Sebi out to cut MF schemes by half; what happens to your investment

Sebi aims to ensure that an asset management company has only one product offering in any category. A structural shift in Indian investors’ savings habits has resulted in mutual funds becoming one of their preferred investment destinations.

India’s mutual fund has swollen quite a bit in the mad rush to launch asset management businesses and also thematic sales push by various fund houses to mop up money. This often leaves investors at sea with a pool of over 2,000 schemes to choose from. Buying mutual fund in India is almost like picking a stock from nearly 2,000 companies listed on the National Stock Exchange (NSE).

Market regulator Securities and Exchange Board of India (Sebi) is trying to address this issue by cutting down the number of schemes by half.

It will make things easier for new fund buyers, but old investors are jittery, trying to figure out what will happen to their existing investments.

Sebi’s mutual fund advisory panel has recommended strict definitions on how mutual funds are categorised, a move that might halve the number of schemes offered by asset managers currently, business daily Mint reported on Monday.

Sebi aims to ensure that an asset management company has only one product offering in any category.

The Sebi move may force fund houses to consolidate their offerings going forward.

“Merging of scheme would be a better option,” says Lakshmi Iyer, Chief Investment Officer (Debt) and Head Products, Kotak Mutual Fund. It is a welcome move and will not impact investor interest. Homogeneity in the requirement of the time in this sector, she said.

It is unlikely that any of the existing schemes will be closed, but the industry may see plenty of mergers in order to reduce the number of offerings and meet Sebi norm. Some of the schemes will become bigger in the process.

“If AMCs are to reduce the number of funds, it is inevitable that there will be mergers. However, it’s unlikely that funds will close altogether – they will simply be merged into similar larger funds,” said Bhavana Acharya, Deputy Head of Mutual Fund Research at FundsIndia.

Existing investors of such schemes have to check whether the new scheme suits their risk levels, timeframe and investment purpose. If it does, then they can simply hold the new merged fund without any tax implication in this case, she said.

If the new fund does not fit one’s requirements, it will be better for an investor to opt out of the merger and reinvest that in other suitable funds. Taxes will apply in this case depending on the fund and holding period.

That may mean short-term pain for some. But fund managers believe the move would make it easier to spot quality funds, eventually helping investor interest.

Asset under management (AUM) of domestic mutual fund industry surpassed the Rs 20 lakh crore mark in August 2017. The figure has doubled over the past three years from Rs 10.10 lakh crore in August 2014.
This move will help reduce confusion among investors, says Renu Pothen, Research Head at fundsupermart.com.

“When we used to work out the models to choose the best funds in each category, some of the funds in the top ten bracket used to belong to the same fund house. This leads to a dilemma, as we not only had to select the best funds in a particular category, but also had to decide which fund from a particular fund house in that category should make it to the final list, she said.

When a fund house has two to three funds in a particular category, there is no clarity on the investment mandates of these funds. Often, there would be two funds from the same category (largecaps), defeating the whole purpose of diversification.

Market experts say the last three years, especially the last year, has been characterised by large inflows into equity and balanced funds, with increasing participation from retail and HNI investors.
Individual investors’ share in the overall AUM of the industry has increased to 48 per cent from 45 per cent a year ago. There are expectations that rapid financial inclusion and a shift in household savings to capital markets will further increase inflows into the mutual fund industry.

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