Five takeaways from Sebi’s order on mutual fund mergers
Seeking to rationalise the choice of mutual fund schemes for investors and at the same time ensure standardisation in how fund houses define scheme categories, the capital markets regulator issued a circular on Friday, instructing fund houses on how they should classify their schemes.
The Securities and Exchange Board of India (Sebi) has asked fund houses to respond, individually, within two months with a plan of action as to how they will consolidate their schemes. It will then examine each fund house’s plan and respond to them.
Once Sebi approves them, fund houses would have a window of three months to carry out the necessary changes in their product bouquet. Here are five areas where your life, as a mutual fund investor, is set to change:
Too many options tend to complicate our lives. Between 45 fund houses, there are more than 1,200 schemes on offer. There are more than 400 equity funds, around 300 debt schemes and around 426 hybrid schemes out there. And we’re not even counting more than 800 fixed maturity plans (more are being launched as we speak, as many schemes keep winding up or getting rolled over), and between a dozen and three dozen schemes each for international funds, sector funds and arbitrage funds.
This would go down. Sebi has now defined 10 categories of equity funds, 16 categories of debt funds, six categories of hybrid funds, two categories of solutions-based funds (one each for retirement planning and children’s future) and one category each for index funds/exchange-traded funds (ETF) and fund of funds (FOF).
While some believe that this categorization will reduce the number of schemes, others like Manoj Nagpal, managing director and chief executive officer, Outlook Asia Capital, a wealth advisory firm, feel that the number of categories that Sebi has allowed is still too many. “Of the approximately 830 open-ended funds on the street today, this circular would impact around 700 schemes. But after consolidation, I think the number of mutual funds would come down to 650 to 660. That is barely a 5-7% reduction. We have to go back and analyse though this, in detail”, he says.
Your large-cap, my large-cap, her large-cap
Although there are many large-cap, mid-cap and small-cap schemes in the market, different fund houses have different definitions as to what a large-cap stock is or what a mid-cap stock is. For instance, Franklin India Bluechip Fund, a large-cap fund, invests in companies whose market capitalisation is higher than that of the 100th stock in the Nifty 500 index. ICICI Prudential Focused Bluechip Equity Fund, another large-cap oriented fund, invests in the top 200 stocks in terms of market capitalisation on the National Stock Exchange of India Ltd. “Having a uniform definition for stocks that constitute a large, mid or small cap is good news. It makes comparison of funds much easier for the investor”, says Munish Randev, chief investment officer, Waterfield Advisors Pvt. Ltd, a family office advisory.
Large fund houses will be impacted more
The large fund houses will have to work more towards scheme consolidation than the smaller ones. And most of the large fund houses had acquired some or the other fund house during its lifetime. And as a result, many among them have landed up with two or more schemes across categories. To be sure, fund houses have attempted to differentiate most of the funds in similar categories, but often the differentiation is not visible to the naked eye. HDFC Asset Management Co. Ltd has two balanced funds, HDFC Prudence Fund (which it had acquired from Zurich India Asset Management Co. Ltd in 2003) and HDFC Balanced Fund (its own fund right since inception). Aditya Birla Asset Management Co. Ltd has two tax plans; Aditya Birla Sun Life Tax Relief 96 (which it had acquired from Alliance India Asset Management Co. Ltd in 2005) and Aditya Birla Sun Life Tax Plan (its own fund since inception). “Fund houses would have to re-think how they would now position their funds and in which categories”, says Randev.
Comparision of fund ratings across rating agencies
In the absence of a standardised fund classification, various rating agencies like Value Research, Morningstar and Crisil have been using their own definitions. For instance, as on 6 October, Morningstar India classifies Reliance Vision Fund as a ‘flexi-cap’ fund whereas Value Research classifies the same as large-cap. Also, Value Research has a separate category of funds in the small-cap space, but Morningstar has one category wherein it measures mid-cap as well as small-cap funds together.
While it’s soon to say how rating agencies will recalibrate their own categories, indications are they might. “It’s too soon to comment on that now, but we will examine this in detail. In anyways, Morningstar has always categorized funds as per their actual historical portfolios and not just by their names”, says Kaustubh Belapurkar, director, fund research, Morningstar India, a US-headquartered MF tracking and research firm. “It actually makes our research easier as far as debt funds go, as most fund houses used to define their gazillion debt funds in different ways one year and then the next year, their investment pattern constantly changing. SEBI has now tightly defined what each debt fund would do, so it has become easier to define debt fund categories at our end as well. For equities, at Value Research, most of the categories that Sebi has prescribed are already in practice”, says Dhirendra Kumar, chief executive office, Value Research.
Too many debt fund categories
At first glance, the categories of debt funds appear to be many. Broadly the categories have recognized two strategies that all debt funds follow; duration and accrual. While duration strategy aims to take the most out of interest rate movements, the accrual strategies aims to make regular income out of corporate bonds as well as- in the case of many debt funds- anticipating credit rating upgrades. Sebi has defined 10 categories of duration-styled funds, including a whopping five categories for just funds that mature in a year’s time- in which all fund houses would now position all such funds.
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