SEBI Weighs Allowing A Second Mutual Fund Scheme Per Category

The Securities and Exchange Board of India, in its latest consultation paper, has proposed a change in the rules that govern categorisation of mutual fund schemes. The regulator is contemplating allowing mutual funds to launch additional schemes within the same category if certain conditions are met.

As things stand, fund houses are only allowed one scheme per category. And as per the latest data from the Association Of Mutual Funds India, there are already a total of 1,791 schemes offered across various categories. Allowing a second scheme could potentially take this number up significantly, and if implemented will widen the range of options for investors.

According to the proposal, an AMC may launch an additional mutual fund scheme in an existing category if the existing scheme has completed more than five years and the AUM exceeds Rs 50,000 crore.

The new scheme is mandated to have a "similar investment objective, investment strategies and asset allocation, broad features as the existing scheme," with a separate Scheme Information Document to be released

Further, upon the launch of an additional scheme, the existing fund will stop accepting new subscriptions, though it may continue to accept existing SIPs.

While a separate fund manager can be appointed for the new fund, it must adhere to the same performance disclosures and its Total Expense Ratio will be capped at that of the original scheme.

To avoid investor confusion, both schemes must stick to clear naming structure like "Large Cap Fund (existing scheme or Series 1) and Large Cap Fund (series 2 or additional series)."

The proposal also outlines that AMCs will be limited to a maximum of two schemes per category at any given time and have the option to merge an existing scheme with an additional one under certain conditions, such as significant AUM decline.

Why The Change Is Being Contemplated

Certain mutual fund schemes have seen their assets under management grow very large. The largest actively managed equity mutual fund scheme - Parag Parikh Flexicap Fund - currently has an AUM of over Rs 1 lakh crore.

Some have argued that large AUMs make equity schemes unwieldy, forcing fund managers to deviate from their stated strategies in favour of prioritising liquidity. For example, a very large small cap fund would be forced to hold a significant quantity of large caps to ensure that redemption pressure can be met. This is possible, because the SEBI's rules allow small cap funds to have a minimum of 65% of AUM in small caps, with the rest allocated based on the fund manager's discretion.

While the primary objective of ensuring that nimbleness and flexibility of a mutual fund scheme is maintained, the change, if approved, could create some problems.

Currently, investors already navigate a vast number of options when it comes to schemes and strategies to invest in. As per data from AMFI in June the number of schemes offered have crossed the 1,790 mark. The introduction of more schemes within the same category could push this number significantly higher.

Kirtan A Shah, founder and CFP of Credence Wealth, took to X and flagged a few concerns that implications mat entail for investors.

"As per the new SEBI consultation paper, AMCs will be able to start a new fund under the same category if the old fund is five years old and has more than 50,000 crore of AUM. Which means there can be 2 Midcap funds offered by the same AMC," Shah highlighted.

He further elaborated on the potential ramifications, noting, "The 2nd fund can have a different fund manager but same TER as the old fund and as soon as you launch the second fund, the first fund will stop taking new investments."

Shah concludes with a warning for investors, "If I was an investor in the first fund, I will pull off my investments because the fund can only see redemptions and no inflows (barring SIPs, I am assuming), this should hurt the performance of the original old fund." This hints that the proposal creates a potential challenge for AMCs in managing the stability of their older funds under the proposed framework.

Of course, the proposal could see more tweaks based on feedback from the mutual fund industry.