At the second AMFI Annual Summit held in Mumbai, SEBI chief Ajay Tyagi commended the industry for achieving stellar growth in the last few years. However, he noted that the Indian mutual fund AUM to GDP ratio is still lower at 11% of GDP as compared to global standards. The global average AUM to GDP ratio is around 62%. He said the industry has a lot of catching up to do in order to improve penetration.
Concentration risk
Tyagi expressed his concern over the growing concentration of assets among the top 5-7 players. The top seven AMCs currently manage 70% of industry AUM. The top seven AMCs accounted for 60% of entire industry’s revenue. The profit before tax as a percentage of revenue of large mutual funds has also stood at a very health rate of 40-50%. The SEBI chief stressed on the need of having higher competition in order to have a widespread growth among industry players. “We need to examine whether the high profitability is due to high TER. We need to bring in a health competition in the industry which is lacking as of now,” said Tyagi.
SEBI looking into the issue of rationalizing TER
Tyagi also said there is a scope to rationalize TER in mutual funds further: “We feel that that there is a scope to rationalize TER. Currently, we are reviewing TER structure very closely.”
Tyagi further said that SEBI had structured the TER rules when industry was still nascent. “Much has changed now. The industry is at Rs 24 lakh crore AUM. Hence, the industry needs to keep pace with these developments. ”
SEBI has constituted a six-member sub-committee to review the existing TER structure. The sub committee, which will meet on the first week of September will look at the existing structure and give their analysis to SEBI on TER
Risk Management
With the growing size of the industry, Tyagi said that the role of risk management and valuation assumes importance. Valuation is important for mutual funds as it has direct ramifications on the entire industry. He observed that in debt funds, more than 90% of assets are invested in instruments rated AA – and above and almost 100% in A1 plus short term rated instruments. He said retail participation in debt funds is very abysmal. Of the total Rs 12.30 lakh crore total debt AUM, around Rs 11.50 lakh crore is held by non-retail investors.
Debt funds have to be more vigilant about the risks they are taking and how these risks are being valued. He said the industry needs to think of more innovative means to deepen the bond market. Products like debt ETF, bond index tracking funds could be a solution. He also alluded to the recent cases of corporate governance issues in mutual funds. “Fund houses have a strong public interest and need to maintain integrity. The recent instances of deviations do not augur well for the industry and have to be avoided at all costs. Board of trustees have an important role to play here so that AMCs adhere to the highest standards,” said Tyagi.
Promote direct plans
Direct plans were launched in 2012. Tyagi stressed on the need for AMCs to promote direct plans more actively in investor awareness campaigns. He said that direct plans are more cost effective, transparent and lower instances of mis-selling. He also said that the industry needs to promote passive funds. Currently, passive funds account for 4% of total industry AUM. In US, passive funds account for 15% of mutual fund industry assets, he said.
Highlight risks
Tyagi said the industry needs to use the investor awareness corpus available with AMFI in a more meaningful manner. While SEBI chief commended the industry on raising awareness about mutual funds, he also nudged the industry to highlight the short term risks associated with mutual funds in investor awareness campaigns at ground level and in advertisements to set the right expectations among investors.
Geographical expansion
SEBI’s main focus area has been to increase the penetration of mutual funds in smaller towns. He said the industry has achieved good growth in B15 markets in recent years. The share of B15 AUM has increased from 12.7% in 2013 to 17.7% in 2108. He said the time is ripe for the industry to concentrate on B30 markets. There is need to bring long term savings from smaller towns. He said the additional expense of 30 basis points to get inflows from smaller towns should help facilitate this growth.
Ease of doing business
SEBI has taken a few initiatives like payment through e-wallet, instant liquidity, standardisation of schemes and introduction of Total Return Index for benchmarking schemes to help improve investor experience. He said the industry needs to supplement this growth by adopting digital technology right from onboarding clients to processing of redemption requests to further ease the transaction process.