At the AMFI Members Summit held in Mumbai, on Aug 27, 2019, Mr Ajay Tyagi, the chairman of SEBI addressed the present members with an eloquent speech. In his speech he elaborated about the role of the Mutual Fund and its structure, stressed on investors’ safety concerns, and pointed out to some hard-hitting facts of the overall industry.
Mr Tyagi mentioned that the “Mutual Funds are one of the most important institutions through which money collected from various investors, especially retail investors are channelized into the capital market. The importance of Mutual Funds can be seen through the sheer size of the AUM of the industry which stands at more than Rs 24.5 lakh crores today.”
In terms of growth, it has been phenomenal, specifically in terms of the AUM and number of folios as on July 2019 as compared to that of March 2015.
Table: Growth in AUM and No of folios in 4 years
|Values in 2015
|Values in 2019
|Rs 10 lakh crores
|More than double of Rs 10 lakh crores
|Rs 3.5 lakh crores
|Rs 7 lakh crores
|Rs 7 lakh crores
|Rs 17 Lakh crores
|No of folios
With the reference of the tagline, “Mutual Funds Sahi Hai”, Mr Tyagi said that the investors reposed a lot of faith and trust in these funds, but the industry must remember it takes years to build this trust, but even a single event may erode it.
Because SEBI took several initiatives, within a year with the sole intent to bring in more transparency and clarity for investors, in order to enable them to make better investment decisions in form of TER disclosures and debt investments regulations.
As until August 2018, the significant growth of the mutual fund industry was one of the most talked-about success stories of capital markets in India. But since September 2018, several credit defaults by some entities made headlines, it had an adverse impact across the financial sector in India.
But, events in the last year also exposed the fault lines in the industry and showed that a credit event in even one issuer or group could have a contagion effect leading to liquidity risk across the market, he said.
This further exposed the several risky investments, made by the industry in the quest for higher yields, as well as raised concerns of the mutual fund exposure in debt and money market instruments with structured obligations or credit enhancements in various forms and complex structures.
Owing to which it, “led to a general erosion of trust of investors in debt schemes”, and once again SEBI had to step in.
“SEBI undertook a review of the risk management framework of debt funds, especially liquid funds, and prudential norms governing investments in debt and money market instruments. The efforts focused on ensuring that the systemic risks arising from such events are as minimal as possible. The measures included permitting the creation of segregated portfolios subject to certain conditions, reduction in cap of overall sectoral limits, minimum holding of 20% in liquid instruments by liquid schemes, restrictions on investments in debt instruments with structured obligations and credit enhancements, dispensing of valuation of debt and money market instruments based on amortization, provision for graded exit load in liquid schemes, restriction on investments in unlisted equities, NCDs and CPs, etc.
SEBI also reviewed the existing valuation provisions to make them more reflective of the realizable value, to bring in uniformity and consistency in approach, increase the robustness of the process and address possible loopholes and misuse of the provisions. Based on the review, it has been decided to take certain measures including those relating to the waterfall approach for valuation of non-traded money market and debt securities, flexibility for valuation agencies to ensure fair pricing of securities while continuing to have the final responsibility on the AMC for fair valuation, norms relating to valuation of Inter-scheme Transfers, disallowing the use of own trades for valuation, etc.”
To support his statement, he presented the findings based on the SEBI’s study which shows the AUM levels of the open-ended debt schemes haven’t revived to the levels seen until the end of the August 2018. Plus, he said, “It was observed that in 20% of the instances, the average holding in liquid instruments was less than 5% of AUM as compared to an average net redemption in these schemes of around 19%.”
Further Mr Tyagi even spoke of risk aspect of investments made in debt schemes; “There is a clear distinction between lending and investing. A mutual fund’s investment strategy needs to have the required elements of safety as well as returns. While making an investment, the mutual funds have to necessarily take into account their mandate and organizational structure. Mutual Funds do not have risk capital and are essentially pass-through vehicles wherein NAV ought to reflect the correct value of assets held at any time. This is an important aspect which Mutual Funds should keep in mind while making debt investments”
He pointed out to one of the crucial roles of the Trustees in the structure of the Mutual Fund industry, to step up as “the first level of gatekeepers”, by following a certain element of self-discipline within the industry and not be passive participants in the MF ecosystem.
The Trustees are expected to take remedial steps and corrective measure along with intimations to SEBI to avert any fund investment crisis, when there are concerns and lapses.
“While we have taken steps to restrict such investments, the industry as a whole needs to do its own analysis on a regular basis to avoid such situations in future.”
The role of Trustees is pivotal in the Mutual Fund ecosystem. The designing of the trio Mutual Fund structure with the fund-AMC-trustee as its constituents was a conscious call on SEBI’s part wherein the fund was to be the pooling structure, AMC was to handle the management and operations of the fund and the trustee was to act as an overseeing authority on an independent basis as a fiduciary of the MF investors.
The Mutual Fund Regulations cast enormous responsibility upon the Trustees. One particular regulation I would like to highlight is Regulation 18 (10) of these Regulations which states that where the trustees have reason to believe that the conduct of business of the Mutual Fund is not in accordance with the regulations and the schemes, they shall forthwith take such remedial steps as are necessary and immediately inform SEBI of the violation and action taken by them.
Going forward, I hope to see greater proactivity on the part of Trustees where there are such concerns and lapses. However, a balance is required so that it does not hinder the day-to-day operations and fund management activities.”
Views on outreach and ease of doing business!
In terms of geographical spread, the challenge continues in the B-30 centres, as the penetration is low for B-30 as compared to B- 15. And currently, the time is ripe to focus on the B-30 centres, and to attract more investors. With regards to it Mr Tyagi added, “SEBI has already revised its norms permitting 30 bps additional TER for B-30 only be permitted based on B-30 inflows from retail investors.”
Also, among investor types, women and millennials are significant constituents that are highly untapped. So, to tap such investors, other factors such as education, regional differences, marital status, and children, etc. play a vital influence in investment decisions in different ways.
Hence, targeted programmes for various type of investors could be a good way to attract such specific investors into the mutual funds’ space.
Besides, despite all the measures taken till date by both SEBI and the industry, the numbers with respect to direct plans are not very encouraging; and for ETF investments, not much progress has been made.
He addressed the recent government’s announcement of improving market access for the domestic retail investors by permitting Aadhar-based KYC to the opening of demat account and making investment in mutual funds and said that SEBI will work with the government on this with a view to operationalizing the decision.
Months earlier, SEBI with multiple stakeholders had formed a working group to ease the process of investing in mutual funds further. The group has since submitted the report and we are in a process of implementing its recommendations, he said.
Mr Tyagi even spoke about Mutual Fund’s role as a stewardship that is important. Since Mutual Funds invest in the capital markets as institutional investors, they have a fiduciary responsibility towards thousands of investors who have put in their money in the fund.
And ever since SEBI introduced the disclosure of voting policy and voting decisions, SEBI has seen an increase in participation of mutual funds in voting on shareholder resolutions. So mutual funds can play an important role in improving governance by fulfilling their stewardship obligations.
Mutual Fund being a collective pool for retail investors to invest their hard-earned money directly into the capital markets. All the participants of the industry – advisers, mutual funds, AMCs, Trustees, must follow the best of fiduciary standards and practices within the regulatory framework to provide ethical and need based advice to add value with credibility.
Another most crucial aspect, which even Mr Tyagi pointed out is “faith and trust in Mutual Funds”. Trust is the integral core and building trust and gaining the respect of investors/clients is a prolonged process. So, a collective effort should be taken to uphold and maintain that trust and faith of investors at all times.