April 15, 2015

Naming Schemes

Here’s a question: which is the most commonly used, ambiguous word in the names of mutual fund schemes in India?  By my count, it is the word, ‘Opportunities,’ which currently features in the names of 49 open-end schemes.  It is followed by the words, ‘Advantage’ and ‘Plus.’  According to one industry observer, their popularity is because these allow fund houses to conveniently create a perception of difference between similar schemes (e.g. ‘short term fund’ vs. ‘short term opportunities fund’).  I, for one, have given up on trying to figure out why fund houses come up with the names that they do.  I have come to conclude that any analysis of scheme names throws up more questions than answers.  Nonetheless, I believe that SEBI should be giving more attention to the naming of schemes and that fund houses need to be held accountable for the names they choose.  In this post, I’ll try to make my case.

Based upon their names, I would group schemes into three categories.  In the first category, I would include schemes whose names are meant to impress or appear clever.  These names may or may not convey anything meaningful about the scheme’s objective.  A few examples of these would be Reliance Vision Fund, Franklin India Prima Fund, DSP BlackRock T.I.G.E.R. Fund, Sundaram S.M.I.L.E. Fund, UTI Mastershare Fund, and SBI Edge Fund. As I see it, these don’t imply anything of consequence to anyone other than the most na├»ve investor and, hence, are not worth much attention by the regulator.

In the second category, I would include schemes whose names indicate or hint at the scheme’s investment objective.  Some examples of these would be equity funds with the words, ‘equity’ or ‘growth’ in their name, debt funds with the words, ‘income’ or ‘bond’ in their name, and liquid funds with the word, ‘liquid’ in their name.  These are names that fund houses need to take seriously, and around which SEBI should have clearer guidelines (I am not sure if any exist).  Let me elaborate.

Words such as ‘equity’ or ‘bond’ or ‘liquid’ leave very little room for doubt as to a fund’s broad objective.  However, there are other words/terms that are commonly used, which can mislead an investor.  Examples: ‘balanced,’ ‘short term,’ ‘medium term’ etc.  The evidence suggests that there is no unanimity on the interpretation of these terms.  Take ‘balanced’ funds, for instance.  Leave aside the dictionary definition of the word, ‘balance,’ or what it may mean to a layman.  When I speak to advisors and investors who regard themselves as informed, there is a general expectation that a balanced fund would hold, not more than 75% of its portfolio in equity shares. Going by their SIDs, there are some ‘balanced’ funds that can hold up to 80% of their portfolio in equity shares.  There is also at least one fund with the word ‘balanced’ in its name, which can hold up to 100% of its portfolio in equity shares and equity derivatives. To be fair, it is described by its fund house as being an equity fund (and not a balanced fund). But everyone whom I spoke to, who was aware of this scheme, looked upon it as a balanced fund.  This begs the question: what is the need to call it ‘balanced?’

Far worse than this is the issue of ‘short term’ debt funds. Based on information in SIDs and conversations with advisors and investors, I gather that there is no clear consensus on the definition of ‘short term.’   In broad terms, nearly everyone whom I spoke to, said that they would expect a ‘short term’ fund to have an average maturity of somewhere between 6 months and 2 years.  Yet, if the data on Value Research is anything to go by, the current average maturity of ‘short term’ funds ranges from less than a month to over 7 years with at least 8 funds having an average maturity in excess of 3 years.  It also seems that the fund at the upper end of that band, in the past year, swung between an average maturity of 1.5 years and 8.5 years.  Added to this diverse interpretation is the case of a leading fund house that has two ‘short term’ funds and one ‘medium term’ fund.  Going by its fact sheets, over the past few months, the duration of its ‘medium term’ fund has been less than the duration of its two ‘short term’ funds.

In the US, as an example, there are clear guidelines about the naming of schemes.  A fund that holds itself out as ‘balanced’ is expected to invest at least 25% of its assets in fixed income securities and at least 25% in equities.  A scheme whose name includes the words, ‘short-term,’ is required to have an average maturity of no more than 3 years.  If a fund’s name implies that it invests in a particular type of securities then it must have at least 80% of its assets invested in the indicated type of securities.  Having such guidelines puts the responsibility on fund houses to adhere to them rather than have the regulator step in and examine every case.  Of course, guidelines cannot be all-encompassing.  Which brings me to the third category of schemes.

In the third category, I would include schemes whose names could easily mislead lay investors.  Ideally, this category should not exist.  It exists because SEBI has granted conditional approvals to certain scheme names, or because of a possible oversight on SEBI’s part.  To set the record straight, by and large, SEBI has been watchful.  For instance, in 2004, when HDFC MF and the erstwhile Grindlays MF filed offer documents for ‘Relief Bond Funds,’ the idea was shot down by SEBI.  Similarly, whenever ‘Monthly Income Plans’ or ‘Capital Protection’ schemes have been sought to be launched by fund houses, SEBI has allowed these with caveats. But, as I mentioned earlier, there have been some possible oversights as well.  The erstwhile ITC Threadneedle MF was allowed to launch a fund with the words, ‘High Interest.’  Shriram MF was allowed to launch an equity fund with the name, ‘Risk Guardian.’ 

In recent years, one may not find any notable instances of inadvertence.  Personally, though, I wonder.  For instance, when ICICI Prudential MF decided to change the name of one of their equity funds thrice within a span of 3 years or so, without any apparent change in its fundamental attributes, I wonder whether SEBI took notice of that, and, if so, what did it have to say.  Or when HDFC MF chose to rename Morgan Stanley Multi Asset Fund (which it took over) with the ponderous name of ‘Dynamic PE Ratio Fund of Funds,’ I wonder if SEBI took note of its similarity to an existing scheme of Franklin Templeton MF.  After all, that name was a bona fide brand, and not just a collection of common nouns.  As I said at the start, the deeper I dig, I end up with more questions than answers.

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