Last week, SEBI released a consultation paper on the same topic (categorization and rationalization of mutual funds). Therein SEBI has proposed several changes, and invited public comments.
Oddly enough, the overarching theme seems to be—launch more funds (read new fund offers—NFOs). Perhaps in SEBI’s books, that is the way forward for the industry.
For instance, one of the proposals is to permit launching a second fund in each of the defined categories, subject to certain conditions being fulfilled. Critics will point out that an asset size of INR 500 bn for the existing fund (one of the conditions) is a big hurdle. It isn’t. Several funds have already breached that threshold, and given the popularity of mutual funds, more will, sooner than later.
Then there are other proposals: Allow fund companies to launch both Contra and Value funds, instead of either one at present. There is a proposal to allow launch of Sectoral Debt Funds. Introducing more Hybrid Funds (Solution Oriented) and Life Cycle Fund of Funds, also find mention.
I have been a vocal critic of fund companies for recklessly launching funds with the sole intent of shoring up assets. Nonetheless, even back in 2017, I had opined that SEBI’s ‘one fund per category’ rule lacked nuance and, in some cases, could result in the baby being thrown out with the bath water.
Perhaps back then, SEBI believed that its ruling was the best way to rein in fund companies. And to its credit, so far, SEBI has stuck to its guns.
That said, I have no idea what’s driving SEBI’s volte-face.
Did fund companies prevail upon it, or, does it truly believe that limiting number of funds, was a flawed move to begin with?
Fund companies have repeatedly demonstrated a herd mentality-like approach. For instance, in categories such as Flexi Cap and Large & Mid Cap, despite the leeway to exploit the market cap spectrum, the average portfolio is consistently dominated by large-caps.
It’s unlikely that more funds will enhance the quality of choices available to investors. But fund companies will gain thanks to more assets.
Will SEBI’s proposals be implemented in toto? Let’s wait and watch.