Equity new fund offers dry up as Sebi frowns on me-too schemes

November so far hasn't seen a single draft filing of new fund offers in equity schemes from asset management companies (AMCs), according to data available with Securities and Exchange Board of India (Sebi).

Experts feel the mutual fund houses have slowed down in expanding their product basket in equity schemes after the market regulator last year expressed its displeasure for "me-too" products and asked fund houses to categorise all their equity schemes, including existing and future schemes, into 10 specific categories with just one product in each category. However, the rules do not apply for closed-ended schemes.

In November till date, at least 10 draft filings were submitted with the market regulator across groups except for equity schemes. The last filing for a new fund offer in an equity scheme was made on October 30.

This is the second such instance visible this year. Earlier in January, there were filings for 12 new fund offers across groups with only two in equity. The gap between the two filings was around 22 days.

Last year Sebi, in its circular, said all open-ended schemes will be classified under five broad groups such as equity, debt, hybrid, solution-oriented and others (index, exchange traded funds and fund of funds) in a move to weed out multiple fund launches on similar themes.

According to Kaustubh Belapurkar, director – fund research, Morningstar Investment Adviser, in Sebi circular's the only place where the leeway is thematic funds.

"Certain fund houses have therefore announced launches to fill gaps in their product basket, such as multi-cap funds," he said.

He said till end 2017, new fund offers, especially open-ended funds, had slowed down. The market regulator is not approving products unless there is a unique element to it, and hence most fund offers in the recent times are close-ended series from certain fund houses.

"But with the new regulation around closed-ended TER being capped at 1.25%, even closed-ended equity NFOs are likely to die away," he said.

The Rs 23.15 lakh crore mutual fund industry has a total 41 players. According to data available with Association of Mutual Funds in India, there are around 330 open-ended equity schemes and 116 closed-ended schemes as of October, 2018. The Sebi restriction has resulted in fund houses from rushing to launch similar products as was the case earlier.

Radhika Gupta, CEO, Edelweiss Asset Management said her fund house is not in a rush to launch equity products for the sake of launching, despite having a limited product basket for equity schemes.

"Fund houses like ours want to scale our existing schemes than obsessing over continuously launching one product after another. It is a good thing that one cannot launch scheme after scheme. We have only 4-5 open-ended equity schemes, but that does not mean we will jump to launch everything as soon as we can," she said.

Market sentiment is also an important factor while making draft filings, said Sadanand Shetty, an independent advisor. The market has fallen around 5% in the months of September and October each.

According to him, the market sentiment is depressed since January, while the single most important criteria for a fund house is to sell and that the product should get absorbed in the market.

"When the market is down, we generally don't see much amount being generated, because there is always a cost to asset collection also," he said, adding, "uniqueness" is also a big challenge for fund houses with most fund houses almost exhausting such uniqueness.

Meanwhile, Edelweiss mutual fund, which has already received Sebi approval to launch an equity NFO, expects to hit the market in the next 2-3 months.

"We always believed that funds should be launched at a responsible time when investors, also, can make money. It has never been about market volatility as that would actually be a reason for us for more launches," she said.

Belapurkar said the current market volatility should not be linked to the slowdown in the draft filings of equity schemes, since the schemes can be launched post Sebi approval at a later time. On the other hand, the new regulation around distribution and commission has resulted in a reduction in the appetite from distribution community to go out and offer these products, he added.