At the 4th edition of the annual Mint Mutual Fund Conclave last week, the overarching theme was the question: should FY 2018 be called the year of the mutual fund? For an industry that just two years back was still calling itself ‘nascent’ 24 years after privatisation, it is a giant leap forward to have assets under management that have tripled in the last five years. Mutual fund assets are now one-fifth of bank deposits and almost two-thirds of the assets under management by the life insurance industry. G. Mahalingam, whole-time member of the Securities and Exchange Board of India (Sebi), in his keynote address, said that possibly the external factors that helped this growth, such as easy money policy overseas for the last few years and more recently, demonetisation, are coming to an end, and now the real mettle of the industry will be tested. He said that several regulatory measures that are coming in the days ahead will ensure that the industry is investor-friendly. One, the scheme merger announcement will be made soon by Sebi. Two, the work on the total expense ratio (TER) going down must begin. Third, investor-friendly disclosure measures such as using the total return index should be taken. “Good times are the best times to swallow bitter medicine,” he said.
The industry view across the debate in the two panels that followed, seemed to be in favour of some of the medicine, but not all. Take for instance the soon-to-be-here Sebi regulation on the merger of mutual fund schemes. The regulator has been nudging the industry to clean up the mess of similar schemes for some years now. Too many similar schemes were launched historically to harvest new fund-related charges, they resulted from the takeover of fund houses and a too-fine slicing by the industry of a still-to-be-understood product. This has resulted in an ugly sprawl of schemes. Not just investors, but even sellers find it difficult to make sense of the plethora of me-too schemes from the same fund house. In fact, one large distributor laconically said to me earlier that he does not even go beyond the basic five or six broad categories to shortlist schemes: “Sab shor hai (it’s just noise).” Sebi is likely to allow a well-defined set of categories of mutual funds, such as large-cap, mid-cap, balanced, liquid, and short-term, among others, and within each category, a fund house can have only one product. Ideally, as suggested here, the approval should be on tap, but Sebi seems to not be ready for that yet. The definition of the asset allocation of some categories, for instance the balanced fund, has been an area of friction in the industry. Some of the older balanced funds have an equity allocation of up to 80%, but Sebi wants new balanced funds to stick to the 50:50 asset allocation between debt and equity. Sebi’s forthcoming rules seek to put an end to this anomaly, removing the “caste system where some are brahmins and others are not,” said Nilesh Shah, managing director, Kotak Mahindra Asset Management Co. Ltd. Whether the older schemes get a ‘grandfathering’ (of a special case of allowing an existing balanced fund with an 80:20 allocation) is still to be seen.
