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What do you understand by consolidation of MF schemes

28 Jun 2023

As a mutual fund investor you would have surely worried about why there are so many equity schemes and debt schemes in the market. For example within equity you have large cap, mid cap, multi-cap, top-100 fund, frontline fund, diversified fund etc. In most cases, the essential structure of the equity fund is still the same. What SEBI has done recently is to make it compulsory for the mutual funds to consolidate these schemes of similar category into one single scheme. This is more so where there is not much differentiation between these schemes. Consolidation of mutual fund schemes makes a lot of sense for the small investors who are quite confused by the plethora of schemes available in the market. Let us understand consolidating scheme of mutual fund meaning and also how it will impact fund decisions.

Investors are likely to get less confused

Quite often investors complain about the enormity of the mutual fund universe. There are over 40 AMC with over 2,000 schemes. Each scheme has growth plans, dividend plans and reinvestment plans. Then there are direct and normal investments. When you add up all these permutations you have a product that is not only huge but actually unwieldy. From the point of view of an investor this is giving them a lot of choice with very little differentiation. Consolidation of schemes forced by SEBI impels the funds to only have limited schemes so that investors are actually able to differentiate and understand the merits of a scheme vis-à-vis others. Of course, there will be 10 categories of equity funds, 16 categories of debt funds and 6 categories of hybrid funds. This, by itself, is quite large but at least the process of streamlining funds through consolidation has started.

Putting numbers to categorization of equity funds

This is the second focus area of the SEBI announcement on consolidation of schemes. While fund houses have large cap, mid cap and small cap schemes, there is no standard definition for defining large caps and mid caps. Now SEBI has taken the market cap approach on a relative basis. The entire population will be indexed on market cap on a descending basis and the large cap, mid cap and small cap segments will be determined. Of course, the impact will be more on the large fund houses managing over Rs.1 trillion as that is where you really have the multiplicity of overlapping schemes. From the investor’s point of view, they are much clearer on what they are getting into.

Consistency in measuring debt fund performance

Within the debt fund category, you will find scores of funds with absolutely fancy names. Here again, SEBI had created 16 categories in all but has brought it down to just two themes. While duration strategy is one theme, the other theme is accrual strategy. The duration schemes essentially try to make profits by shifting duration of the bond in anticipation of interest rate shifts. For example, if interest rates are likely to go up, then these funds shift to higher duration bonds since they are more sensitive to rate cuts and hence yield higher capital gains. This is likely to give an extra boost to the NAVs of these funds. The accrual funds are more of regular incomes and refer to those funds that invest in corporate bonds and higher yielding bonds to give that extra boost to regular income. These funds are typically preferred by retirees seeking regular income. Within these 2 themes, all debt funds are consolidated into one of the 16 categories.

Will consolidation serve its purpose? Let us look at the number of categorizations. SEBI has permitted 10 categories in equities, 16 categories in debt, 6 categories in hybrid funds and 2 categories in solution-oriented funds. That is a total of 34 categories. Under each of these 34 categories, a particular AMC can only have 1 fund. What does that add up to? There are about 45 AMCs operating in India. Assuming that each of the 45 AMCs launches a fund in each of the 34 categories, we may still be left with around 1530 schemes. Of course, only the top 10 funds may launch in all the 34 categories but even then we may be left with over 1200-1300 schemes in India. That probably makes the offering a tad simpler but consolidation of schemes is still far from making the choice simpler!

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