Concerned that mutual fund schemes are becoming too complex for average investors, capital market regulator Sebi has asked several asset management companies to rework some proposed new schemes and file offer documents afresh. More than a dozen new fund offer (NFO) prospectuses of leading mutual fund houses such as Reliance MF , ICICI Prudential , Birla Sunlife Mutual Fund , Kotak Mutual Fund , Tata Mutual Fund and Benchmark Asset Management are awaiting approval from the market regulator. The regulator is particularly skeptical about capital protection schemes.

According to sources, four fund houses have been asked to withdraw applications to launch capital protection schemes. The regulator was not comfortable with the quality of debt papers that these funds were planning to invest in.

A typical capital protection scheme, or CPS, will invest a small portion of the pool in equities, while the larger portion (about 80%) would remain in debt and money market instruments.

By allocating a portion to equities, the fund will participate in the upside during bullish phases and offer downside protection in a bearish market.

“The regulator will give us approvals only if (an) external rating agency vets the debt portion of the fund’s corpus,” said the top official of a domestic mutual fund which had plans to launch a ‘capital protected’ fund.

Sebi wants us to include some more features that will provide an additional safety net for investors. Changes in current structure will, however, reduce the flexibility of the fund,” the official added.

The regulator is also going slow on approving structured mutual fund schemes where instead of investing in equities and debt in a pre-determined ratio, the fund manager is given the flexibility to adopt complex strategies.
Structured funds require investors to take active calls on market direction. Sebi is also discouraging fund houses from launching flexicap, thematic funds and also schemes similar to the ones they already have.

Apart from CPS, the regulator is also not very comfortable giving approvals to funds and those that work on the lines of ‘range value’ structures where the MF promises a certain NAV as long as stock indices remain within a certain range.

“The thinking (at Sebi) is that mutual funds should be simple products for investors to understand. The regulator feels too many similar-sounding products would add to confusion among investors. Sebi is also of the opinion that fund houses should not launch NFOs to bring in more business,” said Dhirendra Kumar, CEO, Value Research, a mutual fund tracker.

In an interview to ET last month, Sebi executive director KN Vaidyanathan said the regulator is making NFOs more difficult for fund houses. He said mutual funds were misusing the new fund offer option to pay higher commissions and also because some investors continue to believe that by getting units at par they are getting them cheap.

“None of these factors are in the long-term interest of the fund industry so while a lot of people are barking the problem on entry load, actually the root, if you analyse, is that we have made NFOs more difficult,” he told ET in the interview.

The delay in getting approvals is posing problems to fund houses, which tapped the NFO route to mobilise fresh money.

The delay will kill favourable market conditions (like the current phase) to launch ‘flavour-of-the-season’ sector funds, capital protection schemes and thematic funds, a fund marketer said.

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