Mutual funds wary of rising inflows

Asset managers mull raising exit loads, gating flows, tempering investor expectations

Continuous large inflows with expectations of high returns by investors are unnerving executives in the mutual fund industry, which now manages nearly Rs 23 lakh crore of assets, more than three times of what it did five years ago.
 
“When inflows become so large, management becomes an issue,” said a chief executive of a fund house. “The risks attached become equally important if we want many more happy investors,” he added. “It is better to put in safeguards to avoid a possible crisis. The worry is what is driving these flows and with what expectations?” said the chief executive of a mid-sized fund house.
 
Fund houses have started deliberating on measures that need to be implemented to curb the flow. Steps include increasing exit loads, reducing or removing incentives to distributors in select categories of funds, stopping fresh inflows, and suggesting to investors not to enter the market with an investment horizon of less than three years.
 
Around a dozen mutual fund schemes have suspended sales of units during the past year. Schemes like DSP BlackRock Micro Cap, IDFC Arbitrage Plus, Principal Personal Tax Saver Fund and SBI Small and Mid Cap Fund have not yet resumed sales. Industry executives said several other funds too might stop sales of units.
 
“It is good that the industry is thinking of safeguards. Investors have not seen a true bear market for several years. Such measures could help prevent knee-jerk reactions from investors,” said Kaustubh Belapurkar, director, fund research, Morningstar India.
 
Factors that are nudging asset managers to speak in such an unconventional manner include fears about corporate profitability and government policies in an election year. These are in addition to global events.
 
“Till late 2016, all was good. But the rally this year raises doubts. How will investors handle a deep correction, say, 30-40 per cent? Will we be able to control that phase? We need to ponder over such issues now,” said the chief investment officer. According to him, debt schemes could  be equally vulnerable with the chase for yields resulting in investment in poor quality paper.
 
A few fund houses have sent mailers to their customers and distributors asking them to redeem money if returns had been greater than their expectations. “What is the problem if investors redeem? If customers feel they have made more than the money they expected, let them take money off the table. This way, we will create repeat customers,” said the chief executive of a large fund house.
 
Over the last two years, fund managers have  been telling investors to lower their expectations of returns. They admit asset management is now more challenging than it was three or four years ago and add the margin of outperformance will be squeezed.
 
Journey of MF industry in 2017