The Indian mutual fund (MF) industry has grown exponentially in the past five years, but one misstep can take it 10 years backwards, says U K Sinha, former chairman of the Securities and Exchange Board of India (Sebi).
While delivering his speech as chief guest at the Business Standard Fund Cafe 2019, Sinha said the Rs 24-trillion MF industry needed to win the trust of the ordinary person on the street and adapt to the changing landscapes, particularly on the technology front.
“It has taken a lot of efforts for this industry to come up to the current level. One incident can take this industry back by 10 years,” he said referring to the UTI MF episode of 2000-01.
The domestic asset management industry has undergone major turbulence in the past one year, particularly with regard to the exposure of debt schemes to papers of some corporates with high debt.
Sinha raised concerns over the industry’s exposure to the non-banking financial companies (NBFCs). “One of the distributing trends I have noticed is the exposure to commercial papers (CPs).
In the past three years, it has gone up three times. If we look at outstanding CPs of NBFCs, 60 per cent is with MFs. Over 17 per cent of the MF assets are invested in just one sector, which is NBFCs. This was 13 per cent in 2014. The total exposure to the NBFC sector is over Rs 2 trillion and add to that another Rs 1 trillion in equity exposure.
This is a substantial number and it should worry us,” he said.
While the exposure of the MF industry to NBFCs was higher, it has come down substantially in the past one year due to risk aversion caused by the defaults at IL&FS.
Sinha said there was a lot of learning for the industry from recent events. "There have been worrying moments. These developments are not unique to India, they can happen anywhere in the world. We need to learn from these mistakes," he said.
Sinha stressed that the MF industry needed to look after the ordinary investor. “MF is now on the radar of a person who has a small investment to make. This wasn't the case seven years ago. The person on the street whose trust you have won must be retained,” he said.
Sinha warned that the industry should keep out small investors when it came to experimenting with new products.
He also highlighted how the industry was losing the edge when it came to beating the benchmark returns.
"The returns of actively-managed equity schemes during 2015-16 were vastly superior, with more than 80 per cent of the funds outperforming the benchmarks. That number has come down to 40 per cent," he pointed out, adding that the existence of funds could be questioned if they failed to beat the benchmark returns over the long term.
“An important trend our MF industry should take note of is that globally more money is moving from active to passive,” he said, emphasising the need to keep costs of investing in check.
Sinha said given the might of the MF industry, it could play a big role in enhancing the governance standards in listed companies.
“World over the asset management industry has taken a lead in enhancing corporate governance in companies that they invest in. In order to make your industry more credible and to serve the investors and shareholders, the MF industry can give a big push to enhance environment, social and governance factor,” he said.