Fault Lines Exposed In Mutual Funds Industry With Risky Bets Made For Higher Yields: SEBI Chief

In a tough message for returns-focussed mutual funds, regulator Securities and Exchange Board of India Chairman Ajay Tyagi on Tuesday said the industry has exposed its fault lines with several risky investments made for want of higher yields and it is high time for them to play by the rule book and stop compromising on safety.

Referring to the industry’s tagline of ‘Mutual Funds Sahi Hai’ (mutual funds are right), Tyagi said the investors repose a lot of faith and trust in these funds but the industry must remember it takes years to build this trust and a single event to erode it.

Addressing the mutual fund industry body Association of Mutual Funds in India’s Members Summit in Mumbai, Tyagi said a certain element of self-discipline by the players themselves could have averted the problems they have landed into after credit defaults and the regulator might not have been required to step in with remedial measures.

He said the industry needs to remember the clear distinction between lending and investing and a mutual fund’s investment strategy needs to have required elements of safety as well as returns.

He also said trustees cannot remain passive participants in the mutual fund ecosystem and they need to step up their efforts as first-level gatekeepers in cases of concerns and lapses.

Trustees need to take immediate remedial steps and inform SEBI and not wait for the regulator to step in and take corrective measures, he said.

“SEBI’s primary objective is the protection of investor's interest, based on which we have issued appropriate regulations and circulars from time to time. These regulations and circulars have been drafted with wide consultation with all stakeholders and due analysis. Needless to say that the industry needs to adhere to them and play as per the rule book,” he said.

Tyagi said till about a year back, the significant growth of the mutual fund industry was one of the most talked about success stories of capital markets in India.

But, events in the last year, 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.

A number of high-profile credit default cases including at IL&FS and DHFL groups have led to mutual funds bearing huge losses.

Stating that the figures speak for themselves, Tyagi said it has been around a year since the defaults started, but the assets under management of open ended debt schemes is yet to reach the assets under management levels seen at the end of August 2018.

“Such instances do not reflect well on the industry practices. 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,” he said.

Continuing with his plainspeaking, Tyagi said SEBI’s study of liquid schemes showed that in 20 percent of the instances, the average holding in liquid instruments was less than 5 percent of AUM as compared to an average net redemption in these schemes of around 19 percent.

“A certain element of self-discipline by the industry could have averted such a situation,” he said.

“The recent events also threw into the spotlight several risky investments made by the industry in the quest for higher yields. The safety of the investment cannot be compromised for want of higher yields. 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,” he said.

On investor outreach, Tyagi said it is encouraging to see increasing number of millennial and women investors in mutual funds, but there is a large space that remains untapped.

He also pitched for making the process of entry, exit and management of investments simple and easy.

Referring to the government's announcement for improving market access for the domestic retail investors by permitting Aadhar-based KYC for opening of demat account and making investment in mutual funds, he said SEBI will work with the government on this with a view to operationalising the decision.

To further ease the process of investing in mutual funds, a working group had been formed some time back by SEBI with multiple stakeholders. The group has since submitted the report and we are in a process of implementing its recommendations, he said.

He also said that despite all the measures taken till date by both SEBI and the industry, the numbers with respect to direct plans are not very encouraging, while not much progress has been made in encouraging investments in exchange-traded funds .