Jimmy Patel is the chief executive officer at Quantum AMC.
Here he takes a step back and looks at the issues that impacted the fund industry in 2015.
Record inflows into equity funds in 2015-16 proved that volatile markets have not dampened the spirits of investors who continue to pour money into equity funds.
Is this a sign of Acche Din coming?
Yes, to some extent it is a silver lining the mutual fund industry has been waiting for. However, we have not even scratched the surface.
Retail participation could provide the much needed liquidity to the stock markets that have been largely driven by FIIs for the past few years. In our estimate, only around 10 million people of the 1.2 billion plus population of India are investors in mutual funds. This number needs to scale up, either through investor education or simply more AMC’s catering to India’s vast potential.
The Ministry of Finance had set up a Committee, led by Sumit Bose, to recommend measures for curbing mis-selling and rationalising distribution incentives in financial products. We believe, the report is in the benefit of investors, as it would reduce cost besides would bring transparency in the payout process.
Recently to honour corporate governance, SEBI chairman U K Sinha had asked mutual fund industry to reduce upfront commission. Upfront commission is the payment that a mutual fund agent or a distributor gets from the fund house for selling a fund scheme to the investor. Some mutual funds pay upfront commissions of as high as 6% in some closed-ended equity funds. SEBI rightly feared that such high upfront commission could lead to mis-selling of mutual fund products and, hence, was insisting on a cap on such payments.
For now the fund industry has mutually agreed to cap it at 1% of the total amount that an investor invests in a scheme, effective January 1, 2016. However there is no cap on trail commissions and AMCs will be free to decide how much commission they want to pay by the way of trail.
The ‘Riskometer’ was also introduced so that investors can gauge the risk of investing in a particular scheme at a glance and can make an informed decision accordingly. This replaced the earlier colour codes for mutual funds.
The year 2015 also saw the mutual fund industry getting drawn by not just the secondary market but also the primary market. Mutual funds accounted for as much as 60% of the anchor investment in 15 IPOs this year, which is up to 30% of the total size issue.
With a growing youth population in India which is incredibly tech-savvy, SEBI is looking to use the internet as one of the major channels to reach out to new investors and get them onboard. By using technology, AMCs can directly reach the investors. To boost the growth of the fund industry, AMCs are moving from KYC to E-KYC, where the Know-Your-Client procedure will be moved online; mobile apps and other instant messaging platforms help investors invest with ease.; and the NACH is being used in order to make investing simple for investors.
(The NACH is an abbreviation for the National Automated Clearing House, a funds clearing platform set up by NPCI, or the National Payments Corporation of India.)
Noting the increased use of e-commerce platforms and low penetration of mutual fund products in the country, the industry looks plans to take fund distribution to a new level by introducing the e-commerce platform. Investors using e-commerce platform to witness the sale of their units could soon be a reality.
The year 2015 saw AMCs face a crisis of sorts as their debt funds bore the brunt of the fund’s exposure to some low-quality papers. Rules about portfolio exposure to a single issuer, group and sector may undergo a change going forward.
But more importantly it teaches us why mutual funds should follow a mark-to-market system of valuation for all its schemes. This helps investments to be valued at the current market price of the security based on its last traded price. This helps see to it that all market tradable instruments would be valued at fair value reflecting the current realizable market value. Also mark-to-market NAV treats all investors alike – existing investors, redeeming investors or newly subscribing investors as all investors transact on a market value driven NAV. The impact of a large redemption would be equally felt by all investors as against in an amortized NAV where redemptions met at a loss, impacts the investors who remain invested in the fund.
We will hopefully adopt a model similar to the European one where there are two type of money market funds. The first ones are pure mark to market funds whereas the second type is called constant NAV money market funds, or CNAV. These funds are governed by stricter rules about the quality of papers in the portfolio, investment avenues, maintaining balances for redemption, maturity of securities and adjustment to market NAV in case of divergence. These rules ensure greater protection to investors of money market funds.
In a move to protect investors’ interests, it is crucial for AMCs to merge all clone schemes, unclogging the scheme basket of the fund industry and, therefore, making it simple for investor to invest in the right fund that suits his/her investment needs.
However, the fund houses were seen merging only non-performing schemes with the performing ones so that their overall bouquet looks good.
Looking forward
The year 2016 could prove to be a game changer for the Indian mutual fund industry if domestic and global cues play their card.
While we could continue see a soaring retail participation in mutual funds, power reforms package announced already several times could be finally undertaken, the expectation of the year 2016 could be a La Nina year is favouring the Indian monsoon, inflation, oil and the rupee balancing out, and last but not the least, the Fed rate hike are some factors that could influence the next year for the mutual fund industry.
Much of what happens in India will depend on how FIIs react to the Fed hike. Thus the same will have its repercussions on the mutual fund industry. This was one of the last major events to impact the financial world in 2015.
We look forward to a similar scenario like this year’s where FIIs invested $3 billion in CY15 whereas domestic mutual funds have seen strong inflows and have been net buyers of $10 billion. This means that while FIIs are considerably important, it is the domestic inflows that are here to stay for the long term that will fuel growth.
We have a huge plus in a regulator who is always striving to make sure to offer investors prudent and unbiased investment solutions. Investors can also expect to see lower TER in the coming year.
