SEBI Chairman Ajay Tyagi’s address at the 25th Annual General Meeting of AMFI was insightful and straight forward.

At the outset, he complimented the mutual fund industry for having weathered the storm (of the coronavirus pandemic) well, which demonstrated the robustness of regulatory framework and the maturity of the industry.

Highlighting the remarkable growth of the mutual fund industry, he drew attention to a massive jump in the industry’s AUM.

Mr Tyagi discussed various policy measures taken by SEBI to protect investors’ interest and ensure the smooth functioning of the industry in the last one year.

Further, he hinted at what the regulator might be contemplating on introducing some structural changes in the system.

He also did some plain speaking and gave cautionary advice to mutual fund houses.

(Image source:; photo courtesy – Alexas_Fotos)

His 4-point advice to the mutual fund industry was:

  1. Mutual fund industry must make every attempt to live up to the confidence investors have shown in them

    SEBI chief brought the industry’s attention to limited success the industry has achieved in popularizing mutual funds beyond top 15-30 cities, which currently contributesonly around 15%-17% in the industry’s AUM.

    According to him, the industry must continue to preserve the faith investors have shown in it—to make it a win-win situation for the fund houses as well as investors.

  2. The primary duty of mutual funds is to protect the interest of investors

    Mr Tyagi did not miss the opportunity to address the bigger issues that have far-reaching effects –– such as the laxity some debt mutual funds demonstrated in the recent past and the lacunas in their investment systems and processes.

    Elaborating on the fund house’s fiduciary responsibility towards their investors, he reminded mutual funds of their primary duty. Mr Tyagi remarked…

    “The debt mutual funds must remember at all times that there is a difference between ‘Investing’ and ‘Lending’. Mutual funds are not banks and shouldn’t attempt to behave like one. Unlike banks there are neither capital adequacy requirements for mutual funds nor do they have the ‘lender of last resort’ comfort as banks have from RBI. The true reflection of their portfolio in its NAV on daily basis is the cornerstone of transparency and investors’ trust.”

  3. Mutual funds should maintain their portfolios true to their label

    SEBI Chairman drew the industry’s attention to the marathon exercise of scheme categorization and rationalization, which the regulator did in 2017 in consultations with the industry. He reminded the mutual fund participants that the wrong categorization of funds not only leads to the confusion among investors, but it increases the possibility of mis-selling.

    The point he made about mutual funds adhering to their name and risk category was an extended response on the topic of SEBI recently changing the definition of multi-caps. Mr Tyagi expressed, “If a scheme portfolio is not true to its label, it might be giving very different risk-return exposure to the unitholders of the scheme than what they have signed up for,” …and rightly so.

  4. There is no alternative to prudent risk management

    During his address, SEBI Chairman time and again highlighted the necessity to embrace risk management and transparency as the foundations of the asset management industry.

    SEBI chief offered a detailed explanation on measures it has undertaken to protect investors’ interest in mutual fund investing.

    He briefed that, SEBI has been evaluating the mechanism to set up a backstop facility for debt funds. In other words, setting up an entity may offer liquidity support to mutual funds (having papers rated below “AAA”) by intervening in the secondary market operations.

    Mr Tyagi categorically mentioned that if any such facility sees the light of the day, there shouldn’t be any moral hazards and the industry must have skin in the game.

For IFA shere are few takeaways…

The advice Mr Tyagi offered works like a guiding force to IFAs, since many investors solely depend on their advice.

To be able to remain on the right side of the regulations, IFAs should put themselves in the armchair of investors and make every attempt to serve them in the best possible way by following high fiduciary standards.

To achieve that, IFAs must know what investors expect from them and recommend investment solutions doing a thorough need-based analysis.

Investors expect IFAs to be proficient, transparent, open, and ethical in their approach. Hence, it pays to follow the best disclosure norms, continuously upgrade skills and keep oneself abreast with the latest developments in the industry.

Investors/clients are always happy and satisfied when they see their IFA is keen to resolve their issues and put the investors’/clients’ interest at fore before their own. If IFAs voluntarily make the effort, it will earn them trust and respect.

Cultivating trust, of course, takes time but is truly worth it in the long run for the advisor and the investor. A client looks at a professional as a representative of the industry. Honest ethical advice builds trust and goodwill, a favourable reputation in the industry, which leads to satisfied clients and additional business.

Besides, after-sales support and offering value-added servicesplay a crucial role in advisory services today.

In a nutshell, you need to earn the client’s trust, make him/her believe that you are working in his/her interest and work indeed.

At PersonalFN, we’ve always given the emphasis on solid research, proficiency, empathy, ethics, disclosures, transparency, and have always put our client’s interest before our own. Our clients have been appreciative of our effort. Instead of addressing their own business objectives, IFAs should just focus on doing best for their clients and helping them achieve their envisioned financial goals. If the investor/client is satisfied with the quality of service and advice, he will spread a good word about you, the IFA. And that good will eventually help you, the IFA grow the advisory business.

Keep in mind, ethical conduct, empathy, patience, perseverance, proficiency are the key in the financial advisory business.

by PersonalFN Content & Research Team

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