#BQMutualFundShow: How SEBI’s Mutual Fund Classification Can Impact Your Portfolio
Market regulator SEBI’s move to rationalise and categorise mutual fund schemes, in an effort to make it simpler for investors to compare plans with similar characteristics, may impact your portfolio holdings.
Mutual fund houses will have to classify schemes into five standard categories – equity, debt, hybrid, solution oriented and others, as per a recent circular by the Securities Exchange Board of India.
Each of these will have their own respective sub-types, but the overall exercise will bring down the number of schemes since no asset management company can have more than one fund per category. While this may result in a reduction in the number of schemes that large fund houses offer, newer fund houses with limited schemes, may be unaffected.
Each investor will have to monitor their investments to check if their scheme gets impacted by the ruling, Aashish Somaiyaa, chief executive officer at Motilal Oswal AMC said on BloombergQuint’s weekly series The Mutual Fund Show.
Here are edited excerpts from the conversation.
There are some changes that are going to happen in the mutual fund industry, probably already happening. Tell us what this decision is all about? Are you in favour of it and what’s the impact?
I am in favour because it makes life simple for everybody, and especially for investors. Mutual funds have been launched now for over 25-30 years. If a particular fund was launched 25 years ago, and they said this is a mid-cap fund, and let’s say I launched a mid-cap fund three years back when the market is developed and the definition of mid cap has changed dramatically. Many years ago, there was no regulation on what a fund’s nomenclature should be, or what is the definition of a large cap and a mid cap. If I launched a mid cap fund 25-30 years ago, I could define for myself what mid cap means. Today, the industry has moved forward quite a bit and there is a need to standardise these definitions.
It is a good to step because there is an apple-to-apple comparison. The circular clearly says that the top 100 stocks are large cap, stock number 101 to 250 by market cap is mid cap and 251 onward, is a small cap. So it ensures that all funds are comparing the same things.
From an investor’s perspective, if I say my fund is a mid cap but I have only 40 percent invested in what a mid cap is meant to be, then it is misleading. If you are someone who likes to do you asset allocation, you thought you bought a mid cap, but the fund is holding something which is actually not a mid cap. So, it makes life easier for clients. Most importantly, the circular says that in every category you can only have one fund.
It is good for clients. It is a simplification and it enables the right comparisons.
What is the number of schemes that are currently in place and on an average, how many schemes would a mutual fund house have to cut down on, as per the current SEBI norms?
This has been in talks for a couple of years. Everybody had a sense that this was being discussed because the regulator has been proactive, and they have been discussing it with everybody. So mutual fund houses had time to plan things.
If somebody has a poorly-defined schemes, say your offer document is very loosely worded, then you have to re-position them and slot them into categories which the regulator has defined. That is one fallout.
Secondly, within a category... you rightly said that there are now 10 open-ended categories and a fund house has 12 open-ended equity funds, then you have to ensure that they fall under these 10 slots. Something might have to get merged or closed. The only exception is sectoral funds are not included in it, because under sectoral funds you can have an auto fund, FMCG, pharma fund, etc. So we were talking about 10 types of diversified funds and everybody has to fit within those types.
If we see open-ended equity funds, there are over 400. If you add all types of close-ended, FMPs and fixed income, there could be over 2,500 schemes. I don’t see the number of schemes coming down dramatically. Yes, to an extent. But there could be a classification and re-orientation of schemes to fit into the slots.
For an existing investor who holds a scheme and assuming that scheme falls under schemes which have to be merged or consolidated or shut down, what would the impact be on that investor?
From a long-term perspective, it is positive for investors. If there are 30 funds, do people have 30 fund managers? There are cases where one fund manager manages 8-15 portfolios at a given time. If the number of schemes is consolidated, the focus goes up. So in the long run, it’s going to be a good thing. As an investor, over the next 90 days, I should keep an eye out on the schemes where I have invested. Forget the schemes getting merged, amalgamated or closed down, the point is are they going to change their investment universe or are they going to re-classify it?
I may have thought that I have bought a mid-cap fund and that mid-cap fund had loosely-worded definitions. Now the regulator says that if you are a mid cap fund, 65 percent of your portfolio should be in stocks numbered between 101 to 250. Now let’s say your mid-cap fund happens to be 40 percent in that bucket. So you will see a churn in the portfolio because that 40 percent will start tending towards 66 percent. You should keep an eye out on all kinds of communication to see what your particular scheme is going to go through and what kind of changes it will call for.
You would presume that a stock with a market cap of 275, or somewhere near that rank, could possibly be a great stock for a mid-cap fund but will not not find presence in a mid-cap fund because it will have to be classified as a small cap. What happens to some of these schemes? Do these stocks find buying only in a multi-cap scheme or a small or micro-cap fund?
The regulation or circular has some relaxations. It says that if you are a mid-cap fund, at least 65 percent of your portfolio has to be in stocks between 101 to 250. So theoretically, the other 20-25 percent can be allocated that way. You can’t use up the entire 35 percent bucket by filling it with large or small caps. The point is whatever mid caps you own, they may be slipping or maybe on their way out. You do have a leeway to include ideas other than pure mid caps. But now there is some method to the madness.
What about investors who are fund agnostic or size agnostic? They will invest in a multi-cap fund and the rules will stay as they are?
Yes, there is no change in multi-cap. Multi-cap or the diversified equity is the largest category in the industry. The only thing which changes now is that there is only one multi-cap fund in a fund house. In the past, almost every fund was a pseudo multi-cap. Large-cap funds used to have 40-50 percent in mid caps, so everywhere there is a sprinkling of something. In a large cap, if you are generating outperformance by having 30 percent in mid caps and there is another guy who is sticking to its large-cap mandate, then the comparison with the index and the peer is wrong. Now, you are comparing it with the right things and you are showing the right numbers.
Watch the full interview here.