Side-pocketing can protect the interests of new as well as old investors and should certainly be used during stress events, says Vishal Kapoor, CEO at IDFC Mutual Fund
The opportunity ahead for mutual funds is enormous. Even after registering phenomenal growth over the last several years, mutual funds still serve under 5 per cent of India's household savings. With just about two crore active mutual fund investors in a country of our size, higher penetration can continue to drive growth for several years across T30 as well as B30 cities.
Direct plans primarily cater to the needs of the well-informed, self-reliant investor needing limited advice or those who have a regulated advisor working for them. On the other hand, passive funds cater to another set, largely those who would like to reduce the fees and variance in fund-manager performance.
While these segments exist today and will keep growing, we feel that the role of the expert hand-holding as well as active fund management will remain relevant for a large set of current and future investors. We are continuing to invest in our product and fund-management capabilities, technology, sales as well as service.
Impact of new expense slabs
The new expense slabs are very investor friendly, since they pass the benefit of scale efficiencies in a fund through a progressive reduction in expenses. The new expense slabs will require AMCs to more closely review product pricing, since margins for the AMC as well as for their distribution partners will become more dynamic.
Risk control in debt funds
Since 2017, we have been working tirelessly to highlight to our partners and investors some of the risks involved with debt-fund investing, especially the recognition of increased risk that investors take for higher yields. Since a lot of our investors preferred higher safety, wanting capital preservation over growth for their debt investments, we chose to remain largely invested in higher-rated instruments.
Our framework for debt investing looks at three distinct buckets: liquidity needs, 'core' or deposit replacement needs, and 'alpha' or return enhancement from taking measured risk. Our portfolios have been largely tilted in favour of higher quality over higher yield, given the current risk-return trade-offs. Being disciplined with this approach has helped us weather the recent credit events and downgrades that hit the industry.
As for side-pocketing, we are happy that SEBI has enabled this tool since it can protect the interests of new as well as old investors. It should certainly be used to safeguard investors during stress events.
Many new investors may have invested based on historic high returns that funds have generated, like those in 2016 and 2017. This creates an unrealistic expectation. We need to ensure that new investors stay invested through this cycle. We need even more distributors and advisors to handhold investors through such volatile times.