Motilal Oswal Asset Management Company Ltd. (MOAMC) is a public limited company incorporated under the Companies Act, 1956 on November 14, 2008, having its Registered Office at 10th Floor, Motilal Oswal Tower, Rahimtullah Sayani Road, Opposite Parel ST Depot, Prabhadevi, Mumbai - 400025.
Motilal Oswal Asset Management Company Ltd. has been appointed as the Investment Manager to Motilal Oswal Mutual Fund by the Trustee vide Investment Management Agreement (IMA) dated May 21, 2009, executed between Motilal Oswal Trustee Company Ltd. and Motilal Oswal Asset Management Company Ltd.
 
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SEBI’s attempt to stabilise scheme labelling

Blogs Blog Details

Mr. Aashish Somaiyaa

Managing Director and CEO

Dear Investors and my dear Advisor friends,

The mutual fund industry is bracing for the latest move from the regulator to bring method in the madness amidst hyper-growth. It has recently come up with a circular which will classify mutual funds into standardized categories. So equity mutual funds could be large cap, mid cap, multicap, small cap, value, combination of large and midcap so on and so forth. Debt funds could be categorised as liquid, ultra short term, short term, credit etc. Further at a more fundamental level one expects the regulator to also define large cap, mid cap or short term, long term in case of debt. This should help investors and intermediaries know what exactly they are buying into and also enable appropriate benchmarking in homogeneous peer groups. Great move…but this is not it…what is most likely to have an impact is the expectation that the regulator would permit only one fund per category per fund house. It is well known that there are fund houses with a long history synchronous with industry evolution itself and classification once announced, could lead following scenarios:

1. more than one fund in a category
2. funds which don’t exactly fit into any category may need to change investment universe to fit in
3. aligning to the new definition of large, mid or small cap or short or medium term

In cases where there are multiple schemes in the same category; it might result in merger of similar schemes or suspension of subscriptions into one scheme and continuance of another. All of these changes will be accentuated in case of debt because there is more product proliferation there. While for debt the story will likely be that of “consolidation” for equity funds it will be about “categorisation and rationalization”.  

It is not appreciated enough that “excessive choice leads to sub-optimal decisions”. I have been an investor in funds since 1999 and it is beyond comprehension why the AMC sends communication about all their new product launches but never about reinforcing my decision to invest in the fund that I own. Never thought what the barrage of new fund communication did to the stickiness of my original decision; I always felt that the fund that I had invested in is clearly not the “hot fund” to be in anymore much less an area of focus for the head honchos out there. Coming to discussing choices, my favourite read on this topic is “Paradox of Choice” by Barry Schwartz. If you aren’t much of a reader, you could view his ideas at https://www.youtube.com/watch?v=VO6XEQIsCoM. When provided excessive choice people make sub-optimal decisions, they make choices that they are likely to regret, that they are less likely to stick with and at the extremes sometimes they just refuse to make a choice lest they go wrong! It’s ironic that the regulator has to step in for the industry to appreciate human psychology and provide optimal number of differentiated choices instead of an array of poorly defined similar looking choices.

Excessive choice in mutual funds has counter-productive outcomes. The top 500 stocks by market cap account for over 94% of market cap and top 300 stocks; >88%. This means that if a fund investor has a bunch of 8-10 funds that in turn owns say 300 unique stocks for her, then the investor owns 88% of whatever there is to be owned in the market. Needless to say, if you buy the market you can’t beat the market. And this is where I think a lot of mutual fund investors are taking the expensive route to fetching couple of percentage more than the broad BSE 200 or worse still to just track it.

Product proliferation also results in significant scope for mis-selling; it increases scope of pushing irrelevant products. Just as the regulator is working towards putting the onus of product suitability on intermediaries, who determines whether the products being launched and pushed over emails, SMS, phone calls are relevant for whoever they are being pushed to by AMCs themselves? While mis-selling may not be intentional, this kind of thrust on offering something new as a bait to investors, may result in mis-buying i.e. buying irrelevant funds with misplaced expectations, over-diversifying instead of just adding to the supposedly suitable funds one may have already bought. There is also the tendency for fund houses’ sales machinery to propagate the funds that have the best immediate past performance and temporarily relegating to the background those funds that are undergoing a lean patch. This comes at the cost of explaining what goes into producing long term track record and what determines suitability.

For these reasons I welcome the regulatory intervention and I am quite sure it will result in better landscape for an industry that has come of age.

Happy Investing,

Yours sincerely,
Aashish P Somaiyaa
Managing Director and CEO

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