If you were asked to select one of two options, it may be easy to choose. Now, if the number of alternatives increased to 10; your job might become slightly tougher. Naturally so. You would have to understand pros and cons of all 10 options along with their suitability in the given context. How about selecting 5-6 from 2,266? It sounds crazy, doesn’t it?

Well, this is what people are expected to do if they plan to invest in mutual funds. As per the data published by Association of Mutual Funds in India (AMFI) on February 29, 2016, there are 2,266 schemes across 9 categories. So if you want to pick up 2 in Equity, 2 in debt, 1 in ELSS, and 1 in Gold, you have a herculean task at hand. You may always seek the experts views to figure out a winning mutual funds for your portfolio. PersonalFN has been doing this for years—without holding any bias for or against a particular fund house. At PersonalFN, research is driven by a well-established and tried-tested process.
 

Current Stats...

Category	Number of Schemes	AUM (Rs. in crore) #
Income	1,580	5,71,192
Equity	418	3,18,233
Balanced	27	39,104
Liquid / Money Market	55	2,57,986
Gilt	41	16,935
ELSS-Equity	58	36,409
Gold ETF	13	13
Other ETFs	44	12,846
Fund of Funds investing overseas	30	1,942

# AUM (Assets under Management) as on February 29, 2016
(Source: AMFI, PersonalFN Research)

But what about those who don’t opt for research services? The Securities and Exchange Board of India (SEBI) has rushed to address this concern. It wants mutual fund houses to drastically reduce the number of schemes on offer. Can you imagine top 5 fund houses by AUM namely ICICI Prudential Mutual Fund, Reliance Mutual Fund, HDFC Mutual Fund, UTI Mutual Fund, and Birla Sun Life Mutual Fund collectively run over 1,000 schemes put together? The Capital Market regulator has urged that any fund house should have a maximum of 15 schemes.

Let’s see how it works...
The regulator has divided the entire spectrum of debt oriented schemes into 8 categories as given below and expects mutual fund houses to offer only one scheme each in each of the categories.

Categories of debt oriented funds

1. Liquid,
2. Liquid Plus,
3. Ultra Short Term
4. Short Term,
5. Income,
6. Gilt,
7. Monthly Income Plan,
8. Credit Fund

Similarly, fund houses will have to offer 1 scheme each for 7 categories of equity oriented funds.

Categories of equity oriented funds include

1. large cap
2. mid cap
3. micro cap
4. ELSS
5. balance fund
6. arbitrage fund
7. concentrated fund

What this entire process means to the industry and investors?
As per AMFI data, there were 39 fund houses as on February 29, 2016, with a total AUM of over Rs 12.60 lakh crore. Now that the SEBI expects fund houses to merge all similar schemes, bigger fund houses are going to find this transition tough.

This is because, after merging schemes, their AUM under the single scheme may become practically difficult to manage. When a fund size grows beyond a limit, the fund manager loses flexibility, more often than not. The funny part is, there’s no clarity on flexi cap funds. What if a fund wants to invest across market capitalisations? The same is true about a debt fund aspiring to invest across maturities. It is unlikely that the capital market regulator hasn’t thought this through, but, equally important is that it communicates with industry players and investors before ambiguity gives rise to unneeded speculation. More clarity is needed on how schemes with different mandates but with similar portfolios will be treated. Likewise, it also remains unclear as to what the time frame would be for fund houses to reduce the number of offerings? You may expect the number of schemes to go down to 585 from the 2,266, post-consolidation (39 fund houses may have maximum of 15 schemes each). For investors, selection may get a little easier.

Another good thing for investors is, there won’t be any dumping of New Fund offers (NFOs). The new policy of SEBI with respect to consolidation of schemes will ensure that, mutual fund houses won’t come up with mindless NFOs. More NFOs with similar objectives only create confusion among investors and often miss lead them. PersonalFN has written several times highlighting why one should stay away from NFOs.

To sum up—a good intent, the right approach, but perhaps wrong timing (though this should have been done much earlier, better late than never) and still a lack of clarity. Another reason to believe the mutual fund industry is over regulated.


 

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