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May 11, 2018

The Indian Mutual Funds are undergoing a defining change, albeit silently and not entirely voluntarily.

 

A brief history

 

Every mutual fund company operating in India sells mutual funds as per the objectives defined by the respective fund. Regarding this there was no commonly defined parameters for funds to position themselves in, so each one followed their own logic and philosophy. This was further compounded by funds that defined themselves in a particular style but went ahead and diluted it when it suited them, invariably leading to a lot of confusion. For example, a LARGE CAP Fund, which was supposed to invest only in LARGE CAP companies would be investing a sizeable portion in MID CAP companies or SMALL CAP companies, thereby rendering benchmark performance comparisons redundant. Also, over a period of time the fund names became mixed resulting in confusion. Every fund house, thanks to M&As, had more than one fund in each category, thereby creating disconcert in the minds of the investors and making investing fairly complex.

 

SEBI has now mandated that every fund house must have funds slotted in the particular category that was pre-specified and manage the funds in the manner so defined by that category. What this means, is that going forth, Fund houses will have far less creativity at managing funds, and category of performances will become more defined and comparisons easier to make. For example, a LARGE CAP fund will have to invest only in the top 100 listed companies by Market Capitalisation. Therefore, the outperformance must be generated therefrom and not from other segments of the equity markets.

 

What is the outcome:

 

  • It is going to be difficult for the fund managers in the future to beat benchmarks, as the funds will need to work within the category alone.

  • Clear category winner over a long period of time will be virtually impossible.

  • Fund Performance comparisons will be pretty easy to make.

 

What to expect:

 

We expect the next 12 months to define new funds that would be the category winners and these need not necessarily be the winners of the past. Every fund irrespective of small, medium or large will have equal chance to perform at its best. So all bets are off in the next 12 months. Discipline and Deep Equity Research will differentiate the men from the boys.

 

We are excited with this change and believe that this level playing field is necessary to create a world class Mutual Fund Industry that India is aspiring for. 

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