For quite some time, the Securities and Exchange Board of India Limited (SEBI) was desirous of raising the minimum net worth requirement for mutual funds.SEBI has long believed that the higher capital commitment is necessary for mutual fund houses to weed out players who are not serious about doing business. Without paying much of importance to clamours of smaller players, SEBI put its plans into action last week. It raised the minimum net worth requirement of Asset Management Companies (AMCs) to Rs 50 crore. The fund houses have been given 3 years’ time to comply with this norm.

The SEBI is of the view that mutual fund industry is over-crowded thanks to low capital requirements to enter mutual fund business. However, it was observed that, top 10 fund houses manage the majority of chunk while smaller fund houses have a meager asset base. This made the industry lopsided. In the recent past, the regulator had warned that all those fund houses that have not expanded their operations beyond the top 15 cities may lose out on incentives.

It is argued that, the move recently made by the market regulator is targeted at addressing the issues mutual fund industry faces today. Although mutual funds will have to maintain capital base as directed by the regulator henceforth, PersonalFN is skeptical about the effectiveness of this move. Raising capital requirement may not do any better to the investor. On the contrary, it may discourage competition and industry which is dominated by fewer players, would continue to be dominated by only handful fund houses. PersonalFN has been holding this view ever since this issue was raised for the first time.

PersonalFN believes, merely increasing the minimum capital requirement may not ensure that fund houses are committed to doing serious business. Imagine a fund house promoted by a top banking company having thousands of crore worth market capitalisation. For it, running a business which has a base capital requirement of say, Rs 50 crore may be just a matter of interest and diversification. The promoter has very little to lose even if it has to close its asset management business one day. On the contrary, a promoter of another fund house with a relatively small asset base might have invested substantial amount (of total sum available with it) which would always keep it interested in doing competitive business. The dedication with which investors are served could also be higher in case of a fund house that is fighting with bigger fund houses for a market share. Promptness in servicing investors, quality of fund management and proportion of well-performing assets to the total asset base decides the seriousness of a fund house about its business. Furthermore, it should also be seen how the new assets are being garnered.

Another change that SEBI recently brought in is requirement of seed capital. According to this, 1% of the amount raised has to be invested by mutual funds in all open-ended schemes, subject to a limit of Rs 50 lakhs. SEBI believes mutual funds would be encouraged to perform better if their own capital is at stake.Seed capital will create incentive for the fund houses to generate higher alpha through the invested corpus. PersonalFN is of the view that, although introduction of the concept of seed capital may make fund houses more serious about generating higher returns; this too may have limited positive impact. The seed capital for any scheme is capped at Rs 50 lakh, which is extremely low for large fund houses. Suppose a fund house, through a New Fund Offer (NFO), manages to garner say Rs 500 crore (where only Rs 50 lakh is contributed from its own pocket); annual fund management fees (charged to investors at say 1.0%) would be higher than its own “seed capital”. Under such scenario, the requirement of seed capital may not fetch any positive results.

PersonalFN is of the view that, a serious fund house can broaden its asset base by working in favour of investors. Such a fund house would try to do justice to its investors irrespective of any regulatory binding. Consistent performance in majority of the schemes offered by the fund house across time frames and market cycles may rather be better indicators of its commitment towards investors. A fund house with strong financial position can always comply with all regulatory requirements but still generate poor returns thus losing the faith of its investors. Only repetition of good performance may hold the key. PersonalFN helps you identify consistently performing mutual funds that may help you meet your long term financial goals.
 

Add Comments

Comments
rajeevkapur77@hotmail.com Feb 22, 2014 I agree with the view that merely increasing the size of the mutual fund can not ensure that the investors will gain. The logic of "Too big to fail" has been proved wrong so many times in history that one wonders why the mandarins of finance ministry have not learnt this lesson.  Small is beautiful and can give better returns due to focussed investment and easy to manage features. Hope the next FM will not be foolish like the outgoing one and the MF regulator will take back such orders. HDFC Prudence - one of the largest MFs is one of the worst performers. There are many smaller MFs that have give much better returns consistently over last 5 years -e.g. Quantum Long Term Equity Fund.
lufcbssiu@hotmail.com Mar 18, 2014 IJWTS wow! Why can't I think of things like that?

 1