BFSI Insight Summit: MF institutional structure needs rethink, says Thorat

The mutual fund organisation structure needs a rethink and more responsibilities should be entrusted to asset management companies (AMCs), Usha Thorat, chairperson of the Securities and Exchange Board of India’s (Sebi’s) Mutual Fund Advisory Committee, said on Tuesday.

Delivering her keynote speech at the Business Standard BFSI Insight Summit on mutual funds (MFs), the former deputy governor of the Reserve Bank of India said the roles and responsibilities of sponsors, trustees, and AMCs need to be redefined.

“One really has to ask the question ‘who is actually responsible for what’. While the trustee has got the oversight responsibility, the AMC has to be equally accountable to act in investors’ interest,” she said. 

 “There is no reason why the responsibility of investor protection and investor interest can’t be taken up by AMCs. Currently, this is the responsibility of trustees,” she said.

Under the current framework, an MF has three main pillars -- sponsor, trustee, and AMC. The sponsor is like a promoter who brings in the capital for setting up the MF. The AMC manages the unitholders' money and is responsible for all investment decisions. The trustees, which comprise independent directors, oversee the AMC and are the torchbearer for the unitholders.

“I think there is a need to understand the roles and responsibilities of AMCs and trustees. It is the trustee who is overseeing investors’ interests and in a way accountable for that. There is no reason why this cannot be the AMC,” Thorat said. She emphasised that as AMCs mature, they can do more to protect the interests of unitholders.

In recent years, the roles and functions of an MF trustee have come under the scanner, with the market regulator urging them to act more proactively. However, given their limited powers, there has been a question mark over their sway over AMCs.

Thorat said there has been a “significant overdrive in regulations” in the MF industry, which has benefited everyone.

“A number of things have happened which have transformed the industry. The MF industry has moved from being upfront commission and distribution-driven to one that is focused on investors’ interests,” she said, adding that there is a need to look at uniformity between ULIPs and MF schemes.

She said steps taken by Sebi such as product labelling, risk-o-meter, and the way performance is calculated and communicated have helped investors understand risks better.

Other initiatives like cost reduction, a cap on expense ratio, and the introduction of direct plans have benefited investors.

On the debt side, rules around inter-se transfers and segregated portfolios have made funds more stable and less prone to sudden shocks, she added.

Thorat, however, said more needs to be done to increase awareness about these initiatives.

She said there was scope for further reduction in costs when it comes to passive investing. “We are not at a high or best-end compared to global standards. There is a drive to move to lower cost,” she said, forecasting the share of passive products to increase in the overall AUM.

Thorat urged the industry to be more vigilant about data privacy and cybersecurity. “Lot of data is held by MFs. This is extremely important with more and more digitisation.”