Smaller and especially newer fund houses are finding it difficult to compete with the established players when it comes to offering a wide product suite to their investors. Some large fund houses have two to three schemes within a same fund category.
Most of these funds were launched by the larger established players at a time when the regulator had a more permissive attitude to new product launches. With the regulator now being stricter about ensuring that there is no overlap with existing products, one unintended consequence seems to be that the newer fund houses feel they are handicapped in offering the fuller range offered by their established peers.
For instance within fixed income category, each scheme has a different investment strategy. Fixed income funds are sensitive to interest rate changes. AMCs have to position different funds to suit the changing market conditions to their investors. In such a scenario, large players are said to be in a better position to get a higher share of the investor’s wallet as compared to smaller funds having limited schemes.
“Most established players have three products in one category. When you have one product in one category and the competition has five products in the same category then it becomes easier for them to reposition the products during different market conditions as compared to us. The problem is not so much on equity side but on the fixed income side. For instance, some existing players have four to five liquid funds (treasury, liquid plus, etc.),” said the CEO of a mid-sized fund house.
The scope of outperformance in fixed income funds is less as compared to equity funds. Thus, there’s no reason for investors who are getting decent returns from large funds to invest in smaller funds.
“SEBI doesn’t give approval to launch a new product with the slightest overlap with an existing fund. Yes, it’s a challenge to sell funds when the competitors have a host of funds to suit different market conditions. Established players have launched multiple funds a long time back,” says the sales head of a foreign fund house.
Industry experts say that large fund houses have different schemes to suit different investor segment – retail and institutional. The fund catering to retail will have a higher expense ratio compared to one tailored for institutional investors. “Fund houses have different expense ratios to suit retail and institutional investors. A small fund house has to take a call whether it wishes to cater to institutional or retail and decide the expense ratio accordingly. Thus, big fund houses are able to garner a larger market share by offering a wider range of solutions meeting needs and expectations of a broad set of investors,” says a Mumbai based IFA.
The industry has already taken up the issue with the regulator; say some of the fund houses. “The regulations are advantageous for older fund houses. We have taken up the issue with regulator and AMFI many times but we have not got any positive feedback. The regulations should be on a level playing field. Today we have many customer segments. Within the institution category, some investors like to invest in high credit quality while others want to take credit risk. Some investors want lower maturity and some higher maturity,” said the CEO of a domestic fund house preferring anonymity.
