Over the last two weeks, there has been some talk that the mutual-fund regulator, SEBI, is planning to limit the number of funds that mutual-fund companies can operate. If true, this is a good idea that should be implemented quickly. Such a limit could go a long way in ensuring that mutual-fund investors choose funds suitable for them and stick to them.
Under this plan, each AMC will be allowed only one fund of each type. This will reduce the complexity of the choices that investors have to make. Currently, there are over 2,500 distinct funds and several plans under most of them. Even if one looks at broad categories, like equity, debt and hybrid, there are hundreds of funds in each. There is no way that an investor can make sense of this huge number and understand what he or she is investing in.
According to reports, there will be eight debt-fund and six equity-fund categories. While fixed-income funds are mostly of interest to corporate and professional investors, who are better equipped to understand complexity, retail-focused equity funds will be much easier to understand for small investors. The equity categories that the SEBI is said to be planning are large cap, mid cap, micro cap, ELSS, balanced funds, arbitrage funds and concentrated funds.
While the SEBI is planning this great simplification of the fund universe, knowledgeable investors, like readers of this magazine, can avoid all the complexity themselves with help from Value Research. For investors, the most useful point of this impending change is actually not the reduction in number by itself but simplification and comparability. The types of funds that will be predefined by the SEBI are simple vanilla ones. However, knowledgeable investors haven't been waiting for this new dispensation. They've always invested in just basic funds, which are simple to understand. They invest in plain vanilla funds, which do not have any special features that marketers have dreamt up.
We are used to feature-oriented selling and buying for all other products; but for mutual funds, it's far better to focus only on comparable characteristics like returns and volatility. The whole idea of investing in mutual funds is to get a decent return on one's investment, without having to go through the complexity of investment management oneself. You, the investor, just write a cheque and that's that. After that, what sector or industry is doing well or badly and what to move in or out of are no longer your headache - they are the fund manager's problem. In fact, this offloading of decisions to a professional fund manager is the whole point of investing in a mutual fund, and this can happen perfectly only in simple funds.
The other great advantage of such a simplification is comparability. With the SEBI placing each fund unambiguously in a statutorily defined category, comparison will become easy. If someone is running a large-cap fund, then it must be comparable with every other large-cap fund that exists. This will make funds comparable and help investors make the right choice. However, this is a major part of what Value Research has been doing all these years. Classifying funds into categories and comparing like with like help investors discover the truth about their investments. As Value Research readers, you have always had the facility of doing this.
Smart investors are not waiting for the SEBI's simplification; they are already using Value Research to simplify their investments.
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