Dhirendra Kumar of Value Research has a nice bit of info on mutual funds. If things go as per plan, we should look at simpler mutual funds going ahead. SEBI has been nudging to make this industry simpler and transparent for a while now. This is another such step.
In the new scheme of things, SEBI proposes to ask all MF companies to restrict their mutual funds to just one or two across six categories:
There’s some talk that mutual fund regulator SEBI is planning to limit the number of funds that mutual fund companies can operate. If true, this is a brilliant idea that should be implemented quickly. This one change alone would go a long way in ensuring that mutual fund investors will choose a fund that is suitable for them, and will stick to it. It would be reform that is entirely positive, with no downside whatsoever.
Each company will be allowed only one fund of each type. The idea is to reduce the complexity of the choices that investors have to make. Currently, there are over 2500 distinct funds, and several plans under most of them. Even if one looks at broad categories like equity, debt or hybrid, there are hundreds of funds in each. There is no way that an investors can make sense of this huge number and choose after understanding what he or she is investing in.
SEBI is said to be targeting this complexity at the level of each AMC, where each one should have just one or two funds in each category. I guess the final degree of simplification would depend on how ‘category’ defined, but according to reports, there will be eight debt fund categories and six for equity funds. While fixed income funds are mostly of interest to corporate and professional investors who are better equipped to understand complexity, the retail-focussed equity funds will be much easier to understand for investors. The equity categories that SEBI is said to be planning are large cap, mid-cap, micro-cap, ELSS, balanced funds, arbitrage funds and concentrated funds.
The biggest positive impact will come from the categories being easier to understand for investors. In terms of risk vs potential returns, each of these can be easily mapped to a particular need. A potential investor can easily choose which one is most suitable. Beyond simply choosing a category, the real payoff will come in being able to unambiguously compare different funds. Today, no two fund companies define their funds in exactly the same way. As a result, salesmen can always avoid any comparison with another fund companies’ fund that might be doing better. The salesperson can always spin some tale about how the other fund is of a different type and has a different goal or has some hidden weakness.
In a way it is going back to earlier times of UTI when there were just a few schemes and things much simpler. There was hardly any competition. Then came 1991 and we had multiple funds offering multiple and me-too schemes. The end result was too much competition and too much confusion. So back to a field when there are many players offering a few schemes.
This also takes to the classical question of why should this require a regulator? Why can’t market players figure that too many similar products don’t help anyone. Apart from consumers, it is a lot of headache for the fund as well in terms of management. Ideally, one would expect and hope that players figure this themselves. But very few MF companies choose to let things be simple. Most join the herd. Then you need a liberal paternalism visible hand to simplify things.
Nice bit. Will be interesting to see how this goes.