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Mutual fund (MF) houses have sought clarity from the capital markets regulator on its recent proposal to allow them to launch an additional scheme once the assets under management (AUM) of a particular scheme crosses ₹50,000 crore.

As per an 18 July draft circular of the Securities and Exchange Board of India (Sebi), asset management companies (AMCs) would be allowed to launch an additional scheme in the same category of the older one that has reached the ₹50,000-crore AUM mark. The older scheme will then have to stop receiving subscriptions.

The draft paper had invited comments until 8 August.

“Even though the circular says that the existing scheme will have no new inflows, for now it is not clear what will happen to the existing SIPs (systematic investment plans); whether they would be allowed to be in the same scheme or not," said a person from the mutual fund industry on the condition of anonymity. “We need to get more clarity on that."

“A lot of questions are being sent to the regulator about what happens to existing SIPs," said another person from the industry.

According to data from investment research firm Value Research, in the equity and hybrid schemes category, the number of actively-managed schemes with more than ₹50,000 crore AUM is 13, with the combined AUM of these funds accounting for over ₹9 trillion.

MFs are also not so keen on the idea of a new scheme launch within the same category, industry experts said.

If a fund with a strong decade-long track record is closed to new inflows and a new scheme is launched, investors and distributors may prefer competitors with proven histories, rather than a new scheme with no track record," said Neil Parikh, chairman and chief executive officer at PPFAS Mutual Fund.

Parikh said launching a second scheme is complex and could require a new fund management team, higher costs, and could also leave investors confused about which scheme to choose.

For a bigger fund house, the costs won't be that high as they already have large teams but a small fund house may need to hire additional fund managers and bear scheme-related costs, Parikh said. Moreover, the individual stock limit is at a fund house level and not at a scheme level, so having more schemes will dilute the fund’s best ideas, he added.

Moreover, if a fund is only seeing redemptions, it will be a negative for the existing investors, experts said. “Imagine investors in the first scheme, which is closed for subscriptions and only allows outflows. In a ₹50,000 crore fund, where the manager is only selling stocks and not buying, the returns for existing investors will be impacted," said another mutual fund executive on the condition of anonymity. "If redemptions increase, the fund manager sells more, the performance deteriorates, and because the performance is weak, more investors will redeem. It becomes a vicious spiral," the executive added.

Plus, there are no new benefits for the fund in launching a new scheme, experts said. The new scheme will not have any significant benefit for the asset management company (AMC) as the total expense ratio (TER) charged to the investors for the new scheme will be capped at that of the older scheme.

The new scheme's expense ratio will be capped at the level of the existing scheme’s TER, as last disclosed on the date of the new fund offer (NFO), Sebi's draft paper had said. This cap was proposed so that the AMC cannot benefit with a higher expense ratio for the new scheme since its AUM would be lower.

Industry executives also stressed the need for a new scheme, launched after an existing one breaches the ₹50,000 crore AUM mark, to remain true to the stated mandate.

For instance, in the case of hybrid funds, which are expected to carry lower risk than pure equity schemes, there should be adequate guardrails to ensure that the new offering does not drift from its original objective in pursuit of higher returns, said Jimmy Patel, managing director of Quantum Mutual Fund.

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