In the light of the recent credit events that jolted the mutual fund industry, Confederation of Indian Industry (CII) has suggested that distributors need to ensure that the right risks are communicated to clients.
"Distributors need to ensure that the right risks are communicated. If debt products are being marketed as likely to have improved returns over FDs, it must be appropriately identified that debt portfolios are marred with non-zero credit risk, which may play out. Similar scenarios play out with duration-based products as well," notes the 14th CII Mutual Fund Summit whitepaper.
The vision document further notes that risk management by distributors is an important aspect to keep alive investor trust in mutual funds.
CII’s whitepaper also highlighted the steps that credit rating agencies and AMCs should take to avoid credit events.
The whitepaper has advised AMCs to build internal capabilities to assess risk better, instead of solely relying on credit agencies.
"Own due diligence is essential. Many AMCs are bank-backed and can have additional sources of portfolio intelligence. Further, AMCs need to strengthen their legal teams, strengthen the role of debenture trustees and strengthen internal documentation," notes the whitepaper.
Further, the document notes that fund managers should be measured on the right set of metrics to follow risk adjusted returns on portfolios. It also recommends strict reviews of concentration norms on portfolios.
The whitepaper also suggests ranking should not be stressed while promoting liquid products. "The importance of quartiles while promoting liquid products should be significantly downplayed, as it goes against the objectives of these fund categories since investors are primarily looking at safety and consistency in returns in short term," notes the document.
In case of credit rating agencies, the whitepaper highlights the need for CRAs to be more careful in their approach.
"A lot of measures have been put in by the regulator on the role of credit rating agencies and the processes they need to follow. However it is equally imperative that credit rating agencies learn from their vast experience, build models that more accurately derive ratings and have stronger data-backed disclosures," notes the document.
Credit rating agencies also need to upgrade market intelligence to accurately reflect current macro and player-specific scenarios.
