There’s a vast difference between liberty and unrestricted liberty. Ideally in a democracy, there should be liberty to all. People shouldn’t be muzzled or deprived of anything, especially the pursuit of personal happiness. So, liberty for anyone is good to the point it doesn’t bother or interfere with another’s rights. When such a situation begins to affect the masses at large, one needs to take heed of it. In our story, this is exactly why Securities and Exchange Board of India (SEBI) is putting all (trans)actions of mutual funds under scanner.

No shortcuts available anymore…
To begin with, there were no restrictions on launching New Fund Offer (NFO) per se. Mutual fund houses adopted an opportunistic approach and launched a consistent stream of NFOs when markets were near the peak and valuations were high. Unfortunately, investors too were confident about equity markets and hence were a bit complacent too. Commission-driven distribution models and lack of awareness about investing made it easy for mutual funds to launch NFOs and collect monies quickly.
  Capitalizing on upbeat market sentiments

Calendar Year Number of NFOs Launched 2012 4 2013 29 2014 77 2015# 60

Note: Only equity oriented NFOs are considered
# NFOs launched in 2015 so far
Data as on November 06, 2015
Source: ACE MF, PersonalFN Research  

The path of proving one’s mettle before asking investors for fresh funds, and/or the practice of wooing new investors with a rock-solid track record had proved rather difficult. Encouraged by the apparent success, mutual funds got habituated to this NFO-hammock cozy environment and enjoyed unrestrained liberty in operations. This made the lax investors greedy enough to err from their path. Many times, the difference between these two schemes were so subtle that it would’ve taken a while to identify these through layman eyes. The scheme’s objective, investment pattern, strategies, focuses looked identical.

Result? The popularity of mutual fund schemes with investors hasn’t improved. Shortcuts took mutual funds to a dead end.
Taking serious notice of this, SEBI started to checkmate all shortcuts of mutual funds. A few quotes from a senior SEBI official in his interview to Economic Times (published in circulation dated November 04, 2015) were very telling. One of these reads, “We are for simplification of products. Unless the fund house is able to explain the difference, SEBI is not clearing any scheme.” Giving a gentle reminder to fund houses he added, “We have told them you have no excuse for not merging the schemes.”

The broader view of the regulator is to cut down the scheme count drastically as numerous schemes with similar objectives and modus operandi create confusion. Since a few years ago, Mutual Fund houses sailed into the phase of merging one scheme with another but fund houses weren’t really toeing the SEBI-drawn line. Initially, they merged poorly or averagely performing schemes with those faring well.

Now, no beating around the bush
Present time, SEBI sends a clear message to protect Investors’ interest first. So in the coming days you might see more frequent scheme mergers. In lieu of this, already the Budget 2015-16 has provided incentives towards merging schemes. Capital gain tax is no more applicable when two schemes are merged.

But that’s not all. The promise of driving Investor education still remains the most critical aspect for spreading awareness about mutual funds and attracting more customers to mutual funds. Now, storytelling tactics won’t work for these mutual fund houses, which is healthy for the industry as well as for investors in the long run.

Important takeaways for investors:

• Keep an eye on your portfolio and follow the developments related to scheme mergers (forming a part of your portfolio)
• Take time to revisit the portfolio and minimize duplication of schemes
• In case you have no time to refurbish your portfolio, avail of expert advice
• Please remember, consistency in performance, integrity of the fund house, and due diligence are important factors that differentiate good funds from the average funds .

PersonalFN has always maintained this view on the matter. Very rarely do NFOs offer any value to investors as there isn’t a proven track record to bank on. Therefore, it is important for you to select schemes carefully. As you are going to see more schemes merging, you must closely track how it affects your portfolio. Prudently avoid schemes inconsistent in performance, irrespective of who’s managing them. Now that everyone’s liberty is assured with mighty SEBI flexing its regulatory muscles to protect your investment interests. It’s up to mutual funds whether to fall in line or fall from grace.

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