index fund and ETF choices for investors, as there are no regulatory limits imposed on the number of schemes that track indices.

Manoj Nagpal, MD and CEO, Outlook Asia Capital

For an investor, the most important impact of the Sebi’s categorization of mutual fund schemes circular will be that this will lead to standardization of fund mandates, eliminate style drift and reduce changing scheme characteristics. It was not uncommon earlier that an investor would have invested in a mid-cap fund, just to find that it had become a multi-cap fund due to its increase in assets. This new classification leads to a regulatory standard on “What you buy, is what you own" (Stephen King).

The circular will lead to classification of around 610 schemes which comprise almost 90% of industry’s assets. On the balance 1,400 mutual fund schemes, which are excluded like index funds, ETFs, fund of funds (FoFs), and close-ended, there is no impact of this circular. In terms of scheme mergers or reductions, there will be no significant impact—albeit for a few large fund houses—with around 5% reduction in number of schemes.

Some chinks in the classification are that there is no categorization of funds investing directly in international securities and only FoFs are defined, which may need to be changed. Also, a negative impact on investors in the balanced hybrid category (40-60% equity), which earlier had a component of arbitrage is that this will lead to change in tax implication.

Swarup Mohanty, CEO, Mirae Asset Global Investments (India) Pvt. Ltd

The Sebi circular is a good step in improving transparency and helping investors choose the appropriate product.

The uniformity in classification of funds and defined investment strategy will make it easier to compare fund performance and will aid fund selection.

Let me give an example: if an investor (after discussion with his adviser) and based on her goal, invests in a long debt fund, but the fund changes its strategy and runs a short duration strategy, it defeats the purpose of investment.

This will not be possible going forward as portfolio and security duration has been clearly defined.

As an asset management company, since our inception we have believed in one fund per category, and it is great to see that the regulator is appreciating our stance and ensuring the industry also follows this best practice.

We believe the recent circular from the market regulator Sebi will reduce the number of schemes, help the investment teams across the industry to focus on fewer funds, and may help in improving fund performance.

My personal opinion is that if the regulator fixes the fund names (that is, all schemes in the same category have the same name) and follow the same benchmark, it will further improve transparency and ease of selection of funds.

Nilesh Shah, MD, Kotak Mahindra Asset Management Co. Ltd

Sebi’s circular will help investors understand mutual fund schemes in a simplified manner. They get confused in searching, for example, a large-cap scheme. Such a scheme can have multiple schemes ranging from ‘Growth’, ‘Value’, ‘Dividend Yield’, ‘Contra’, ‘Diversified’, ‘Concentrated’, to ‘Dynamic’, across fund houses. This plethora deters investors as well as advisers. Sebi’s rationalization of schemes will help remove the clutter and make choice of investment simpler with higher conviction. From the fund houses’ point of view, Sebi’s regulation brings level-playing field among firms. A few fund houses had more number of schemes, more liberal asset allocation, such as in the case of many balanced funds, as also a liberal definition of market-cap for, say, small- and mid-cap stocks. This asymmetry resulted in differential performance. This asymmetry resulted in a few fund houses running a normal race to generate performance as well as AUM, whereas most fund houses were running a hurdle race. Non-level playing field curtailed competition and gravitated market share towards beneficiary fund houses.

Now, there will be level-playing field for all fund houses. Simplification and fairness in industry will breed competition and innovation, which is always good for the customers.

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