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Sebi chairman Ajay Tyagi is a worried man.
Of late, Tyagi has taken to public worrying about the poor, vulnerable, small investor.
He worries a tad too much.
He worries about concentration in the mutual fund (MF) industry.
He should worry, more usefully, on why the Tier II account of the National Pension System, which offers the general public low-cost access to fund management expertise, is not open to one and all, instead of being open only to those who hold a Tier I pension account.
He worries that the Rs 25 lakh threshold for an investor to put her money into portfolio management schemes (PMS) is too low.
He should worry, instead, on how the small investor stands to lose from the relatively inflexible asset allocation rules that mutual funds are obliged to follow, even as PMS managers swiftly shift money across the risk spectrum of asset classes when things turn volatile.
He should drop the idea of preventing someone who can drum up Rs 25 lakh and is willing to pay for the superior services of a PMS from accessing a PMS.
The top four MFs account for half of the investor money (or AUM) of over Rs 25 lakh crore, and the top seven players account for 70% of the money managed by these funds.
This does not warrant action unless there is evidence of abuse of such dominance.
The regulator’s worry seems to be that concentration can lead to systemic risks.
Sebi would do well to leave competition to Competition Commission of India.
Expenses eat into the returns on equity and debt mutual funds to the extent of a fifth or a sixth.
Sebi wants to lower the fee the funds charge investors.
Excessive regulation is a bad idea, and will stifle the MF industry.
This happened in August 2009 when Sebi scrapped entry loads to stop the practice of brokers getting investors to take money out of well-performing existing schemes Subscribe to new fund offers to pocket the entry load.
Without a specific incentive for brokers to rope in subscribers to MFs, inflows tanked.
Sebi then had to allow such incentives, by merging them into overall expenses.
MFs are free to compete with lower fees, subject to a cap already in place.
(This piece appeared as an editorial opinion in the print edition of The TheIndianSubcontinent.)
