When you have multiple choices with no real or identifiable differences, you are likely to buy two things almost identical. Mutual fund investors have been facing this dilemma for long. There have been multiple schemes from the same fund house which have similar features, orientation, and objectives. As a result, investors get more confused and end up either making a wrong choice or conclude, mutual funds are not meant for them. They are too complex. No wonder, the spread of mutual funds in India is extremely low.

Why mutual fund industry offers so many schemes when a few are enough?
In reality, a fund house can be very successful even with a briefer portfolio of select schemes. What it needs indeed is a unique product in each category. However, the work-shy mutual funds initially thought, they can satisfy their distributors by incentivising them to push their products. To garner higher Assets under Management (AUM) under existing schemes, it takes more efforts. Unless the scheme performs consistently and generates superior returns across market cycles, it becomes difficult to push the existing scheme.

On the contrary, swanky ad campaigns and aggressive promotion through channel partners who often lured potential investors by 10-Rupee NAV, helped mutual funds collect a good deal of money quickly through New Fund Offers (NFO). This country has witnessed how distributors and promoters sold 10-Rupee NFOs as if a company is coming with an Initial Public Offer (IPO) at a face value of 10. This created an illusion.

Today, every fund house has an extensive list of schemes whose performance has nothing much to speak about. Don’t you find it weird that mutual fund houses offer two open-ended midcap funds along with a number of close-ended funds targeting midcaps? No matter how deeply a man loves his fiancée, he cannot buy her five engagement rings. A fund house might be bullish on midcaps, but what stops it from buying all stocks it finds attractive under one scheme?

Similarly, only fund houses can tell us, how they justify 3-4 offerings in the ELSS category and a couple of balanced funds and multiple Monthly Income Plans (MIPs).

Most of the fund houses have been displaying traits of a man who loves his wife until the couple celebrates their first anniversary. Thereafter, the spring of attachment suddenly dries up. Only performing schemes stay in limelight and investors of non-performing schemes feel cheated. This leads to investors’ dissatisfaction and hinders the spread of mutual funds. Multiple choices often result in disservice of investors.

SEBI finally took a firm action...
Taking a serious note of all these factors, the Securities and Exchange Board of India (SEBI) asked mutual funds to merge schemes with similar fundamental attributes. SEBI also warned that it will not allow mutual funds to launch any NFO unless they merge old schemes with the same characteristics and objectives.

The Government played its role as well...
It is believed that the taxation was one of the barriers in the merger of schemes. Addressing this problem, the Finance Minister, said in his budget speech, “Any transfer by a unit holder of a capital asset, being a unit or units, held by him in the consolidating plan of an MF scheme, made in consideration of the allotment to him of a capital asset, being a unit or units, in the consolidated plan of that scheme of the MF shall not be considered transfer for capital gains tax purposes and thereby shall not be chargeable to tax.”

In simple words, if scheme “ABC” had two plans—Regular and Institutional; both can now be merged without any tax incidence.

Strict actions are now fetching results...
From 2010, mutual fund houses have merged close to 150 schemes of which nearly 1/5 i.e. 30 schemes they have merged in the first five months of 2016. Approximately 15 were merged in 2015, as the Business Standard dated June 2016 revealed. However, there’s a long way to go before mutual fund houses start looking slim and trim. The appetite to grow larger without winning over investors’ confidence make fund houses buy out others. Replication of schemes also happens as an outcome of mergers and acquisitions.

PersonalFN is of the view that, synchronized efforts of the regulator and the Government to facilitate the merger of schemes of the same fund house may simplify the process of selection for investors. PersonalFN believes, instead of getting into the fancy of the sector and thematic schemes investors should stay with the equity diversified funds. You should be wary of fund houses painting a rosy macroeconomic picture as a carrot on a stick to get you hooked to the NFOs. Just shun them. While investing in a debt fund, don’t get carried away with returns. Instead, look at the credit quality of the portfolio with eyes wide open. Reputed fund houses too have made blunders with investors’ money. Their MNC stature unfortunately couldn’t safeguard investors’ money. This shows that, no matter how reputed the fund house might be, it can fail if it compromises on the risk management.

Investors expected mutual funds to shower returns on them. It seems mutual funds so far misunderstood “schemes” for “returns”. Strong words from SEBI made fund houses learn what the regulator and investors don’t appreciate. If investors expect something unreasonable, mutual funds should make them understand that through financial literacy.

PersonalFN always follows this approach.

Here’re four things you can do to avoid investment blunders.

1. Always evaluate risks involved in mutual fund investing and check your risk appetite.
2. Invest in equity diversified funds with a long term view.
3. While investing in debt funds, first look at your time horizon and invest in funds whose maturity concurs with the period for which you can stay invested. PersonalFN believes you shouldn’t hold more than 20% of your debt portfolio in long term debt.
4. While selecting a fund for your portfolio do comprehensive analysis and invest in only those schemes that have a superior track record across timeframes and market phases.

PersonalFN offers unbiased mutual fund research services that help investors create a portfolio of mutual fund schemes with good potential.

Will merger of schemes lessen the confusion among investors at the time of selecting schemes? Please share your feedback here.

 

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