If you have ever tried scouring through the policies on offer for individuals to insure their lives, you would fully appreciate why having too many options may not always be a great thing. There is a plethora of life insurance policies in the market today, and even policies of a similar nature, from different insurers, offer very varied benefits. This makes any meaningful comparison between policies of two different insurers very difficult for any common person.
The same is also true in mutual funds, with over 2,000 schemes on offer, though the product is far less complex in comparison to insurance covers. The Securities & Exchange Board of India (SEBI) has long chided asset managers to limit new launches of similar schemes and consolidate existing schemes of a kind, but there has been little movement on this front. Recent reports suggest this is likely to change.
Any restriction on having multiple schemes with the same objective and almost the same investment philosophy and asset mix will be a welcome move for investors. It often becomes difficult for investors to choose where to invest when one fund house has multiple schemes of a similar nature. Unless there is a calibration of portfolio to risk and return of a scheme in a certain category, which is quite different from that of another, the existence of more than one scheme in a category for a fund house is unreasonable.
Let’s take the case of a balanced fund. If two schemes floated by a fund house in the balanced category have almost similar risk profiles and asset allocations, there is a reasonable case for them to be merged. Their independent existence is merited only when they offer an investor two different propositions.
If one invests only in AAA rated papers and blue chip stocks while the other is focused on high yield lower rated papers and mid-cap stocks, a clear distinction is evident. The first scheme will be more suitable for risk-averse investors while the second will be ideal for high-risk appetite investors.
Such schemes will present a clear differentiation in terms of investment profile and offer an investor a clear indication of suitability for portfolio allocation. A move towards merging similar schemes will help an investor more easily and quickly decide where to put the money.
Just imagine how much simpler it would be to narrow down your prospective list of schemes from over 200-plus to just about 40. It would offer an investor more time to consider meaningful differences between schemes, rather than spending hours sifting through the maze.
Such rationalisation will also prevent mis-selling. The only case against scheme mergers, other than differentiation, is size. If a scheme will likely become too large and unmanageable post a merger, there might be merit in reconsidering a merger.
In India, though, at present there will hardly be any scheme that would qualify on such grounds for reconsideration. If SEBI puts it foot firmly behind consolidation of schemes, investing might just get simpler for mutual fund investors in the times to come.