One too many

Fund houses must take their cue from Sebi

The market regulator's patience with the mutual fund industry seems to be running out, with its reported move that no new launches will be cleared until fund houses merge schemes having similar attributes. The Securities and Exchange Board of India (Sebi) has been insisting on this for over five years now, with limited results. In fact, former Sebi Chairman C B Bhave was the first to point this out in 2010 when he wondered at a CII Mutual Fund Summit whether the schemes were really so different from each other or whether there were other incentives operating in the market that made the industry generate so many schemes. No credible answer from the industry has come over the past five years, prompting the current Sebi Chairman U K Sinha to say publicly that fund houses have launched many new schemes to keep the agency commissions and fees high and this has led to rampant mis-selling of MF schemes. He also said merging of schemes can bring down cost of ownership, and thus protect investors' interests. These are serious observations and the mutual fund industry's continued silence on the issue is baffling, especially because the government removed a key tax hurdle to facilitate such actions in the last Budget.

The data buttresses Sebi's argument. The number of schemes that have been merged is nothing to write home about - 33 schemes were merged in the 2011 calendar year, followed by 15 in 2012; 12 in 2013; 16 in 2015 and nine so far in 2015. If the total number of open-ended equity schemes was 407 in March 2010, the number has come down to 385 more than five later, showing a net reduction of just 22 schemes. The fact that there is a surfeit of schemes without any meaningful distinctions is evident from the following example: one leading fund house has three schemes in the large-cap category - growth fund, dynamic large-cap fund and business leaders' fund. In fact, in the peer comparison segment of Value Research, these three schemes are competing with themselves with a combined assets under management of just Rs 498 crore. What's more, even the top 10 stocks in each of these schemes are similar. It has also been pointed out that many sales representatives of fund houses themselves do not know how many funds they have in their own companies, and fund houses have only merged non-performing schemes with performers so that their overall bouquet looks pretty. These examples prove why multiplicity of schemes has been a major bugbear for Sebi for some time and why merging of schemes is a necessity so that fund managers can concentrate on improving performance rather than managing a multitude of schemes.

A part of the reason for the industry's reluctance to merge schemes is that fund houses can charge higher expense ratios through smaller-sized funds (scheme merger increases assets under management) and the belief that if they have a lot of schemes, chances are that a few of them would do well. Also, fund houses say many high net worth individuals are not comfortable in shifting schemes. And on their part, smaller fund houses say a bouquet of products kills the innovation edge and leads to templatised products. These are fallacious arguments, as the track record all over the world has shown that standard offerings eventually help the industry widen its investor base and fund houses need to have lesser number of, but more credible, schemes from each category.