Amfi to ask Sebi to reconsider new mutual fund regulations
Mutual funds say classification regulations limiting their ability to produce products, may impact risk management
The Association of Mutual Funds in India (Amfi) will ask the capital markets regulator to reconsider its new norms on mutual fund classification, said two people with direct knowledge of the matter.
Fund houses are complaining that the new norms are limiting their ability to offer products within the suggested classification and are likely to impact risk management, these people said.
On 6 October, Securities and Exchange Board of India (Sebi) had asked fund houses to classify their schemes under five broad categories to cut through the clutter of similar plans and help in making better decisions.
India’s mutual fund industry has close to 2,000 schemes and manages Rs21 trillion in assets.
An email sent to a Sebi spokesperson was not answered till press time on Monday, 6 November.
Amfi chairman A. Balasubramaniam, too, did not respond to calls seeking comment.
“The biggest hurdle is the restriction of market capitalization for equity funds that will limit choice of stocks,” said the chief executive of a mid-sized fund house, one of the two people cited earlier.
Sebi’s new norms prescribed that an equity large cap fund would need to consist of at least 80% large cap stocks.
Large cap stocks are defined as the top 100 companies in terms of market capitalization.
For a mid cap equity fund, at least 65% of the funds need to be invested in mid-cap stocks. These are stocks that rank between 100-250 in terms of market capitalization.
“This stricture may limit our picks and increase the overall risk in the fund,” said a fund manager, the second person cited earlier. Both people wished to remain anonymous.
“Funds houses are individually approaching the regulator on their interpretation of rules and concerns. After getting a feedback from all the fund houses Amfi will send a formal communication to the regulator,” said the first person cited earlier.
Another concern for fund houses is on the fate of funds with a good track record.
According to the Sebi circular, every fund house can have one fund in each sub-category to ensure no duplication. The five broad categories were further finely divided into 36 different scheme categories such as Dividend Yield Equity Fund, which would focus on dividend yielding stocks.
Equity funds are allowed to have 10 subcategories such as large cap, small cap, midcap and so forth. Debt funds have 16 subcategories and hybrid funds (which invest in equity and debt) six.
“There are cases where a fund house has two similar looking schemes and both of them have a good track record. Fund houses are considering to tweak them as shutting them down or merging them will create a fund with assets too large to manage,” said the fund manager cited earlier.
But this argument is not being accepted at least by some experts who say that the new norms provide enough room for risk management and flexibility.
“The norms provide enough leeway and have room for flexibility for a solid portfolio. The industry instead of pushing back should think of implementing these norms in letter and spirit. The norms were prescribed ... after industry consultation. So, industry raising the concerns later seems incorrect,” said Manoj Nagpal, chief executive officer of Outlook Asia Capital, a Mumbai-based mutual fund advisory firm.
Sebi has asked funds to classify schemes under 5 categories to cut through clutter of similar plans