Inter-scheme transfers in mutual fund houses see over 50% fall this year

The mutual funds (MF) industry is witnessing a change in the practice of transferring securities between a firm’s own schemes, with fewer fund houses doing so nowadays. 

Shifting of securities within the same fund house rather than selling in the open market has more than halved since last year, shows regulatory data. 

The value of transactions has fallen 52.2 per cent to Rs 22,429 crore so far this year, from Rs 46,958 crore for the same duration last year. The number of transactions, too, fell from 1,641 to 1,185. Such transactions typically invite attention because of the possibility of malpractice, when both the buyer and seller of the security are the same entity.  

This decline comes during a period of higher regulatory scrutiny. The dynamics of investor preferences at a time of relative turbulence in the fixed income market is also seen as a major factor. 

The Securities and Exchange Board of India (Sebi) has, in the past, warned firms against using such transactions for manipulative activities. It moved to restrict the use of such transactions for valuation purposes, last month.  

“In order to increase the robustness of valuation and address possible misuse, various proposals related to valuation of inter-scheme transfers (ISTs) disallowing the use of own trades for valuation, etc, were approved. Suitable grandfathering, wherever applicable, and adequate time period shall be provided for implementation of the above proposals,” shows a statement following the Sebi board meeting on June 27.  

The need for such transfers become more pronounced when there is a change in investor preferences, with people looking to switch from one scheme category to another, said Dhirendra Kumar, chief executive officer of fund tracker Value Research. 

“There is a need for inter-scheme transfers when investors move their money very dramatically,” he added. This has not happened in the last year. So, there has been limited scope, he suggested.    

Dwijendra Srivastava, CIO (debt), Sundaram Asset Management, said such transactions make sense on many occasions. They could cut down on costs such as brokerage and other transaction fees that would otherwise have to be paid if securities were bought and sold in the open market, as opposed to transferring it from one scheme that needs cash to another that needs the security in question. 

The average AUM for the debt segment was Rs 12 trillion in FY19, shows Value Research data. This includes closed-ended and open-ended schemes. Investors can exit when they want in the latter, while they have a lock-in period in case of the former.

Majority of the assets are held under open-ended schemes, accounting for over Rs 11 trillion as of March-end. 

The value of inter-scheme transfers in FY19 was Rs 2.3 trillion, shows Sebi data. The value of transactions account for a fifth of the average debt AUM, show back-of-the-envelope calculations. 

The last financial year saw multiple issues involving MF investments in the debt category. This included lenders such as Dewan Housing Finance (DHFL) and  Infrastructure Leasing & Financial Services (IL&FS).