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Saturday, 09 September 2017 00:00
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With nearly 2,000 schemes, choosing funds is really difficult – Sebi right to ask for merging schemes

With over 2,000 types of schemes being marketed by 40-plus mutual fund houses, it is getting increasingly difficult for investors to actually choose a fund for investing. Once you go beyond the very broad classification of debt and equity and then settle on, say, large caps instead of balanced or small- and mid-cap funds (assuming you finally decide to invest in equity funds), you would think the choice is an easy one. Not quite. A top asset management firm, for instance, has three schemes within the broad category of large-cap funds, and they all look very similar. Fund A invests in HDFC Bank, SBI, ICICI, ITC and L&T; fund B invests in the same but replaces ITC with Reliance Industries Limited while fund C is similar to B but replaces Reliance with Infosys. The same example can be replicated over most other categories such as balanced funds or multi-cap funds; something similar also takes place for various types of debt funds. While the capital markets regulator, Sebi, is not against having various types of funds, according to newspaper reports, it wants the number of schemes dramatically reduced and clubbed according to similar attributes—if Sebi has its way, the fund house talked of earlier will have just once scheme under the large-cap category instead of three right now.

The benefits are large, apart from the obvious one of making investor choice easier. Sebi has a cap of 2.5% of assets under management (AUM) for fund expenses for the first Rs 100 crore of AUM, this reduces to 2.25% for the next Rs 300 crore of AUM, to 2% for the next Rs 300 crore, and then to 1.75% thereafter. For debt funds, the expense ratio allowed is 0.25 percentage points lower than equity funds. If various schemes are merged, the expense ratio will come down automatically—since there will also be economies of scale. Sebi can, at a later date, look at reducing the expense ratio since Indian funds charge more than the global average, but given mutual funds remain a push product, perhaps right now is not the time to do that. Fund houses, naturally, like to have more schemes since that allows them a higher expense ratio and, to the extent a fund is under-performing, re-launching it under a new name, with some minor tinkering in the portfolio, helps confuse investors. Given equity mutual funds yield around 12-13% returns on average, a reduction of one percentage point in expenses is quite large, especially over a 10-15 year time horizon. Given how mutual fund inflows are growing—AUM rose a whopping 42.3% in FY17 to cross Rs 17.5 lakh crore, and in the first four months of FY18, this rose by nearly 14%, to Rs 20 lakh crore; fresh inflows into mutual funds rose from Rs 106,000 crore in FY16 to Rs 283,000 crore in FY17 and to over Rs 140,000 crore in April-July this year—if effective returns rise more, this can rise even faster.

While Sebi looks at lowering effective commissions/expenses for mutual funds, there is the issue of regulatory arbitrage that needs to be addressed by the insurance regulator. Ulips, for instance, have expenses capped at 4% per annum, reducing to 2.25% per year over a 15-year policy—since both mutual funds and Ulips compete for the same market, acting on one and not the other is placing mutual funds at a disadvantage.


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