In a significant relief to mutual funds and investors, the capital markets regulator SEBI has reversed its decision to scrap Retirement and Children funds and allowed mutual funds to continue accepting inflows in these schemes, which have an asset base of ₹57,663 crore.
The industry has claimed that investors will incur huge tax liabilities if the two ‘solution-oriented’ fund categories are closed and merged with comparable schemes.
“SEBI has addressed the concerns raised by the industry and investors by allowing retirement and children’s funds to continue, as there are a lot of nitty-gritty and tax components involved in the closure of these funds,” said DP Singh, Deputy Managing Director and Joint CEO, SBI Mutual Fund.
Following this, MF industry players offering these funds have been allowed to continue them, by foregoing the launch of two of the six proposed life cycle funds, he added.
In February, SEBI had directed the discontinuation of such schemes and their merger with other schemes having a similar asset allocation and risk profile. There are 44 schemes under these two categories, of which 29 are retirement schemes and 15 are children’s funds.
New norms
Meanwhile, the asset management industry is also set to comply with the new norms for the sector from April 1, including a restructured expense framework, more disclosures and stronger governance standards.
A Balasubramanian, Managing Director and Chief Executive Officer, Aditya Birla Sun Life AMC, said, “We are fully prepared to implement the changes announced by SEBI from tomorrow.”
SBI MF had made all required changes to be in line with the new norms from April 1, Singh said.
Though the move to cut the expense ratio by 15 basis points will impact MF profitability in the short term, the industry believes that the steady inflows and market gains will offset the revenue loss. Brokerage and transaction cost caps have been sharply reduced — from 12 bps to 2 bps for the cash market and from 5 bps to 1 bps for derivatives.
“The volatility in the market may have a marginal impact on SIP inflow, but investors have realised that looking at short-term performance will not help them in wealth creation, particularly when there are no other competing asset classes providing a transparent growth opportunity linked to the country’s economic growth,” Balasubramanian added.
On the cut in expense ratio of passive funds, Sonam Srivastava, Founder and Fund Manager at Wright Research PMS, said cost has never been the primary friction point for passive fund adoption, but the deeper challenge was distribution.
Advisors and distributors have little financial incentive to recommend index funds or ETFs because the trail commissions are thin, and this dynamic does not change simply because the expense ratio has been trimmed further, he said.
Akshat Garg, Head-Research & Product, Choice Wealth, said the restriction of the 50 per cent portfolio overlap rule is a clear signal to the industry that differentiation in product is mandatory.
The new thematic fund launch will slow down and will also trigger consolidation. Non-performing or overlapping thematic funds may either be repositioned or merged, he said.
Sriram BKR, Senior Investment Strategist, Geojit Financial Services, said AMCs can come up with thematic funds, as long as they can offer a non-overlapping portfolio and ensure true to label schemes.
Some of the AMCs have overlap in ELSS funds with other diversified funds, but ELSS as a category is witnessing outflows on the backdrop of the new tax regime, he said.