Corporate dominance in few debt funds may lead to risks

By Morningstar |  27-07-20 | 

In its Financial Stability Report, the Reserve Bank of India (RBI) has noted that corporate dominance in a few mutual funds could lead to concentration risks.

The central bank noted that between March 2019 and March 2020, the share of the top 5 funds in the total liquid fund corpus increased from 55 % to 61 %.

While expense ratios are capped through regulations, large fund houses have the advantage of spreading their fixed costs over a large AUM to be cost competitive. Hence, corporate dominance in investments may lead to concentration in fund management as smaller fund houses are unable to compete on expense ratios. Moreover, a large fund size is also incentive compatible from an investor point of view, as such funds have significant systemic spill-overs, potentially improving possibilities of bailouts.

The central bank noted that corporate fleet footedness in terms of exit can be diversified by ensuring that no single investor contributes a disproportionate share of investments to any scheme of a given asset management company (AMC). Extant regulations specify single investor concentration norms for diversifying the investor base. However, when the investor profile is dominated by risk averse investors, as is the case in money market/debt mutual funds, there is a strong possibility of a few corporates distributing their surplus over four/five fund houses and hence exits during times of stress could still be concerted.

Risk aversion has increased

Deployment of debt AUM in government securities as a proportion to total debt AUM has been on an uptrend since March 2019, notwithstanding the dip in March 2020 due to redemption pressure. Moreover, the proportion of liquid securities in holdings of debt mutual funds reached an all-time high in April 2020 reflecting risk aversion and liquidity storing.

The net assets under management (AUM) of debt/income oriented mutual fund schemes in India grew by about 70 % during 2015-2020 (5 years) to Rs 11.80 lakh crore by end-March 2020.

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