Categorization and Rationalisation of Mutual Fund schemes, 2017

So one more attempt by Sebi to categorize and rationalize the existing schemes of mutual funds. Yes over a period of time SEBI has approved (though it says it does not approve) many schemes and this has led to there being many mutual fund schemes with most of the fund houses. Obviously newer fund houses have learnt from the older fund houses’ mistakes and thus do not have so many scheme. Needless to say fund houses like Hdfc, Icici, Sbi have more schemes than the newer fund houses like Motilal Oswal and Mirae.

The good portions of the circular areĀ  the definition of Large cap, Midcap and small cap – there will be better uniformity now in the industry. What is difficult to believe is that it says that a fund house is allowed to have only one fund in each category. This sounds funny and difficult. So if I am a fund house and I haveĀ  a) Large cap Growth b) Large cap Valud c) ELSS Large cap d) Contrarian fund – currently take a large cap exposure e) Focussed Large cap with just 25 shares f) Large cap psu shares g) Large cap non psu shares.

Are they all the same? No. They are different.

What we lack is a clear PHILOSOPHY STATEMENT, and a Trustee’s supervision that the scheme stick to the label. Being true to label in this country is a joke. I have seen Reliance Growth and Reliance Vision both have shares of Reliance Industries. One was supposed to be a large cap fund and one a small cap fund.

We have Sundaram Rural Fund- good performance, but the shares it has is a beautiful extension of one’s imagination of ‘rural’.

Many people reading this post may not remember ILFS ‘e -com’ fund. At one point it has HUL, SBI, Hdfc bank….I could never make out what it was supposed to do.

We do not have a well trained sales force which has been told what each scheme is supposed to do. So when a fund house wants more AUM in one scheme they just increase the commission (the only thing MF sales people do) in the schemes where they want money. So suddenly there is a spurt in the aum in that category. Currently all the fund houses are concentrating on ‘balanced’ and there is confusion in the word balanced. Is it balanced as per the English language or as per the Income tax convenience?

Sure we have 4500 schemes out of which 110 are useful. However, let the people decide whether they will want to put money in a ‘Large cap fund family run business’ by Subra Mutual fund. Why should the regulator worry whether so many companies will be available. Let Subra Mutual fund worry. If they do not get enough subscription, close it down. If he buys a non family run business, levy a fine. If he persists, do not give new permissions. Create a hall of fame and a hall of shame.

Lets take an eating example. I am headed to Dosa Plaza to have breakfast. He has 40 varieties of dosa. I have tasted 3 – I doubt whether I will ever taste the remaining 37. I might. I may not. However, is it my business to tell him how many varieties he should have? If some do not sell he will remove them. So if somebody wants a chillie, cheese, tomato, dosa toast – who am I to advise them that they should have ‘sada dosa’ -BECAUSE I AM THE REGULTOR?

Regulators are like parents – if they interfere too much, the kids will revolt. Anyway our regulators are overambitious in reach and zilch in implementation. My take is no product or industry can be simplified so much that the stupidest person understands. There is a role for a Value fund (large cap, mid cap), Growth fund (large cap, mid cap, small cap) Elss (large cap, multi cap, mid cap), infra funds – and I may not want all these funds to be in one portfolio, but in different portfolios. I may want the 59 year old father to hold large cap, and the 29 year old son to hold mid cap, elss, and infra funds. Why should the regulator micro manage? What is he going to achieve?

I am not sure what this circular is supposed to achieve. All the best.

I would love to read the preamble of all such circulars and do an analysis after 5 years about what they sought to achieve and what happened.

Regulators need to be trusted yes, but somebody has to verify that they are meeting the objectives which they claim.

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2 Responses to “Categorization and Rationalisation of Mutual Fund schemes, 2017”

  1. I agree with the author’s analogy and views.
    I think no great purpose would be served by limiting different fund schemes into some categories and thereby even curbing the imagination of the fund houses/marketers.
    It is like saying, there will be only two types of biscuits – one ‘meetha’ and one ‘namkeen’.

  2. Gist : Our regulators are overambitious in reach and zilch in implementation.

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