The regulator had done the categorisation of mutual fund schemes and subsequently asked the fund houses to showcase their performance against the 'total return index' thus making them more transparent and accountable.
It is more than a year now, since the SEBI had introduced some major changes in the mutual fund (MF) industry touching upon the structure and the costing of the MF schemes. Firstly, the regulator brought out the categorisation of mutual fund schemes and subsequently asked the fund houses to showcase their performance against the ‘total return index’ with the objective of making them more transparent and accountable.
The MF re-categorisation exercise was brought about by SEBI with the primary objective to help investors evaluate different schemes in a better way. “India has always been a prolific market in terms of the number of funds and the different strategies they play, and choosing between funds has always been a complex process for investors. It was not uncommon to see multiple funds of the same category from the same fund house, investing to different strategies,” says Erik Hon, Managing Director, iFAST Financial India. Post the re-categorisation of the MF schemes in both equity and debt segments, a better clarity was expected to emerge in terms of asset allocation, investment strategy etc.
In nutshell, all MF schemes were put under these 5 groups – Equity schemes, Debt schemes, Hybrid schemes, Solution Oriented schemes and Other schemes. Further, categories of schemes were defined under each group. So, for example in the group of Equity Schemes, the fund house can have categories such as Large Cap, Multi-cap and Mid cap amongst 10 clearly defined categories.
On top of it, SEBI came out with definition of large-mid-small caps schemes and strictly defined the mandate of each category of fund. A situation where a large cap fund which used to ride upon mid-caps in times when the latter were performing will no longer be there. A fund has to stick to its allocation levels as per SEBI’s mandate now.
Most importantly, MF houses were asked to have only one scheme per category with few exceptions. “We view this as a step in the right direction as this not only means clarity for investors but even for research teams who would earlier report top three performing funds in the same category from the same fund house,” says Erik. Overall, the investors are now in a better position than before to pick the right scheme as per one’s need.
Earlier the performance of equity MF schemes was benchmarked to the Price Return variant of an Index (PRI). PRI only captured the capital gains of the index constituents i.e. the index stocks. SEBI asked fund houses to benchmark the performance against the Total Return Index (TRI). The TRI takes into account all dividend received by the stocks that constitutes the index.
So, what has been the impact so far? “This, while being a fair comparison, has led to funds reporting lower out-performance compared to their benchmarks. Fund managers now have a higher threshold to beat, while keeping in line with the stringent small cap, mid cap and large cap investment thresholds defined for each fund category,” informs Erik.
Here’s how the Large Cap Funds performed over the last 1-3-5-7 and 10 years against their TRI benchmark. The data is sourced from Valueresearchonline.com and is till 15th May, 2019.
The Category Average for the 10-Year period was 13.19 per cent, while the S&P BSE Sensex 50 TRI and S&P BSE 100 TRI generated 14.19 per cent and 13.96 per cent respectively.
After accounting for the TRI, not just over the last one year, even the long term performance has been hit. The above data shows the Category Average returns and it can be seen that for every time-frame, the Category Average returns are lower than both the Large Cap TRI benchmarks.
While re-categorisation has more or less paved the way for more clarity in terms of selection and choosing the right MF scheme based on one’s risk profile and the duration of the goal. To a large extent, the overlapping and mis-representation of the schemes gets curtailed. However, the benchmarking against TRI may see several funds lag behind their TRI benchmark. “From an investor point of view, these are positive steps taken by the regulator in terms of driving greater transparency in the industry, as well as easing the complexities of understanding reported performance figures,” feels Erik.
Even though, its early days, going forward, if fund managers fail to beat TRI by a good enough margin, investors may choose to go with the relatively less volatile index funds.