The Securities and Exchange Board of India (Sebi) chairman Ajay Tyagi on Tuesday directed mutual fund (MF) trustees to act with more urgency when they spot lapses, rather than wait for the regulator to intervene.
Tyagi also asked MFs to be more careful when investing in high-yield debt instruments and not choose returns over safety.
The chairman cited Sebi's inspection report, which had highlighted some lapses that were “quite prevalent in the industry as a whole".
Tyagi added, "In this scenario, trustees are not expected to be passive participants in the MF ecosystem. Where there are concerns and lapses, we expect the trustees to step up their efforts as the first-level gatekeepers, take remedial steps and immediately make necessary intimations to Sebi and not wait for Sebi to step in..."
A trust is established by an MF sponsor or two sponsors in the case of a joint-venture. Trustees hold property of the MF schemes for the benefit of the unitholders.
Tyagi was speaking at Association of Mutual Funds in India's (Amfi) Members Summit 2019.
In its inspection report, the market regulator had highlighted 23 irregularities in the industry. These included instances in which performance of only selected schemes and not all schemes were presented to the asset management company's (AMCs) board and trustees for periodic review.
The other issue pertained to lack of internal systems to segregate between existing and new investors, which led to instances of AMC levying additional transaction charges on existing investors considering them as new investors. These findings were part of Sebi's inspection report for 2016-2017, which was shared recently with the industry executives.
According to industry sources, Sebi whole-time member Madhabi Puri Buch and executive director Murlidhar Rao separately briefed MF trustees on various instances where they could be more proactive and play a key role in strengthening the internal processes of an MF.
The Sebi chairman pointed out the credit risks taken by the industry in light of the recent credit events.
"The safety of the investment cannot be compromised for want of higher yields...the industry as a whole needs to do its own analysis on a regular basis to avoid such situations in future," Tyagi said.
He also expressed dissatisfaction on the growth of direct plans and exchange traded funds (ETFs). "Despite all the measures taken till date by both Sebi and industry, the numbers with respect to direct plans are not very encouraging," he said.
Tyagi added that even though ETFs are low-cost products for investors, "not much progress has been made in encouraging investments in ETFs."
The Sebi chief said it will soon work with the government to allow use of Aadhar-based KYC (Know Your Customer), to simplify investing in MFs.
Industry eyes Rs 100 trillion AUM
Industry body Amfi also on Tuesday released the vision document for the industry, which highlighted that the MF industry had the potential of reaching Rs 100 trillion of assets under management (AUM) over the next decade, a five-times rise from current levels of Rs 25 trillion.
According to the Amfi-BCG Vision Document, this would require investor base to rise from 20 million to 100 million, addition of 400,000 new channel partners, share of equity to rise to 50 per cent from 45 per cent, increasing reach beyond metros and tier-I cities and expanding coverage to middle income households.