G. Mahalingam, Whole Time Member, Securities and Exchange Board of India (Sebi); Photo: Abhijit Bhatlekar/Mint
I don’t have to quote a lot of statistics to say the mutual funds industry is growing at a scorching pace, helped by internal and external factors. Clearly, what we are going to see now is that the help that the external factors are providing is perhaps going to decline.
I am specifically talking about the liquidity that the central bank provides. Across the world, the general feeling is that this is going to come down. US Federal Reserve’s Janet Yellen has made it clear and has set out a roadmap for how the central bank’s balance sheet is going to shrink in the next few years. So that takes away one part of the game. If we are to believe that one part of US liquidity would have to flow into India, concomitantly, a good part of that has to flow into mutual funds’ coffers.
The second important factor is demonetisation. The liquidity that got generated in the banking system’s balance sheet will also be on a reverse course.
With new money filling in for the old money, the kind of liquidity that banks saw is perhaps going to come down.
Keeping these liquidity factors away, we will see the true growth of the mutual funds industry. How the industry grows without these external factors is going to be an important and interesting indicator for us to analyse to see future growth trends. While the industry has more than tripled in about 5 years, from about Rs5.87 lakh crore AUM (assets under management), to about Rs20.6 lakh crore; from a level of about one-tenth of bank deposits to one-fifth of bank deposits is no mean achievement, but the question is how this will pan out in the future.
The granular part of the statistics, again, shows the healthy aspect of the industry. Gross inflows have been fantastic; share of direct schemes has been inching up; B15 has also been going up—14.2% to 17.8% (March 2014 till now). The efforts of the industry to penetrate into B15 is bearing results The intense efforts would have to continue for a variety of reasons.
The most important (reason) is that when you get into these kinds of areas, Tier 2, 3 or 4 cities, it takes more effort garnering this money. But it is certain that this money will be long term. It will not be fickle minded money. This will create a robust base for the inductry, on which you can build further. This is the story of the banking industry also. This will have to be true for mutual funds industry as well if the efforts are towards growing retail investors and those from tier 2 or 3 cities.
Coming to certain issues. Within Sebi, we are in dialogue with the industry. This is very important because the entire approach to tackling the issues coming up with newer and newer regulatory framework can’t be Sebi’s along; it has to be by the industry or with the industry. Only in that eventuality will the regulatory framework be strong and successful; practicable to be implemented; and helpful for overall growth of the industry and protection of investor interests.
The industry is going through good time, and this is the best time to swallow bitter medicine. So whatever can be done now to make risk management systems and corporate governance stronger, and to bring about reforms needed for investor understanding, can be best done now. That is why we have taken up consolidation and merger of schemes. When i met you about two months back, i told you we will come out with the circular in a month. I slipped on that. But I am telling you we will come out with the circular in one week from now. A lot of base work was done and it was brought up to the level of broad guidelines in this area. Sebi’s subsequent efforts were focussed on whether investor awareness will get enhanced by the base that has been built up, or should we tweak more. At that point it was felt that more thinking was warranted and some more consultation took place. All this is taking a final shape now.
The other area where we worked for almost two to two-and-a-half months, is the modified duration based hedging. This was also in the works for some time because of the complex nature of the topic and we consulted a lot with the industry. So, we hope it is now acceptable to the vast majority of the industry. We will go home happy if a majority of the industry feels this is implementable and in investor interest.
There are areas where we need to work further. There is TER (total expense ratio), where we will definitely consult the industry. Can we do something more in this? How do we shrink this further? How do we ensure that investors get a better deal? This is so that our jurisdiction does not jut out in comparison to some of the advanced ones in terms of the overall TER currently.
There have been plenty of questions on fee versus commission. We have had two consultation papers on the subject. But because the topic is complex and investor interest has to be taken into account, this is taking more time. UK, for example, has come out with a report on this, and also what have been the consequences of the guidelines.
On transparency, we need to go along way in terms of performance benchmarks. While a few mutual funds have taken a lead in ensuring that the measure of returns put out is completely based on total returns, majority of the industry continues to rely on price-based returns. We need to correct this.We need to think about performance benchmarks, and coming out with better indicators.
The investor awareness programmes based on the 2 basis points that the industry parts with, have been fairly focussed, but there is still score for improvement. Amfi (Association of Mutual Funds of India) has taken a lead, but individual fund houses will have to put their shoulders to the wheel.
It is in the industry’s benefit that Amfi’s best practices guidelines are being formulated. We should treat most of these as non-negotiable. It is essential that we follow these in letter and spirit.
Lastly, we need to pay more attention to ETFs (exchange-traded funds). These are making a very reluctant entry into India. And mutual funds are the place place to ensure that ETFs grow fast. You may think that it does not augur well to propagate ETFs, but if this is going to be one route through which TER could come down, so be it. We are talking about Rs20 trillion today. If we are talking about best practices, Rs50 trillion is not a number in the distant future. It’s number we can foresee in the next 5-6 years.