Transformed Editorial: MF's Visual Refurbishment
The Securities and Exchange Board of India (SEBI) has proposed a significant change to the mutual fund (MF) industry, allowing mutual fund companies to launch multiple schemes per category (currently restricted to one per category). This move, aimed at fostering innovation and investor choice, comes with potential benefits and risks.
Potential Benefits
The new regulations could bring about greater flexibility and product innovation. Allowing a second scheme per category can enable fund houses to better manage large funds and tailor different investment strategies within the same category—helping maintain true-to-label investment styles and improving fund management efficiency.
With more schemes available within a category, investors gain a broader selection of options that might better fit their risk appetite and financial goals. This expansion of choice could address the issue of some schemes growing too large, forcing managers to deviate from their mandate by investing outside their stated style.
The move also aims to enhance clarity and rationalisation by limiting to two schemes per category and other categorization updates. SEBI's goal is to reduce portfolio overlaps and improve transparency for investors, making it easier for them to make informed decisions.
Potential Risks
While the changes present opportunities, they also bring challenges. Introducing multiple schemes in the same category might increase portfolio overlaps and dilute strategy distinctiveness, potentially confusing investors on which scheme to choose and undermining diversification benefits.
If investors shift heavily to the new scheme, the original scheme could face large redemptions, impacting returns for long-term investors remaining in it. This cannibalization and redemption pressure is a concern that investors should be aware of.
The increase in schemes per category also increases the burden on investors to carefully analyze differences, which might be challenging without sufficient clarity or investor education.
There is also a possibility of reduced discipline among asset management companies (AMCs) who might misuse the option to launch multiple schemes, potentially leading to product proliferation without distinct objectives. However, SEBI proposes conditions (e.g., schemes older than 5 years and no change in expense ratio) to control this.
Additional Changes
In addition to the proposed changes, SEBI has suggested that all mutual funds will be allowed to invest residual assets in gold, silver, Real Estate Investment Trusts (REITs), and Infrastructure Investment Trusts (InvITs). These investments could provide valuable diversification benefits for both equity and debt mutual funds.
Furthermore, SEBI has revisited its definition of "large-cap" and "mid-cap" as top 100 stocks and next 150 stocks by market cap, and suggested considering pegging these definitions to percentiles instead. This change could lead to more precise categorization of stocks and potentially more accurate investment strategies.
The regulations have consolidated mutual funds into 36 standard categories, providing a clear framework for investors to understand and compare different schemes. Assets invested in mutual funds have grown significantly since the regulations were implemented, from ₹22 lakh crore to over ₹74 lakh crore.
The number of investor accounts has also increased dramatically, from 6.6 crore to over 23 crore, indicating a growing interest in mutual fund investments. As the industry continues to evolve, it will be interesting to see how these changes impact the mutual fund landscape and investor behaviour.
- The new regulation in the mutual fund industry could lead to greater flexibility and product innovation, as it allows mutual fund companies to launch multiple schemes per category.
- With the possibility of more schemes available within a category, investors may gain a broader selection of options that could better fit their risk appetite and financial goals.
- However, introducing multiple schemes in the same category might increase portfolio overlaps and dilute strategy distinctiveness, potentially confusing investors and undermining diversification benefits.
- The increase in schemes per category also increases the burden on investors to carefully analyze differences, which might be challenging without sufficient clarity or investor education.
- In addition to the proposed changes, all mutual funds will be allowed to invest residually in various assets such as gold, silver, Real Estate Investment Trusts (REITs), and Infrastructure Investment Trusts (InvITs), which could provide valuable diversification benefits for both equity and debt mutual funds.
