Sebi tells mutual funds to reduce number of funds under management

MUMBAI: The Securities & Exchange Board of India has told mutual funds to drastically reduce the number of funds under management and stick to only one fund per category in an attempt to end the complexities of mutual fund investing. The regulator believes that the current products list, longer than the number of actively traded listed stocks on stock exchanges, is confusing investors.

A plethora of schemes makes it impossible for an investor to gauge a fund's suitability and often the distinctions are too thin to make any significant difference, Sebi feels.

The number of schemes under the debt category has to be brought down to 8 and 7 for equities, the regulator told industry representatives earlier this week, four people familiar with the discussions said.

The regulator wants every fund to have one scheme under each category. This could include liquid, liquid plus, ultra shortterm, short term, income, gilt, monthly income plan, and credit fund for investors in fixed income plans. For equity, the definition should be large cap, mid cap, micro cap, ELSS, balance fund, arbitrage fund, concentrated fund.

"Words have been spoken many times, but mutual funds have not taken any proactive steps so far to merge similar schemes," said a Sebi official who did not want to be identified. "Sebi has stopped giving approvals to new schemes unless fund houses are able to show that their new product has some distinctive feature."

The mutual fund industry in its eagerness to raise the assets under management played on the psychology of investors with new scheme at regular intervals as they tend to believe that buying a unit at Rs 10 is beneficial compared to an existing fund whose net asset value could be higher. This led to a surge in assets but the sheer number of schemes made life difficult for investors.

There are about 1,605 debt schemes while the total number of schemes, including equities, are at a whopping 2,599, data from Value Research, an industry tracker,shows. The regulator believes that the current products list, longer than the number of actively traded listed stocks on stock exchanges, is confusing investors.ICICI Prudential tops the list with 376 schemes, followed by Reliance at 248. For HDFC Mutual Fund run by Milind Barve, it is 216.

"It is a problem of plenty," said Dhirendra Kumar, CEO, Value Research. "Sebi's move will reduce the unnecessary confusion created by the multiplicity of products among investors. Going forward, this will help increase investor participation in mutual funds."

M Damodaran as chairman of the regulator initiated the process a decade ago, but it did not gain momentum.

"The regulator has given us a format where our fund schemes have to fit, but one scheme per category," said a fund manager who preferred anonymity. "We will again revert to Sebi after doing due diligence."

Moreover, the move should create a level-playing ground between old and new fund houses. Old and large asset management companies enjoy relatively higher flexibility in managing funds compared to the newer ones. For example, when balanced funds were introduced in 1995-96, a manager could invest up to 95% in equities, but the number now is up to 50%. Under the new rule, many of these funds would be merged into one and fund managers believe that the new equity ceiling would apply.