Dhirendra Kumar, India’s goto MF person says we need to lower the number of fund categories:
The biggest criticism of the new system is that from investors’ perspective, it does not really simplify the process of choosing a fund to invest in. There are 2,043 mutual funds in India, and counting all the plans, options and variants, there are possible 9,680 choices. This huge number starts to become manageable if there is some kind of a systematic classification that is applied to these funds. The system that SEBI has now put in place has 36 categories. Are 36 categories easier to begin with than 9,680 schemes? Certainly, they are. However, if you start with close to zero knowledge, which most fund investors do, then even 36 is too much. Let’s see how an investor can use the new SEBI system to achieve genuine simplification.
Here’s a recipe to slice through the thicket of funds and get to you investing goals: ignore almost all the categories. Practically speaking, if you are an individual investor whose financial goals are the normal ones that most people have, then you can easily ignore 32 of these 36. Here’s what remains; Multi-Cap for long-term savings, Aggressive Hybrid funds for medium term savings, ELSS funds for tax-savings combined with long-term savings, and short-term debt funds as a superior alternative for bank fixed deposits. That’s it.
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Here’s a recipe to slice through the thicket of funds and get to you investing goals: ignore almost all the categories. Practically speaking, if you are an individual investor whose financial goals are the normal ones that most people have, then you can easily ignore 32 of these 36. Here’s what remains; Multi-Cap for long-term savings, Aggressive Hybrid funds for medium term savings, ELSS funds for tax-savings combined with long-term savings, and short-term debt funds as a superior alternative for bank fixed deposits. That’s it.
It will be difficult to do this because SEBI’s set of 36 has many categories that have little purpose except to give the sales people complicated stories to tell. While there certainly are funds in many other categories that may have some justification, but if you want a simple to implement plan that also covers all bases and serves all normal investment goals, then you will get along fine. I know that sounds a little extreme, but it will make things extremely simple and still serve all your needs.
In finance, Simplifying things always works…
Mostly Economics 
June 2, 2018 at 12:39 am
4 or 36 might be fine for the majority of investors who want to run their investments in a passive way.
But, not everybody wants to run their investments in a passive way. And, I’m not even talking about a great deal of active trading here. For example: the 36 categories currently don’t include a category for short term treasuries. Fund houses can only have one scheme for gilts so they typically hold varying maturities in it and one would have to rely on the fund manager to manage the average duration, for which he would have no motivation as he will just try to be close to the industry average allocations.
So, if I want to actively manage my duration by being in short term gilts vs long term gilts depending on the interest rate cycle I can’t. Coincidentally, this year has been a good example for being in short term gilts rather than long term. Yet, this category has been removed. Thankfully I was able to make use of it so far but I’ll have to find another way now on.
It is even more unimaginably retarded because the edifice of investment is built upon the short term treasury as the risk free rate and amazingly an entire country, investment industry and the regulator is just fine without having a mutual fund category for it!! When things go bad, what do you think people like to hold? Short term treasuries, but no, there shall be no mutual fund category for it.
I think this is an objective basis for disqualifying this country as a country of humans. I think we have devolved into some combination of a monkey and a donkey. The SEBI people should be volunteered to neuroscientists and anthropologists to study this new species.
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Secondly, outperformance is achieved by deviating from the norm and managers should have the mandate to try to do so. Yes, yes I know most managers fail to outperform the index, but a) that evidence is not borne out in Indian markets due to inefficiencies not found in more mature markets so it is at best premature in this market, and b) what the passive argument fails to note is that some funds do outperform especially when they are in niche categories, with small amounts to manage and newly designed to take advantage of an opportunity or in certain parts of the business cycle. They might eventually grow and peter out in outperformance, but that is fine and expected and there are some people who can and should be allowed to navigate through the fund space to take advantage of this.
Again this is an Indian culture thing, where one person cannot be allowed to stand alone and apart and do his own thing. Everybody must be mediocre and we shall enforce it.
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Thirdly, if you minimize the categories and schemes, each scheme becomes large, difficult to manage and will obviously not outperform the index simply due to its size. Every fund becomes its own too big to manage and too big to fail mediocre index-like fund. So its kind of a self-fulfilling, enforced mediocrity.
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Fourth: why can’t they have a core set of funds and then an unfiltered, unconstrained set of funds for those who are willing to do their own research? I’m fine if they want to attach a financial certification requirement for financial literacy. And, yes there is PMS and stuff for active portfolios, but do I really have to go the PMS route to get exposure to short term gilts?
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And, I’m tired of this average fund not outperforming index argument anyway, as there are a lot of caveats to it. But, I’ll just put it this way: most books don’t become bestsellers so we should discourage writers from writing. Most people who apply to IIMs and IITs don’t get in and fail the exams, so we should not allow kids to attempt the exam at all. Outperformance and meritocracy by definition is going to be limited to a few, what is so surprising about this?
July 23, 2018 at 1:46 pm
Nice. https://www.wisejay.com/openhouse