Mutual fund scheme consolidation: Finding middle path may benefit investors
Only a fund with a relatively smaller corpus size can be quickly repositioned; a large fund will have the baggage of existing portfolio which should not be disturbed.
In the debate on mutual fund scheme rationalisation (also called de-duplication) and having uniformity in the fund offering from AMCs, the arguments are loaded in favour of making it simple, de-jargonised and with a degree of uniformity. This will lead to clarity for investors who currently face a situation of multiple funds being offered, and in certain cases, the difference between one fund and the other being superficial. However, since a move is being made and a debate is taking place on the need for merger and consolidation of MF schemes, let me play the devil’s advocate and argue for retaining the existing schemes i.e. schemes that may not have much differentiation from another scheme of the same AMC.
A mutual fund is a business venture and is justified in making products available to customers, may be multiple. What needs to be taken care of is that this being an investment avenue and not a consumption item like mobile phone or car, it should not be too commoditized to cater only to consumer tastes but should retain uniqueness in product offerings. It takes an AMC’s time and effort to launch and run a scheme, and merging a smaller scheme with a larger one would nullify the efforts made so far. A solution may be found in a different way, so that the mutual fund gets to retain all its schemes but the investor is offered ones with uniqueness.
Earlier, schemes used to have an ‘institutional option’ with relatively lower expenses charged to it and a ‘retail option’ with a relatively higher expense ratio. When regulation mandated that to end the confusion and for uniform treatment of customers there should be only one expense ratio for a fund, AMCs had to abide by it. However, they were allowed to retain both the options, only that they had to demarcate the ‘live’ option where they can solicit fresh business and a ‘defunct’ one that will exist but fresh business cannot be undertaken. The ‘defunct’ option was for continuation of existing customers with existing expense ratio. The investor had the option to switch to the other (i.e. live) option of the same fund, if it had been running on lower expenses.
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A similar approach can be adopted for scheme consolidation. As and when the regulator comes out with the model for rationalization of funds e.g. only one fund for large cap / mid cap / small cap, let the AMC mark one fund as ‘live’ in that category where they can solicit fresh business and one fund (if any other existing fund is there) to be ‘on the shelf’ where business can be solicited, not on a daily basis, but only under certain conditions. The rationale for doing so is that sometimes the market throws unique or niche opportunities and the AMC has to be fleet footed to catch those opportunities. Only a fund with a relatively smaller corpus size can be quickly repositioned; a large fund will have the baggage of existing portfolio which should not be disturbed. The other advantage would be that the ‘live’ and larger fund will remain true-to-label and the ‘on-the-shelf’ smaller fund will have a flexible positioning from time-to-time.
The niche fund offerings may be understandable only to evolved investors or advisers and should be made available accordingly. That is to say, in an ‘on the shelf’ fund, where the differentiation with an existing fund of the same AMC is marginal and niche, can be sold only by intermediaries fulfilling certain conditions, as may be mandated by the SEBI. As and when a market opportunity arises, there may not be enough time for the AMC to obtain a new fund approval and an existing fund, with necessary modifications in the objectives, would come in handy. As an illustration, if an AMC has multiple Ultra Short Term Funds and SEBI mandates only one fund in that category, instead of necessarily merging the smaller fund with the larger one, let the AMC declare the larger fund as ‘live’. The other fund would not be available for fresh business but will remain ‘on-the-shelf’. Let’s say Bank CD yields shoot up someday due to system liquidity tightness and the fund manager sees an opportunity. The AMC would inform SEBI, communicate the opportunity to advisers, get fresh investments only during the stipulated period and then stop fresh subscriptions. Investors can avail of the niche opportunity and redeem freely afterwards.
The other debate is about direct investors. By definition, direct investors know their stuff and do not need the services of an advisor or distributor and can save that part of the expenses. When an AMC brings a fund with limited availability, with a particular investment objective that would not be understood by all investors, the DIY investor should be in a position to appreciate the appeal. If direct investors are not in a position to understand the special fund positioning, they can consult an adviser.
To summarize, the AMC may be mandated to communicate to investors of the ‘on the shelf’ funds to migrate to the ‘live’ fund without any hassles and even a fund with a small corpus should be allowed to exist, as a dormant fund. In a PMS, the fund manager can customize the fund management for a customer and there is a minimum corpus requirement of Rs 25 lakh. Such customization is not possible in mutual funds as it is meant to be a mass offering, but with ‘on-the-shelf’ funds, AMCs can offer special market opportunities to at least a segment of customers.
How does the investor benefit out of keeping a few schemes dormant? It is the benefit of certain niche opportunities that arise in the market from time-to-time. Arguably, nothing stops the fund manager from taking these opportunities in the existing funds, but the purpose of the existing funds is to remain ‘true to label’ and not to play opportunistic for short term. Arguably, the AMC may take SEBI’s approval for niche opportunities in an NFO, but that takes time. Subscriptions to the dormant funds will be open for only a certain period as per SEBI approval, otherwise it will tantamount to running multiple funds in the same category. Both the AMC and the investor have to be fleet footed to avail of the opportunity. To avoid confusion about the true USP, it would be sold only to direct investors and by certain eligible intermediaries.
The writer is an independent financial advisor