The Securities and Exchange Board of India’s mutual fund advisory panel has recommended strict definitions for mutual fund scheme, which might bring down the current schemes by as much as half. The capital markets regulator will enforce the new definitions and ensure that a fund house has only one product offering in each category, said two people with direct knowledge.
The move is expected to help investors cut through the clutter of 2000 investment schemes and take better decisions, said these people. At the end of August, 42 fund houses in India managed Rs 20.6 trillion.
The mutual fund advisory panel has recommended that fund be broadly segregated into equity, debt, hybrid and thematic. In categories such as equity and debt, there would be further sub-categories such as large cap and small cap, said one of the two people.
Currently, Sebi nomenclature rules for mutual funds loosely define just two aspects—whether a fund is open-ended or close-ended and whether it invests in equity or debt.
“The categories and nomenclature devised by the panel is to ensure that scheme name reflects the nature of its investments. If a fund is called large cap fund then 80% of the money received will need to be invested in large cap stocks,” said the second of the two people cited earlier. “If some funds do not fall in the defined categories, they will be shut.”
Sebi is looking to notify these by month-end or after its board meets on September 18, this person added.
At an event hosted by industry lobby Ficci on Wednesday, G. Mahalingam, a whole-time member at the capital markets regulator said Sebi proposed to soon introduce rules for these mergers.
To be sure, some of the definitions which the mutual fund panel has recommended are currently adopted by the industry. However there is no sanctity to investment objectives or names. For instance, some of the large funds houses are managing two Equity Linked Savings Scheme (ELSS) or four Monthly Income Plans (MIPs) or exactly the same kind of balanced funds.
“In many of these cases, these schemes are exactly same in their investment pattern and nature. The only difference is the name. This often ends up confusing the customer and he/ she might end up in buying the same scheme because their names are different,” said Manoj Nagpal, chief executive officer of Outlook Asia Capital, a Mumbai-based mutual fund advisory firm.
Mutual funds are already planning mergers of schemes before the axe falls.
“We have started operationalizing merger plans as we are expecting Sebi’s notification any day. The major challenge is to merge two very large schemes. In such a scenario, most fund houses are planning to tweak the similar schemes in terms of their investment objective so that they can both survive under defined nomenclatures,” said an official of a large size fund house who did not wish to be named.
Amendments to the income tax act in the past two fiscal years’s budgets will also make mutual fund mergers easier. In the budget for fiscal 2017, the government exempted scheme mergers from capital gains tax. Further, in the budget for this fiscal, the finance ministry clarified that if an investor chooses to exit a merged scheme, the date and cost of investment of the original scheme will be considered for taxation.