Too rich a buffet

Arriving hungry at a restaurant for a buffet lunch, how would you like to be offered the choice of a 100 varieties of soup, 400 types of starters and 300 main courses? That's the problem with the mutual fund industry that SEBI is trying to fix today.

In the last ten years, discovering that investors chased different funds depending on market conditions, fund houses frequently rolled out new products. To make the new funds appear attractive, they came up with a wide variety of highly nuanced themes. Thus were born “Opportunities Funds”, “Multicap funds”, “Lifestyle funds” and “Emerging Business funds” in equity.

In debt, you have ‘fixed maturity plans', ‘floater funds', ‘income funds', ‘short term funds”, ‘ultra short term funds' to suit different phases in interest rates.

Complexities in the tax structure prompted fund houses to add on options and plans within each scheme (dividend payout, dividend reinvestment, bonus, growth, cumulative, regular, institutional).

All this has resulted in a mind-boggling array of products today. At last count, not even counting sub-plans, there were nearly 1,700 debt funds and 408 equity funds in the market.

Switch, don't consolidate

Now such a wide variety of schemes creates more problems that it solves for investors. After all, if a retail investor knew when it is time to buy a short term debt fund and when he ought to switch into gilts, he may not need a mutual fund manager! That's why SEBI appears to be nudging fund houses towards fewer and more clearly defined schemes. But for this move to really benefit investors, it needs some careful consideration. Fund houses need to start off by simplifying the proposition they offer to investors. Instead of a battery of funds that multiply the choices, they need simpler products that deliver a return without requiring too much intervention by the investor.

In debt, that may mean offering diversified debt funds with no specific maturity. In equities, it may mean plain-vanilla ‘go-anywhere, do-anything' products that fit different investment goals or risk profiles. Funds shouldn't require the investor to switch between sectors or decide on allocations between large, mid and small cap stocks.

Underperforming products should be the first to go in this consolidation exercise. If a ‘theme' which seemed very hot in earlier bull markets is no longer a viable idea, a fund needs to come clean with it and close down the scheme. Schemes that started out with a high-sounding mandate but have lost their way (‘Global' funds and ‘Opportunities' funds to cite two categories), need to offer an exit too.

Merely consolidating or merging smaller and less successful schemes with larger ones may prove detrimental to investors.

Time for overhaul

Simplifying taxes, something the regulators can do, will also do a lot to reduce the complications in debt schemes.

Mutual funds may worry that they will lose a good chunk of their assets if they follow all this. However, that may be inevitable even if they don't. With open-end schemes dominating and investors getting savvier, trends in fund assets already show more consistent performers adding assets while laggards have shrunk in size.

If a fund house doesn't shed its poorly performing schemes, investors may ensure they become defunct by pulling out money. If the fund industry fails to come up with a wholesome thali meal, only the most popular items may make it to the buffet.

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