You want to buy a large-cap equity scheme of a particular fund house. But, the fund house has three schemes in the same category. What can be the differentiating factors?
Returns, for one. But annual returns of five-seven per cent of all the three schemes do not make them remarkably different. How do you decide?
Dig deeper and look into the portfolio. Out of the three schemes, the top five stocks of two schemes are the same; only the percentage allocated in each scheme is different. These five stocks – Maruti Suzuki, HDFC Bank, HDFC, TCS and Infosys – are the top 10 in all three funds. All three schemes’ top five stocks include Maruti and HDFC. Only one fund has a couple of stocks in the top five, which are different. There isn’t any clinching evidence, in the portfolio or fund manager’s vision, as well.
What about expenses? All three charge between 2.7 per cent and 2.9 per cent – only a 20 bps difference.
Which is the best scheme? After all the basic due-diligence, the investor isn’t any wiser.
Obviously, many are happy with the Securities and Exchange Board of India (Sebi)’s recent decision. That is, the market regulator has finally taken the extreme step by telling mutual fund houses that if they do not merge schemes, they will not be allowed to launch new ones.
Sebi gave the sector almost five years before taking this harsh step. On June 24, 2010, former Sebi chairman C B Bhave raised the issue that the mutual fund sector had 3,000 schemes that confused investors.
This move could be a great help for retail investors as well. “Fund houses should aggressively do this because it makes life easier for investors, distributors as well as manufacturers (fund houses). This way, fund houses can concentrate of delivering performance of one scheme instead of buying the same stocks in similar schemes,” says the chief executive officer (CEO) of a fund house, who did not wish to be named.
Hemant Rustagi, CEO, Wise Invest Advisors, said: “Merging of funds that were launched as a thematic fund (which may or may not be relevant today) or small funds in size and do not have potential to grow in the funds as well as funds with similar philosophy and strategy, will make selection for investors easier.”
The problem for an investor in mutual funds gets accentuated because every time there is a new theme in the making, mutual fund houses latch on to it. For example, in the late 1990s and early 2000s, there was a spate of technology funds. Similarly, when the infrastructure sector was expected to do well, fund houses decided to aggressively tap the potential and launched many schemes in the infrastructure space. Now, many of these schemes in the latter category are suffering.
After Prime Minister Narendra Modi launched the ‘Make in India’ theme, many fund houses launched scheme targeting the manufacturing sector. There are schemes called ‘resurgent’, ‘recovery’ and other catchy names to get the attention of investors.
“To attract the right kind of investor, the market regulator can look at increasing the minimum investment limit of these sector or thematic schemes,” says an industry player.