Seeking to rationalise the choice of mutual fund schemes for investors and at the same time to ensure standardization in how fund houses define scheme categories, the capital markets regulator issued a circular on 6 October, 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 by 6 December 2017 with a plan of action as to how they will consolidate their existing mutual fund schemes. Once the fund houses respond, Sebi will then individually examine each fund house’s plan and respond to them accordingly.
Once Sebi approves these, fund houses would have a window of 3 months to carry out the necessary changes in their product bouquet. This means that by mid-2018, the mutual fund industry will look very different. Here are five ways your life, as a mutual fund investor, is set to change.
Less confusion
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 come down. Sebi has now defined 10 categories of equity funds, 16 categories of debt funds, 6 categories of hybrid funds, 2 categories of solutions-based funds (one each for retirement planning and children’s future) and 1 category each for index funds/exchange-traded funds (ETF) and fund of funds (FOF)—a total of 36 categories.
While this categorization will reduce the number of schemes, many 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 are still too many.
“Of the approximately 830 open-ended funds on the street today, this circular would impact around 610 schemes. But after consolidation, we don’t see a merger of more than 40-50 schemes of the total universe of 2,000 mutual fund schemes. That is less than 5% reduction. Though we have to wait for the proposals that the mutual funds submit to Sebi to get the final numbers,” he said.
Your large-cap, my large-cap, her large-cap
Although there are many large-cap, mid-cap and small-cap mutual fund schemes that exist 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.
Impact on large fund houses will be much 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 their lifetimes. 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 that visible. 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.
Comparison 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 classified Reliance Vision Fund as a ‘flexi-cap’ fund whereas Value Research classified 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 is too soon to say how rating agencies will recalibrate their own categories, indications are that they might. “It’s too soon to comment on that now, but we will examine this in detail. 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 mutual fund 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.
However, experts say that the granular categorization of debt funds is a welcome change as the canvas of debt funds, at the moment, is distorted. “Many debt funds used to add or reduce their maturities aggressively. Tracking all this was anyway difficult for investors. But drastic changes in maturities also changed the scheme’s characteristics and it may suddenly not be the reason why the investor invested in it,” says Swarup Mohanty, chief executive officer, Mirae Asset Global Investments (India) Pvt. Ltd.
Active versus passive
Passively managed funds like index funds and exchange-traded funds (ETF) score over active funds in terms of costs, though historically in India active funds have outperformed passive funds in the long run. But as the markets mature, the performance gap between active and passive funds, especially in large-cap funds, narrows. And here’s where we tend to compare the two. But Sebi’s circular puts index funds and ETFs in a separate category called ‘other schemes’.
“Consider a customer picking a large-cap scheme. She will easily be able to evaluate this between funds that are the best performing, most stable and with the lowest expense ratio within the equity large-cap category. But when looking for a similar Nifty 50 index fund, she has to open up the ‘Others – Index and ETFs’ category. Putting index funds and ETFs in a separate category does not allow apples-to-apples comparison for the customer,” says Kunal Bajaj, founder and chief executive officer, Clearfunds, a robo-advisory firm.
What should you do?
Nothing, at the moment. Stay invested for now and continue with your systematic investment plans (SIP). Wait for your fund houses to submit their respective plans to Sebi and Sebi’s approval, thereafter. The whole process is expected to take another 5-6 months, after which it would be clear as to how your scheme gets classified and recategorised.
Source: Mint