Skim over schemes

MFs may see churn after Sebi diktat, says Nilanjan Dey

  • Published 23.10.17

Capital market regulator Sebi's recent drive to rationalise mutual fund categories will have definite ramifications for investors who need to brace themselves for a period marked by scheme consolidations and, eventually, streamlining of their own portfolios.

Before we move further, let's briefly recall the regulatory measure.

The Securities and Exchange Board of India (Sebi) has recently created four principal categories for open-endes funds - equity, debt, hybrid and solutions-oriented. The rest has been marked as "others".

The relevance of the initiative becomes evident when seen in the context of the diverse nature of funds and the wide variety of identities many of them currently bear.

Within the mid-cap category, for instance, such diversity is very apparent, thanks to attempts by fund houses to position their mid-cap products in a variety of ways.

This, in fact, may also be viewed in the backdrop of increased commoditisation and product differentiation, which have become the hallmarks of many industries in other parts of the economy. Over the years, asset management has not remained an exception.

The big benefit

Comparisons between schemes will now become more realistic and rational - indeed, it should turn out to be a simpler exercise for investors and their financial advisers.

The strength of the move, therefore, lies in uniformity. All schemes in each category will carry the same characteristics. An investor who, for example, is willing to try out a small-cap fund will now choose from within a distinct set of strictly small-cap options.

The market regulator, which has ordered distinct sub-categories, has permitted only one scheme for each of the major classifications.

Such a stricture is expected to lead to consolidation within the product ranks. Product groupings will be clearly demarcated and it will be easier to take critical decisions with regard to the selection of funds. (See chart)

What's in it for investors?

Sebi has effectively ensured that the investment objective and the fund management strategy of each scheme (and, yes, its benchmark too) will be modified in line with its diktat wherever such modification is found applicable. This will be done to compel the scheme in question to adhere to one of the categories that have been outlined.

Further, the market watchdog has prepared definitions pertaining to some of the most vital categories of funds. These include large-cap, mid-cap and small-cap. Here is what investors must remember:

Large-cap: 1st-100th company in terms of full market capitalisation

Mid-cap: 101st-250th company

Small-cap: 251st company onwards

Fund houses, therefore, now must embrace a list of stocks, to be prepared by the Association of Mutual Funds in India, the trade body of asset management companies.

This list has to be updated twice a year, depending on information collated at the end of June and December. Importantly, fund houses must rebalance their portfolios in line with the latest, updated list. Once the policy is effectively implemented, some sections of the investor fraternity may need to tweak their strategy.

Holding similar products within the same fund house (which follow the same investment pattern) will be out of fashion. Such streamlining will positively impact investors' portfolios.

Remember, the market regulator's move will not encompass thematic and sectoral funds. Themes such as infrastructure, manufacturing, banking and technology have had their share of popularity in the past. And new thematic categories are quite likely to emerge in the days ahead.

Already, smart and happening economic segments like fintech are vying for fund managers' attention. Many investors are expected to view these as fresh opportunities. But till such time this occurs, fund houses may well review each existing scheme in the context of the regulator's latest proposal.

How quickly the re-alignments will take place is not for anyone to speculate at this juncture. The regulator's wish will have to be put into effect by the fund houses for the sake of compliance. The sooner it happens, the better it is for the market.

The average investor, at the moment, is probably a confused lot, given the sheer number of funds and variety of monikers. There is great scope and need for apple-to-apple comparisons, and Sebi has just done the ordinary participant a world of good.

The writer is director, Wishlist Capital Advisors