Too many mutual funds of too many types, simplification is the need of the hour
There are too many mutual funds in India, far too many. Do note that I mean actual mutual fund schemes, not mutual fund companies, of which there are too few— but that’s a separate story. Without counting plans and variants, there are 2,413 mutual funds, and counting all variations of individual funds, there are more than 10,000. What’s worse is that there are too many types of funds. At Value Research, we have made a huge effort to simplify the fund universe and have fitted them into 25 categories. However, if one takes fund companies’ own fanciful descriptions at face value, then there could be 200 or even more types of funds in India.
There’s no investment logic in this. The only reason why fund companies do this is to confuse the customer and make it easier to sell mediocre funds. Basic marketing wisdom dictates that the sellers try and differentiate their products as much as possible. Therefore, fund companies typically describe the investment approach of their funds as being unique. This is an attempt to de-commoditise the fund — the fund company is now able to claim that the fund should be evaluated only by its own claimed characteristics and not by comparing it to any other fund.
From the investors’ point of view, there is no need for any fund company to have more than five funds. These should be one conservative and one adventurous equity fund, one liquid fund, one income fund and one equityincome hybrid. There can be taxsaving variants of the equity and hybrid fund, but all of investors’ needs can be taken care by these five types. Fund companies claim that they need to innovate. Maybe this is true but perhaps this need can be fulfilled by issuing a three or four ‘innovation tickets’, allowing a maximum of these many ‘innovative’ funds to exist.
This may sound like a radical plan but actually, it’s only something like this that will make mutual funds understandable to the average investor. The securities and Exchange Board of India (Sebi) has tried a lot of things to simplify the fund universe and is still doing so. But perhaps, it’s time to forget about incremental changes and take the bull by the horns.