The mutual fund industry as on August has 316 open-ended equity schemes. However, not all schemes have substantial assets. While fund houses are required to collect at least Rs.10 crore in their NFO to run a scheme, there is no minimum requirement in terms of assets for open end scheme on an ongoing basis.
Value Research data shows that eight open-ended schemes excluding international funds have assets less than Rs.10 crore. However, if we include international funds the count increases to 18.
Though international funds invest in equity instruments listed in other countries, they fall under debt funds (non-equity funds) for taxation. SEBI norms say that schemes that do not invest more than 65% in Indian equities are non-equity funds.
We have not taken ETFs, as the minimum requirement of 20 investors and the maximum limit of 25% investment per investor of open-ended funds do not apply to ETFs.
Usually, fund houses merge non-performing schemes or those with a small AUM with bigger funds.
Jimmy Patel, CEO, Quantum Mutual Fund believes that fate of a fund depends on the scheme’s objectives. “If the scheme has good track record and has delivered high returns then the fund continues to exist. However, if the objectives of the scheme overlap with another scheme then it makes sense to merge the small scheme with the bigger one,” says Jimmy.
Vidya Bala, Head of mutual fund research at Fundsindia.com seconds Jimmy. She says that fund houses are likely to continue with low AUM funds if the funds have delivered attractive returns despite the fact that continuing with these funds may not be cost effective for them. “Fund houses believe that the good performance of their funds will speak for itself and investor appetite for the funds will increase in due course,” says Vidya.
Mirae Asset Emerging Bluechip Fund and Canara Robeco Emerging Equities Fund are some of the few examples of starting with a small base but growing impressively later. These funds had a modest start but now have more than 1,000 crore of assets under their belt.
Experts say that distributors do not sell schemes with small AUM, as it is risky for investors.
Gajendra Kothari, CEO, Etica Wealth Management says that investors should be cautious of funds having small assets. “Investors should not take higher risk for the 1-2% extra returns. Investors in these small funds can also witness merger with schemes with a different scheme mandate that does not serve the needs of investors. Also, in most cases fund management is focussed on the flagship fund and do not pay much attention to smaller schemes which impacts its performance,” says Gajendra.
Experts believe that many fund houses have been running small sized schemes with a hope of revival. Himanshu Srivastava, Senior Analyst, Manager Research, Morningstar India says that the reasons behind continuing with a small AUM scheme differ from large to small fund houses. “Small-sized funds offered by large fund houses do not impact the fund houses; however, small fund houses continue with such schemes as they believe that the AUM will grow once they deliver performance,” says Himanshu.
