Despite robust industry growth, the Indian mutual fund industry has been on a roller-coaster ride this past year, witnessing regulatory developments, underperformance of equity funds and defaults in debt funds. Needless to say, the last year did not go well for the industry.
Addressing the need for better promotion of investors' interests, self-regulation and risk management during the member summit of the Association of Mutual Funds in India (AMFI) on August 27, the SEBI chairman sent strong messages to mutual fund AMCs, trustees and distributors.
Making a case for mutual funds becoming the preferred mode of investments, Tyagi highlighted the appreciably growing asset size of the fund industry. However, he was quick to point out that the industry still had a long way to go, given that its AUM (assets under management) made up only 11 per cent of the GDP, much behind the 100 per cent in the US.
Further, Tyagi highlighted various issues and challenges posing a threat to the growth of the industry. Here are some major concerns with regard to retail investors, wherein the regulator expects the industry to step up.
Defaults by storied group companies like Essel, Reliance ADAG, IL&FS and DHFL hit debt mutual funds hard, shaking investors' confidence. Tyagi said that last year's credit events exposed fault lines in the industry and showed that credit defaults by even one issuer/group could have a cascading effect.
Tyagi raised concerns over poor industry practices and highlighted the use of several risky investments by managers in pursuit of higher yields. He said that even though the regulator had initiated several provisions to make debt funds better equipped to manage stress, self-regulation and governance were the need of the hour. "While SEBI stepped in and took several measures in the interest of the investors, the need for us to step in may not have arisen if many of these measures were taken by the industry itself," said Tyagi.
Role of trustees
Trustees are the flag-bearers of investors' interests and should therefore ensure that investors' money is invested in the best possible manner. He urged trustees to take ownership of their fiduciary duties actively and to step up their efforts to inform SEBI of any violations, and not the other way round.
Direct plans and ETFs
SEBI was critical of the industry's inadequate efforts to promote direct plans. According to Tyagi, during its inspections, the regulator noticed that the difference in the total expense ratio (TER) between direct and regular plans was not exactly to the extent of the distributor commission paid, as mandated.
In fact, Value Research's TER analysis has revealed that the expenses of direct plans have fallen less than those of their regular counterparts after the revised expense structure came into effect.
With such practices defeating the very purpose of direct plans, he said, "Despite all the measures taken till date by both SEBI and the industry, the numbers with respect to direct plans are not very encouraging."
On a related point, he said that while ETFs were yet to catch the fancy of Indian investors, not much progress had been made to encourage investments in ETFs. He concluded by emphasising that in the case of both direct plans and ETFs, a combination of various investor-awareness programmes and the use of technology could play a pivotal role.