INSUBCONTINENT EXCLUSIVE:
The Securities and Exchange Board of India (Sebi) exhorted the mutual fund industry to build an adequate ‘liquidity buffer’ for debt
schemes to be better prepared for any event of a crisis in future
The capital markets regulator has also asked mutual funds to participate more in the voting process of company resolutions rather than
abstain from them.
Sebi said the ongoing credit crisis that resulted in returns of various debt mutual fund schemes taking sharp hits has
brought to surface the kind of liquidity pressures that the industry could face.
“There was a debate if the mutual fund industry should be
at par with banks having an SLR (statutory liquidity ratio) and CRR (cash reserve ratio)
Should mutual fund industry have an SLR at all?” Sebi whole time member G Mahalingam said at the CII Mutual Fund Summit on Thursday.
Last
year in September, the regulator brought in compulsory liquidity buffer in overnight and liquid funds, where in funds were mandated to
invest 20 per cent in liquid assets.
“Now, this is a nudge which is coming from the regulator
But, what I would wish is that the industry itself is going to operate on a cycle where it actually is able to gauge what is going to be the
liquidity demands in a stress scenario, and it is able to build up the liquidity buffer by building up a ladder of liquidity maturities,”
He said it would squeeze the industry and over a period of time, mutual funds would be volume-based and not margin-based.
Analysts said any
SLR requirement could impact returns on debt mutual fund schemes.
“SLR will help create liquidity and is a good idea, but one must keep in
mind that it could lead to lower yields,” says Kaustubh Belapurkar, director, research, Morningstar India.
Mahalingam also warned mutual
funds against mis-selling of credit risk funds — which invest more than 65 per cent of their corpus in lower-rated bonds — to investors
by assuring them unrealistic returns.
“We’ve gone through stressful times
Clearly, the industry needs to ask a question to itself, how do I sell the credit funds? How do I market it to consumers? Do you market it
saying it will fetch you 50 bps (basis points) extra, or do you also tell him that there is a risk which is inherent and hidden there?”
said Mahalingam.
“I think it is the bounded duty of the industry and the distributors to bring clearly this risk into perspective so that
the retail investor does take a calculated call
We don’t want to deal with complaints later — that I was told that I will get a return of 10-11 per cent.”
The Sebi official said MFs
will have to do a more responsible sales job while selling credit risk funds because of the risks involved
He said investors are going to crowd the industry in search of alpha as the interest rate trend downwards
Alpha refers to the extent of outperformance of a product over its benchmark
“Alpha is going to become a demanding factor
But then from regulators perspective I would like to say, this cannot be the sole obsessive factor for the industry
I think the Greek language has other alphabets too such as beta and gamma and I think we need to focus on things other than alpha,”
Mahalingam said.
The Sebi official also said mutual funds must keep away from structured obligations which don’t make things clear.
The
regulator said mutual fund industry should play a leading role in corporate governance with regard to voting in corporate
resolutions.
“Whether it’s Crompton Greaves, Religare or Fortis, I think these are shocks for the industry and gone are the days when we
can tell that these are few in number, so we can afford to neglect them
Mutual funds will have to play a constructive role
I took note of the fact that there are 12 per cent abstentions by the mutual fund industry
This should be reduced to a single-digit over a period of next three to four years
It should come close to one to two percent
Others like insurance and pension fund industry should take a leaf out of the mutual fund industry and play a constructive role in corporate
governance,” Mahalingam said.
