SEBI norms for mutual funds aimed to make life easier for investors

 Karthik Srinivasan

 Over the past few years, the Indian Mutual Fund (MF) industry has grown by leaps and bounds and achieved a significant size with assets under management, this is evident particularly in the last five years. As per AMFI, the AUM has grown from Rs 7.01 trillion as on 31^st March, 2013 to Rs 21.36 trillion as on 31^st March 2018, a more than three-fold increase in five years.

And in a 10 year span, the industry’s AUM increased from Rs 5.05 trillion as on 31st March 2008 to Rs 21.36 trillion as on 31st March 2018. By no means the growth is phenomenal for an emerging capital market and would compare favourably with the peer markets.

As the industry expanded so have the number of investors. There is increased participation not only from the institutional investors but more importantly by the retail investors. AMFI places the total number of accounts (or folios as per mutual fund parlance) as on March 31, 2018 having crossed the milestone of seven crores, at 7.13 crores.

The MF industry has also become more complex to understand with time. More schemes under various categories like equity funds, debt funds, hybrid, money market funds and so on along with their variations or minor differences in the themes that they pursue or the composition of the portfolios – and all of these from the numerous Asset Management Companies (AMC)s have only added to the confusion. Managing various schemes has posed problems not only for the AMCs but also for the investors, retail in particular.

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The problem that he faced was which AMC's scheme to select, what was best according to his risk appetite and financial planning perspective and allocating his funds amongst various asset classes.

These troubles have not escaped the eye of capital market regulator, SEBI and it has introduced many amended notifications in the existing norms governing the MF industry in the last one year or so. These if followed in the right spirit aims to make life easier for all, the AMCs as well as the retail investors.

Effective May 1, 2018 and through a notification announced earlier, SEBI has directed MFs to rationalise various schemes and categorise it broadly as equity, debt, hybrid and others, thereby asking MFs to have just one scheme per category, with the exception of index funds, fund of funds and sector or thematic schemes. Each scheme distinct in terms of asset allocation and investment strategy.

This is bound to make comparison of schemes across AMCs simpler as the number of similar schemes may be reduced by merging them. Whether it will lead to overall reduction in fund count or not will be known when all AMCs put their revised scheme categorisation in the public domain Retail investors too will find comparing funds easier, review their portfolio and take decisions. If a scheme is merged, they can take a call whether to continue to exit the scheme, in the absence of performance evaluation.

MFs have also been directed to benchmark the performance of the schemes to the Total Return Variant (TRI) of the Index chosen as a benchmark which should be in alignment with the investment objective, asset allocation pattern and investment strategy of the scheme. A TRI is an index that tracks capital gains of a scheme and assumes that any cash distribution, such as dividends, is reinvested back into the index.

How will this help?

The new methodology is supposed to give a clearer picture of a scheme's performance versus its benchmark. And once the fund performance is benchmarked against TRI, percentage of funds beating the benchmark would drastically reduce thereby enabling investors (based on this parameter) to properly decide whether to exit or not and; hold more passively-managed funds in their portfolio.

With a view to bring more transparency and uniformity in disclosure to Total Expense Ratio (TER) and enable more informed decision making, MFs have been asked to display their actual scheme-wise TER on respective websites on daily basis, moreover changes will need to be communicated, three days before the same are affected.

In case of merger of two schemes with similar features, the weighted average performance of the merged / surviving scheme will have to be disclosed. Further performance of the scheme whose features are retained in the merged scheme will have to be disclosed. There won’t be necessary to provide the past performance of schemes prior to merger but can be made available on request subject to disclaimers.

The mandate would help standardise performance disclosure of schemes once they have been merged. In the absence of any current guidelines in this regard, investors found it difficult to evaluate schemes. Now with this directive, investor will get a clear picture post merger of two schemes.

From time to time, the market regulator has introduced several initiatives to protect the interests of the investors in the mutual funds. These announcements are a step further in the same direction. At the same time the new / revised norms are not anti-industry as they are meant to bring more transparency in disclosures and reduce complexity in operations due to duplicity of schemes having similar investment objectives. Whether the new changes will really benefit the concerned, only time will tell and remains to be seen.

Author is Group Head- Financial Sector Ratings, ICRA Ltd