Regulator may ask asset management firms to go slow on thematic schemes

Some themes aggressively pursued by fund houses include environmental, social and governance (ESG), international funds, and other innovative ETFs in the equity, as well as debt segments

Domestic asset management companies (AMCs) have launched a slew of thematic funds in the last few months. Market participants said the liberal regulatory framework has allowed asset managers to launch multiple thematic schemes.

Some themes aggressively pursued by fund houses include environmental, social and governance (ESG), international funds, and other innovative exchange-traded funds (ETFs) in the equity, as well as debt segments.

AMCs have come out with a slew of new offers amid the boom in the equities market. Senior officials in the industry said the issue has come on Sebi’s radar and it can clamp down on multiple thematic scheme launches.

“Sebi intended to reduce the number of schemes for ease of investments when it came out with the rationalisation of schemes. But with the rise in the equity markets, fund houses have again started collecting ‘assets'. If things do not improve, the regulator will be forced even to cap the number of schemes in thematic funds,” said the CEO of a leading fund house.

In 2017, the Securities and Exchange Board of India (Sebi) introduced the so-called ‘categorisation and rationalisation’ norms. Under this, an AMC was allowed to have only one scheme per category. The framework, however, didn’t have any such restriction when it came to thematic funds given the large canvas.

“After the categorisation and rationalisation of schemes, only one scheme was allowed to launch in a single category. But for thematic funds, there is no clear definition whether they (AMCs) can have one or two,” said Arun Kumar, head of research, FundsIndia.

There is also fear that investors will be stuck in thematic funds once the theme is out of flavour. There are certain themes like PSU, international, and banking funds that have given returns in the range of 6-9 per cent in the last 10 years. In comparison, large-cap funds have given an average return of 12.5 per cent over the last decade.

Kaustubh Belapurkar, director-manager research, Morningstar India, said: “The mutual fund industry has seen a lot of launches on the exchange-traded funds (ETFs) side, in both equity and debt. This is because  AMCs are preparing their product bouquet along with the current active funds.”

But this time around, participants believe that new funds offered by fund houses can be helpful to investors even for a longer duration.  “I think passive funds and ESG funds are here to stay for a longer duration. We have seen investors actively looking at such funds as a core portfolio holding. Passive funds are ‘evergreen’ funds and are here to stay. Investors even need global diversification along with the domestic funds,” said Belapurkar.

Some executives also believe that new funds can generate more revenues as they can charge a higher total expense ratio (TER) if the scheme size is low. But the absolute amount earned with higher equity assets is important for the revenue of fund houses.