A few months ago, the Securities and Exchange Board of India (SEBI) elevated the minimum net worth criterion to Rs 50 crore for mutual fund houses. The rationale of the regulator was to weed out players who are not serious about doing business. Another change that SEBI brought in was requirement of seed capital, which they believed would encourage mutual fund houses to perform better if their own capital is at stake in the funds they introduce.

Taking another step forward, SEBI is now planning to place minimum corpus criterion for debt funds. The regulator is of the view that all open-ended debt oriented schemes should maintain average Assets under Management (AUM) of at least Rs 20 crore on a half-yearly basis. And if they fail to comply with the same, SEBI is likely to ask them either close down or merge such schemes with other existing debt schemes.

At later stage, SEBI may also impose similar condition on equity oriented schemes keeping Rs 10 crore as minimum AUM criterion.

So what’s the rationale behind this?
SEBI intends to bring more transparency and reduce complexity by placing a minimum AUM criterion. You see, there are at least 80 debt mutual schemes with average AUM (on half-yearly basis) of less than Rs 20 crore. Cumulatively these schemes have approximately Rs 600 crore under management. SEBI believes that instead of running such tiny schemes, fund houses should focus on schemes that satisfy minimum AUM criterion, or merge them with existing debt mutual fund schemes.

PersonalFN is of the view that aforesaid move may help the regulator in safeguarding investors’ interest. The threshold limit set by SEBI is not very high and PersonalFN believes it is appropriate even for investors to avoid funds having lesser than Rs 20 crore of AUM.

PersonalFN also believes there are disadvantages of investing in debt funds having very low AUM which include:
 

• Lack of flexibility: The fund manager of a debt fund with low AUM would be constrained. He cannot take exposure to issuances having high minimum investment criteria, which can sometimes be even higher than the total corpus of the scheme. For example, a scheme with corpus size of Rs 4 crore may not be able to invest in a bond issue having minimum investment lot size of Rs 5 crore.
   
• Problem of Liquidity: Usually, debt funds have more institutional and corporate investors who may quickly redeem their investments for the want of money. In such cases, the fund manager is forced to liquidate portfolio to raise cash in the portfolio. When this happens, smaller investors suffer. But on the hand, a fund with sizable corpus may not find it difficult to manage liquidity.
   
• Lack of focus: There could be a possibility that a scheme with low AUM might be belonging to a fund house which is managing huge corpus under other debt schemes. In such a case, schemes with low AUM may not get adequate attention and investors might suffer.
   

PersonalFN is of the view that, investors should stay away from investing in mutual fund schemes have a rather small AUM. Although bigger corpus doesn’t promise good returns, it is better to prefer a fund with bigger AUM rather than investing in a fund with tiny corpus. A mutual fund scheme with abnormally low AUM encounters several constraints which infuse risk and limit returns. It is imperative for you to select mutual fund schemes carefully.

PersonalFN is of the view that, if SEBI imposes minimum AUM criterion, it is most likely that fund houses would merge schemes, as no one would like to lose AUM. Before accepting any such option, investors should closely analyse the performance of the scheme with which smaller schemes would be merged.

Do you think SEBI's move will be in the best interest of investors? Share your views here. Or post your comments

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shetttar_4567@yahoo.co.in Apr 23, 2014 SEBI's move is in right direction. Small operators will be forced to close down or merge with other similar operators.---------Amarshettar M.M. retired Chife Manager, State Bank of India, Hubli ( Karnataka)580 023

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